The Frustrated Entrepreneur

How do you respond to an email from a frustrated entreprenuer like this one?

From my experience in today's climate:

• Unless your best friend in the world -- whom you happen to have embarrassing pictures of -- is a VC partner, please do not contact any VC. It makes no sense.
• Passion, experience, real-world results are not qualifiers for introduction to VCs. An MBA from some elite school with 20 board members who know Jack Welch personally, with an extremely complicated idea that has never been built, are preferred.

Jerry Colonna takes that on in his most recent Inc column and does a great job.  If you are a frustrated entrepreneur, go read this.

Comments

[jackson]

Can I have some cheese with that whine.

[Shivering Timbers]

One point the article misses is that it takes about the same work to invest $1M as $100M. The limiting factor is often the partners' time, rather than money.

On the other hand, as an entrepeneur who has consciously chosen NOT to seek venture funding--because I spent the bubble years in investment banking and both know how the system works and can afford to self-finance--I see a lot of very promising "small ideas" out there (and very few promising "big ideas").

There's an untapped market for micro-VC investments: investors willing to make investments under $1M and consider alternative exit strategies. A lot of work? You betcha. But as my mom used to say, hard work never killed anyone.

[Duncan Lamb]

Lot of good points from that entrepreneur, as Jerry Colonna says. I consider myself lucky that I was accepted in to an "Entrepreneur Accelerator" program in my city, which had the express purpose of introducing a select number of us into the investment community over several months. Before that, I had no idea how to get introduced into that network, and no idea even what I was missing to be honest. All I knew was that I hoped someone would notice I and my partners were working our asses off. If my lawyer hadn't steered me to apply for that program (I didn't see it publicized) we'd still be learning things the hard way, instead of having a network of advisors like we have now. I see now a couple of ways I could have got my toe in the door to meet a few of these players (such as joining local tech development organizations, which some play key roles in), but I did not know that previously.

This is a real problem, not whining, but seriously, no disrespect, that just is an indicator of someone seriously out of touch with the struggles of an average entrepreneur.... I have met a number of VCs now, and every one of them without exception has said 99.9% of all opportunities they examine are referred to them from someone they know. Others need not apply. Then again, things work fine enough how they are by all indications.

One real exception I noticed was the Always-On guys, that asked for pitches right on their blog and chose a few to listen to, all of which they would have never heard of otherwise.

On the album front, I know your focus is "pop" and "rock", but if Miles Davis is included then B.B. King's Live at the Regal may make the cut. If you haven't heard it yet, you're missing out.

[Jessica Richman]

I've often wondered, as Shivering Timbers suggested above, if there is a vastly untapped market for VC in three areas:

1. Small investments. Just as microfinance is booming in the Third World, I imagine that "mini-finance" can boom in the US and developed countries. Even if endowments and pension funds are not interested in investing sums of $1 - 5 million, individual investors, in a VC fund that returns the historical rate of 20%, probably would be. What small investor would turn down a great growth rate if someone else will do the managing? And they can participate in the VC revolution they heard so much about during the dot-com boom.

2. Investments in other areas of the country. Silicon Valley, - Alley, and Route 128 are rich with VCs and tech companies. But what about the possible tech entrepreneurs coming out of University Illinois at Urbana Champaign (ever heard of Marc Andreesen?) or CalTech or University of Washington---or just the simple fact that good ideas don't care about geographic location and can start anywhere. Capital is the easiest thing to move, and it should be moving.

3. Less volatile investments. There is a known investment model for investing in high-tech and biotech and other risky things where you can hit one out of the park and get rich quick. What about investments that won't get you rich quick? Small companies in nonvolatile industries that want to expand nationally or internationally are no worse than they were before the tech boom. If their growth rate is 30%, but their business isn't sexy, why can't they get funding? Why should VCs turn them down because they don't have an Ivy MBA and an idea no one can understand? A 30% return certainly beats any established market.

