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According to Mike Glanz, of www.hireahelper.com, there’s a Catch 22 of venture capital financing: you can’t get venture capital (VC) money without a track record, but you can’t get a track record without getting VC money first.
I don’t agree with his underlying point, but I like the way he puts it:
I’m stuck. Not stuck like a truck in the mud, with wheels spinning and no hope of ever going anywhere. But stuck like I would envision being stuck in a pool of pudding. … That’s the best way I can describe trying to get VC with no prior experience raising capital. Pudding. I read everything, forums (like startupping), blogs (avc.com, venturehacks.com etc), articles (wikipedia), how-to’s (howstuffworks, business2.0, Inc) and write letters and emails to anyone I can think of to help me make a connection, offer advice, or even (dare I say it) make an introduction.
Where am I? Almost the same place I started.
I don’t know Mike Glanz, but I’m rooting for him. I like his letter, which he published as an open letter to the community at the Venture Capital review site www.thefunded.com (an excellent resource, by the way).
The open letter goes on to compare his company’s frustrating lack of success with VCs, apparently despite a good-looking launch, to another (unnamed) company’s deal that got $10 million for 50% equity.
The only difference, he says, is that the other company has an executive from RealMedia, and his doesn’t.
So what are your thoughts? Am I stuck? I’ve spent 4 months trying to get intros to VC’s. I’ve sent off the packet and even got great positive feedback on it, but here’s the bottom line. If I don’t know someone, then someone better know me. Since neither are the case, we’re stuck dealing with apathetic Angels, while Mr. Yahoo gets all the big money for his next big flop.
At this point I say stop. Hold on here. Your point is that it doesn’t seem fair? Who said this is about fairness? VCs are not responsible for offering equal opportunity to entrepreneurs. They aren’t judging a school venture contest. They are investing other people’s money. That’s their job, not being fair to newcomers. And they don’t do well at their job unless they choose the best possible deals, obviously guessing as they go.
Of course it’s a Catch 22, because people who have been there before are a better bet than those who haven’t. Mike describes that other team as “Mr. Yahoo” and his team as “2 small business owners and a couple whiz kids with high ambitions.”
I’m touchy on this point because through the 26 years I’ve been watcher of and consultant to venture capitalist, and guidance counselor for entrepeneurs, I’ve heard way too much “VCs are sharks” and not nearly enough of reality. Most of the big VCs are placing money entrusted to them by larger organizations including insurance companies, college funds, and so forth. Not that the source of the funds makes a difference, but it is a reminder that what they are supposed to do is maximize the return while maintaining a decent relationship between risk and return.
The Catch 22 that Mike notes is quite common, throughout life, not just in venture capital. Try getting a job as a journalist without experience, for example, and you’re at a similar dilemma: “How can I get experience if nobody will hire me without experience?”
Futhermore, there are ways around the wall.
- One of my personal favorites is bootstrapping; not always possible, not always a good idea, but when bootstrapping is good, it can be very, very, good. Of course Mike’s business plan might make a great case against bootstrapping, and I haven’t seen the plan, so this is just as an example. Still, with that as a caveat, he says in the letter that his startup sold $4K, $7K, $14K monthly its first three months, and it has $100K in the bank from friends and family investment. Doesn’t that sound like they could just go for it, then, make it $28K next month and $54K the following; does it really need $10 million? What’s that for, a SuperBowl ad? Build the sales, make it happen, don’t worry so much about what “Mr. Yahoo” got. Go get your own without having to convince venture capitalists. Just convince users. For the record, I’ve seen this happen before. I’ve been on the board of directors when it happened. It’s not a bad way to go.
- Strengthen your team. Hire somebody who has the experience the VCs want, offer that person equity, listen to his or her views, absorb the know-how and experience that the VCs want.
- Mike’s letter is discouraging about angel investors but maybe there’s an intermediate option, angel investors who have some future clout and credibility with VCs.
Anyhow, like I said above, I disagree with the sentiment about implied fairness, but I’m also rooting for this to work out because I liked his letter. The best revenge is living well. Forget the VCs, Mike, make a ton of money and then tell stories about how you did it without them.
-Tim
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
