Saturday, November 1, 2008

Canadian Entrepreneurs Need to Toughen Up or Face Extinction - It's Not Personal, It's Just Business

People often ask me:
"Paul, why do VCs seem so scary?"
I gave a speech in Ottawa a few weeks ago, focused on the 7 things that entrepreneurs needed to understand about VCs and the startup business. It was direct and honest. And while I spend most of my time talking to entrepreneurs, it was the first time I had structured my thoughts in that way, and it was the first time I would be delivering it to a Canadian audience.

The result was surprising. Many entrepreneurs in the room were shocked - at the candidness of the delivery, and at the content itself. If Canadian entrepreneurs want to survive these tough times, that is a very bad sign. Here are some of the lines that attendees gasped at:

  • "...I am not your friend..."
    • This is absolutely correct. Your investor is not your friend. In fact, your investor SHOULD NOT be your friend. Entrepreneurs get very emotionally attached to their businesses and to their people. That passion and emotional drive is what makes entrepreneurs great. However, that emotion can also cloud an entrepreneurs judgement in difficult situations. It is far better for the business to have a VC who is somewhat removed, and can look at things objectively, rather than worry about his friend. Of course, this doesn't mean that VC and entrepreneur don't have to get along. I spend a LOT of time with my portfolio companies and only invest in people that I know I would love to work with. If you asked them, I think they would say the same about me. I shouldn't have to be your friend to get your business - we just have to make a great team in terms of working together.
  • "...greed is good...all I care about is making my 10x return..."
    • This once again, is absolutely correct, yet lost on many Canadian entrepreneurs. My only motivation is the desire to make money. It's what I'm paid to do. No breach of ethics, just a focus on returns. In tough times, this becomes even more significant. VCs today want to build real businesses with real business models. 
  • " is more important than your mother..."
    • This is true in good times, and even more true in bad times. The startups that survive are the ones that focus on cash flow. Cutting costs to conserve cash, and doing whatever it takes to build the top line. VCs all over the world have had discussions with their portfolio companies in the last few weeks about cash. In the startup game, cash is truly more important than anything else. You may love your mother very much (as I do), but she won't help your business survive. If you want to build a great business, focus on cash.
I love Canada, I love canadian entrepreneurs, and I want to see the startup environment here flourish. When we invest in companies, we often see ourselves as a founder, and get involved accordingly, working every day to help our entrepreneurs build their businesses. But when I give the same exact lines to US entrepreneurs, they don't even blink. They understand the beast. That understanding makes them tougher and more resilient to downturns. That understanding makes it easier for them to raise funding. 

Canadian entrepreneurs need to start building that toughness. The world is a scary place, with competition and failure lurking around every corner. Be afraid of your competitor, not the VC who wants to make a huge return (and you very wealthy in the process). Be afraid of the investor who tells you everything you want to hear, not the VC who gives you the big picture perspective by removing the emotion factor and can help you make the tough decisions. 

Get tough, and you'll survive.

Wednesday, October 29, 2008

Patience is a Virtue - Long Wait Means Lots of New VC Whisperer Features

People often ask me:
"Paul, what happened to you in the last couple of months? We're dying for some news from the VC Whisperer!"

Based on the first phrase in the title of this post ("patience is a virtue"), many of you are probably expecting a post commenting on the recent economic downturn. It's true. Companies need to be more patient now, and plan for patience. But more on that in a future post...

Instead, I'd like to recap what has occupied my time in the last couple of months, and what changes are coming to the VC Whisperer:

  • The VC Whisperer is in fact my alter ego. My other side is a real VC. Praized Media ( is one of my portfolio companies. In the last couple of months, they have announced a couple of major features, that I think make the product that much more exciting. Here are some of them:
    • They've just launched a very cool service called Praized Answers ( It allows you to find the best places, by simply asking a question, and collects the answers from your community automatically. 
    • Praized also has an iPhone app that is currently in beta and nearing launch any day now. Stay tuned for that. Very cool stuff.
  • The VC Whisperer is launching a sister site - VC Places ( VC Places will serve as a local directory of places recommended by the VC Whisperer and by readers of the VC Whisperer. VC Places will focus on merchants that are appealing to VCs, entrepreneurs, and others in the global startup/business community. Go check out VC Places here and vote on your favorites! As entrepreneurs, VCs, and business people, let the VC Whisperer community know what your favorite places are. VC Places is powered by Praized.
Stay tuned for more posts from the VC Whisperer, more insight into the VC world and VC mind, more help for entrepreneurs, more commentary on VC deals, and favorites lists at VC Places. 