I really dislike the idea that the Dallas entrepreneur is just a "whiner" and should get over it. If the axiom of business is "find a need and fill it", that whining can be reinterpreted as "customer demand". Whining is the best sound in the world to a true entrepreneur. It means that there are great opportunities ahead.

[Anon for now]

Our firm is investing out of the south/central US (Texas included), actively seeking good deals and puts relatively small amounts into good companies for growth capital. We like to see results (revenue growth and ebitda), but consider some early stage deals. We have still struggled to find really good deals that have the opportunity to grow into a good multiple in this part of the world, but are ramping up our marketing to entrepreneurs. We will look at a business plan without an introduction from other "club members".

I would say to that and other entrepreneurs--we are out here. We aren't hiding. We just aren't flinging millions at the wall to see what sticks anymore.

[David]

We're in the middle of a round right now, and while Dallas might be a "dry" area in his mind, he should try Wisconsin! Mostly biotech are the only businesses getting money down in Madison, but here in Green Bay, I like to joke that the VC's here only know about three industries, manufacturing, manufacturing and manufacturing. Of course that's not entirely true, but it's close. Being a tech company in the Dairyland is not easy, but it's something we're dealing with. If I wasn't able to raise money here, I'd look elsewhere. The entrepenuer knows better than to let a little thing like this slow him or her down.

[Simon VC]

Having worn both hats, I can sympathize with Frustrated Entrepreneur.

That said, Frustrated Entrepreneur needs to put him/herself in the venture capitalist's shoes.

One point that no one has yet mentioned is the direct correlation between the geographic proximity of a portfolio company and its performance.

In my experience, the investments that do not work out are almost always the ones that are located in other cities or states.

There is a reason for this: even with the best management teams, venture capital is still a hands-on business. The spontaneous brainstorming which erupts when the entrepreneur stops by to drop something off is often just as important as the monthly strategy meeting.

Of course, you can overcome the distance problem with good communication but it is much more difficult and will way heavily in the VC’s mind when evaluating the opportunity.

Another point the Frustrated Entrepreneur needs to keep in mind is the VC’s risk/return profile.

As Fred mentioned in his post comparing venture capital to poker, venture capital has a high failure rate.

In order to compensate, venture capitalists must swing for the fences every time.

A venture capitalist needs an astronomical success in order to make up for the large number of businesses that, for whatever reason, fail or simply break even.

Along those lines, people need to remember that venture capital funds do not exist in a vacuum and must compete against hedge funds, buyout funds and other types of alternative investment vehicles for a finite amount of resources.

Shooting for average returns is not an option.

In terms of making small investments in a larger number of deals, it is not economical.

As another reader pointed out, whether you invest $100,000 or $10 million it takes the same amount of effort. The transaction costs associated with investing a small amount of money in a large number of companies are prohibitively high.

In general, it makes more sense to invest a larger amount of money in fewer deals because you wind up with a lower ratio of partners/portfolio companies which tends to ensure that the companies get the attention that they need.

One important distinction that also needs to be made and that, perhaps accounts for some of the frustration that plagues entrepreneurs is that there are different kinds of venture capital firms.

So, for example, there are early-stage funds which specialize in start-up companies and there are expansion-stage funds which specialize in existing companies looking to expand, etc.

There are funds which focus on biotechnology, funds which specialize in information technology, etc.

I think that what happens to entrepreneurs is that they sometimes get so carried away with how great their idea is that they assume that everyone will jump at the opportunity to invest regardless of the industry.

This is a fundamental naiveté on the part of the entrepreneur.

Generally speaking, venture capitalists invest in things that they understand (or think they understand). Asking a venture capitalist who specializes in cancer drugs to evaluate a software company is like asking a chemistry professor to evaluate a comparative literature essay: it just doesn’t work.

In order to minimize the amount of frustration for everyone involved, entrepreneurs need to do their homework before approaching a VC to make sure there is an appropriate fit.