Genexodus™ :: Guiding Entrepreneurs "From Beginning to Exit"™

Genexodus 3:1 – Seeking Capital

Posted in entrepreneurship, Genexodus, venture capital by cp on 12 January 2008

After living hand-to-mouth for several months, the Entrepreneur envisioned a day where his financial woes would be over.  Food would be plentiful.  Shelter would be secure.  All the resources necessary to grow his company would be at hand.  He felt that it was time to go before the Elders and ask for an unlimited, guaranteed supply of cash to spend in any way he chose.

In my line of business, I have entrepreneurs who come to me and ask for advice about raising Venture Capital.  The problem is that they can’t answer the most basic question standing in their way: “What to you want to do with your company five years from now”.  If you’re not willing to sell the company, cede control, and otherwise “cash out” of your enteprise, then venture capital is not an option.  If your goal is to grow a nice “lifestyle” company, then grow it on cash flows.  If your desire is to create a company that you can pass on to your oldest child, then invest your life savings and take out loans to cover your (financial) shortfalls.  Never, ever, approach a venture capitalist for money under these conditions.

If you want to take your company to the level where it dominates a sector, is attractive to acquisition by a larger player in the market, or is set to IPO (an unlikely result and a topic for another posting)… then, by all means, get your company ready for venture capital.

Your source of funding will dictate a few things…

  • Taking money from a Venture Capitalist is like getting married.  There will be a “pre-nuptual” agreement (aka term sheet).  There’s a nice honeymoon period after funding where all the promises you made to each other drive a “wonderful life.”  Everything is rosy.  Yet, now you’ve got a spouse to help you make decisions.  If things get ugly, divorce is possible.  But, their lawyers are better than yours and the “pre-nup” protects them.  This is why it’s important to hire your own big-time lawyer to work out the details in the term sheet.
  • Getting money from an Angel investor is like having a live-in lover.  There’s still a term sheet.  But, they’re probably not as interested in spending every waking moment with you. Some, however, might want too much of your time… so pick one carefully.
  • Going to “friends and family” for funding is quick and easy.  But, remember that blood is thicker than water.  Rather than having a legalistic relationship, you’ll be taking money from your parents or your best friends.  You’ve got to answer for failures and difficulties over Thanksgiving dinner or at the 19th hole after a round of golf.  They won’t likely every show up at a board meeting or understand anything about your business proposition.  They’re writing a check because it’s you.
  • Borrowing money from the bank is good because you buy yourself out of the relationship over time.  Of course, they want something in exchange for the capital… so you’ve got to have collateral.
  • The best way, IMHO, is to self-fund the company.  You’ll remain in control and you get to keep all of the “up side” from the deal.  The problem is, however, that most people don’t have such funds.

Regardless of the source of funds, it’s important to understand the difference between “smart money” and “dumb money.”  Neither is better than the other.  Smart money is generally better, but sometimes it is important to take money for the sake of money.  That’s “dumb money.”  The “smart money” comes with extra benefits.  It could be relationships or it could be advise.  Then, there’s the celebrity factor.  If you can get someone who has name-recognition, is an industry expert in your field, has a roladex deep enough to help find you new customers/partners, AND can write a check… you’ve hit the grand slam. 

… more coming soon …


One Response

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  1. trav said, on 20 January 2008 at 4:15 am

    Saw you on APT last night actually doing/teaching a lot of what you’re blogging about here. Good stuff (here and on tv). Thanks for putting it out there.

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