Tuesday, July 1, 2008

I Almost Died - The Importance of Key Man Insurance

People often ask me:
"Paul, why do VCs seem to make such a fuss about key-man insurance?"
I've said it before and I will say it again. People matter most.
Thus, VCs often insist on key man insurance, because they fund people, not ideas. They simply want to protect their investment. VCs who insist on key man insurance feel that you, as the entrepreneur, are critical to the success of your company.
I've been very sick for the last week, and it made me realize how critical key man insurance can be. While I was out of commission, many things just couldn't get done. If my illness was more serious than just a flu, my business would have been at risk. When a founder/CEO gets hit by a bus, a lot of domain expertise and experience is lost. From an operational standpoint, it's also a huge distraction and disruption to the business.
A VC friend of mine from MIT has an interesting view on key man insurance, which I will leave you with.
"We want to make it (key man insurance) high enough to protect ourselves, but not so high as to make us want to knock you off."
Keep it in mind when VCs talk to you about key man insurance. Don't fight it, understand that VCs just want to protect themselves and think that you are important.

Tuesday, June 17, 2008

Don't Lose VC Money - Get to Cruising Altitude

People often ask me:
"Paul, when does an early stage VC start to feel comfortable with an investment?"

Early stage VCs regularly evaluate the companies in their portfolio. They do this to decide if they should continue pouring time and money into a particular company, or if they should shut it down and swallow a loss.

This type of evaluation often starts with a rough measurement of the risk involved with the company. For a VC, a huge amount of risk is eliminated when you've achieved what I call "cruising altitude". Cruising altitude is the point at which a VC is confident that at least he won't lose all of his money. In other words, at that stage, the VC believes that your company could be sold to someone (often just for the technology).

When you've hit that point, the scariest part (takeoff) is behind you. So don't put the VCs money at serious risk and you're halfway there. But the flight definitely isn't over, and your focus needs to shift to executing a safe landing (read: exit).

Monday, June 16, 2008

Cash Is More Important Than Your Mother - Mo' Money, Mo' Problems?

People often ask me:
"Paul, how much money should I take from VCs?"
This is a difficult question, but a good problem to have. If you're at the stage where VCs are offering to fund your company, that's a very good sign. At that point, you have to figure out how much money you actually want to raise. To understand this problem better, I will paint the scenario from each side of the table. First, from the VC side:
  • More. A VC might want you to take more money because they are looking to take a larger position in your company. For example, you may have asked for $2M, but that small of an investment may not be worthwhile for a lot of VCs. VCs also want to make sure they aren't underfunding businesses. Every VC wants to give their portfolio companies the opportunity to succeed. VCs are quite savvy about how much money it takes to build a great company (we see it a lot). Entrepreneurs often underestimate how much money it will take and how long the process is.
  • Less. A VC might want you to take less money because they want to minimize their exposure. Their is always a high risk that a startup goes south and all the money is lost. You may have asked for $10M, but the VC might only want to put $2M at risk in your particular industry/space/company.
Now let's look at it from the entrepreneur side of the table:
  • More. You might want to take more money for a few reasons. First, it's a big weight that is lifted off of your shoulders. Fundraising is an arduous process, that takes an inordinate amount of the CEO's time. The less often that you have to fundraise, the better. Second, more money provides more speed. Speed and the ability to throw resources at a problem immediately are very significant competitive advantages. Finally, taking more money provides stability to the business. You are more likely to hire a superstar if he is confident that your startup will be around for a few years, instead of being unsure if it will last the week.
  • Less. You might want to take less money from VCs to keep a larger share of your company. The idea here is that you take less money in the present, and then raise more later when you can demand a higher valuation.
The VC Whisperer's opinion on this? Take as much money as you can get when it is offered to you. The golden rule should be all the reason you need: companies always need twice as much time, and three times as much cash (relative to their initial expectation).

Follow the golden rule, and take every penny that's on the table. When there is lots of money in the bank, you increase your chances of success, and you eliminate a whole set of potential problems. Cash is like oxygen for a startup. Without it, you're dead. Thus, there is no point protecting ownership in something that you don't have enough money to build.

If you remember just one thing when you're running a startup, remember this: CIMITYM - Cash Is More Important Than Your Mother.

Friday, June 13, 2008

Your Payday Is Closer Than You Think - The 3 S's of Exits

People often ask me:
"Paul, how do companies and VCs manufacture exits?"
The life of a venture backed startup is centered around 3 major events:
  1. The Founding
  2. The Funding
  3. The Exit
The key for entrepreneurs and VCs is to get from funding to exit. The exit can be an acquisition or an IPO, and at that point, everyone involved generally makes a lot of money. However, significant value needs to be created to manufacture an exit, and that value can be generated in one of 3 ways. I have listed these ways to generate value, in order from least effective to most effective, and I call them the 3 S's of exits:
  • Strategic. Strategic value is created when you've designed your product or company to be invaluable to a single acquirer or small group of potential acquirers. Building strategic value to get to an exit is a great way to focus your company, but at the end, you are left with a relatively small number of outs. 
  • Sales. This is self-explanatory. If a company can generate sales, then that might lead to an IPO where people are willing to pay for future growth. It might also lead to an acquisition by a company looking to capture those customers and capture that additional revenue.
  • Self-Selection. This is the holy grail of value creation. At this level, your company has created something so special, or has marketed it in such a way, that no selling is required to bring in new customers. Customers come to you out of their own volition.
The most effective way to get to a big exit is to reach the point of customer self-selection. When customers are walking through the door, without having to spend a dime to get them in, then you know you're close to that big payday. Focus on transforming your business - from one where you have to sell to create new customers, to a business where the new customers are creating themselves. Remember the 3 S's and don't be shy to push your financial partner (your VC) for help in manufacturing the exit you're looking for.

Tuesday, June 10, 2008

Is Your Company Right For Venture Money? 4 Questions VCs Ask Themselves

People often ask me:
"Paul, what type of projects are suited to venture capital funding? For example, is venture capital a viable source of funding for film and other entertainment projects?"
To answer this, let's put business issues aside for the moment. When I say business issues, I mean things like management, business model, customers, etc... Attracting venture capital depends partly on the business issues, but also on how well your business fits with the type of investment a VC wants to make.

When considering a project, VCs always ask themselves 4 questions (among others, but these are always considered):

Question #1 - How much money will this business need and over what period of time?
  • VCs are limited by the size, structure and focus of their funds. Those factors determine a VCs sweet spot. For example, many VCs can't make investments representing more than 10% of the total size of their fund. Also, many VCs identify themselves as "stage" investors: seed stage investors, early stage investors, or late stage investors. Others, on the other hand, like to participate in various rounds of funding throughout the life of the company. Each has a sweet spot. 

Question #2 - What is the expected risk?
  • This is difficult to quantify without getting into discussions about business issues. However, it is important to know that different VCs have different appetite for risk, which is (once again) often dependent on the nature/size/structure of their fund. There is no absolute right answer to this question. Stay tuned for more about risk in a future post. 

Question #3 - What is the expected return?
  • For most VCs, the expected return is a homerun, sometimes referred to as a "10-bagger". In other words, a VC has to believe that there is a chance this investment will return 10x his money. If a VC knows ahead of time that an investment could "only" return 3x his money, then that's usually not an attractive investment.

Question #4 - Can I add value?
  • For most VCs, the answer to this question has to be yes. If a VC doesn't believe he can add value through his own network or domain expertise, then he is relegated to being just a passive investor. VCs get paid to actively manage money, not be passive investors.

Now let's look at film and entertainment projects using the same 4 questions as an initial screen:
  1. Money/Time Required: Major motion pictures require tens of millions of dollars, invested over a very short period of time. Thus, that type of project is outside the mandate/capabilities of most venture capital funds. Independent films require less cash, and therefore are more amenable to venture capital investment. --> A film project might pass.
  2. Risk: Film projects are very high risk. Having said that, the level of risk is similar to the risk assumed in an early stage technology investment. --> A film project might pass.
  3. Return: Successful movies can be tremendously profitable, and those big wins occur with roughly the same frequency as traditional venture capital investments. However, for most VCs, the biggest exits are generated by IPOs. A movie isn't a business, and therefore the potential for an IPO is ruled out from day 1. That's not an attractive prospect for a VC. Additionally, a VC would likely have to take a huge ownership stake in a movie to make it worthwhile - an arrangement that might be difficult to swallow for most filmmakers. --> A film project would likely not pass here. 
  4. Ability to Add Value: Very few VCs could add value to a film project. Filmmakers aren't building businesses. A VC's network and experience could very rarely affect the outcome of a movie. This is where a film project wouldn't make the cut. VCs don't want to be passive investors. --> A film project would not pass here. 
The 4 question screen explains why few VCs (if any) invest in film projects.

It is important to be aware of the fact that VCs always ask themselves these 4 questions. You don't have to answer them explicitly in a pitch deck, but you should know ahead of time if you're a good fit for venture money. Not every idea or business can attract venture capital. Fit matters.

Think of these 4 questions as the first screen that a VC will use. But don't be discouraged. All venture money is not created equal, and different VCs will have different criteria. Just make sure you understand the baseline, and the expectations. Venture money can be your ticket to explosive growth and the creation of a great business.

Saturday, June 7, 2008

Pucker Up And Kiss Some Ass - Flattery Will Get You Everywhere

People often ask me:
"Paul, do I need to do a lot of VC ass kissing to get their attention?"
Yes. You will need to kiss a lot of VC ass to get your company funded, and to get the attention that you deserve.

If you thought you were becoming an entrepreneur so that you would never have to kiss ass again, then you were doing it for the wrong reason. Everyone has a boss, no matter what you're doing, and no matter how successful you've been. If you're an entrepreneur or CEO, your bosses are often your VCs, your board of directors or maybe even your shareholders.

When you're kissing ass, here are a few tips:
  • Be Sincere. If you're lying through your teeth, and can't find anything nice to say about a VC (or any other person for that matter) and also mean it, then don't say it at all. 
  • Don't Overdo It. It's important to do this in moderation. Too much flattery can come off as insincere. 
  • Swallow Your Pride. If you're sucking up, but doing it grudgingly and hating every minute of it, then that will shine through. Fix your attitude first before you try doing any ass kissing.
  • Make It Personal. Take note of the small things that a VC or customer might be doing right, and run with that. Show them that you noticed and that you appreciate it. Try to avoid very general and impersonal flattery. 

There is absolutely no reason to see any of this as a negative. Use flattery and ego to your advantage. VCs, like virtually everyone else on this planet, are frail, emotional human beings with egos that need stroking every once in a while. If you manage to kiss ass effectively, they will be far more tuned in to what you're saying. Keep in mind that VCs like to invest in companies where they think they can add value. Show them how great of a partner they would be, and why - don't be afraid to point why you would love to work with them.

But take solace in the fact that you're not alone. VCs have to suck up as well, to their limited partners (LPs) - the people whose money they are managing. In that case, VCs have to kiss ass over the length of a 10+ year relationship. Now that's ominous, so be thankful that, as an entrepreneur, you only have to worry about a single transaction. 

The reality is that flattery and ass kissing work not only for getting VC funding, but apply to your relationships with customers as well. Everything is a sale in life, whether you're selling your product, selling your company, or selling yourself. Everything is a sale. Flattery is a very effective tool in your sales arsenal, to be used carefully and methodically. So pucker up, kiss some ass, and the rewards will follow.

Friday, June 6, 2008

Always Be Looking Over Your Shoulder Or Your Startup Will Get Mugged

People often ask me:
"Paul, why don't VCs seem to understand that I have no competition?"
VCs hear this from entrepreneurs on a very regular basis. Claiming that your company has absolutely no competition is another sure way of shooting yourself in the foot when you talk to VCs. They don't understand it because they know it to be untrue, no matter how convinced you may be. Even if you don't have any competition right now, you most definitely will in the near future. 

Thus, making this claim hurts your credibility. VCs know that you have competition. Furthermore, VCs know that the probability of competition emerging is very high. Claiming that none exists signals to the VC that you just haven't done your homework thoroughly enough. If you haven't taken the time to fully understand the space you want to do business in, then why should a VC trust you with his money? A VC would much rather fund someone who has identified where the competition will come from, and what the plan is to beat them.

If, at first glance, it seems like your idea or business has absolutely no threat of competition, dig deeper. Here are some good places to look for potential competition:
  • Behind You: The incumbent is your most obvious competitor, and virtually all entrepreneurs fail to identify it. In fact, many don't even think about it. But changing the way people do things is very difficult. Incumbents are also dangerous because they could potentially evolve their product to match yours, with the added benefit of more established customer relationships. 
  • Above or Below You: These are vertical competitors. They are operating in the same industry, and likely have the same customers. However, their product or service addresses a different part of the value chain. It might make sense for them to branch out into a complementary product, one that competes directly with your own offering. For example, say you've developed a great new operating system for cell phones. Samsung builds cell phones (the hardware). Tomorrow, they might decide that they want to create an operating system for the phones they build. This would then directly compete with your own new product. 
  • Next to You: These are horizontal competitors. They are operating in a different industry, but likely have a very similar product (in terms of functionality and purpose). It might make sense for them to modify their product to serve the customers in your target industry. For example, say you produce high power transistors for the telecom industry. A company building high power transistors for electric cars might decide that it would require minor modifications to start selling and marketing their product to the telecom industry, thus becoming a direct competitor.

It is important to assume that not only will you have competition from day 1, but that it will be fierce. It's not enough just to be there first anymore. You have to show a VC that you've anticipated and thought about who your potential competitors are. Of course, it is impossible to predict every competitive move, but thinking about it makes you far better prepared to deal with competitive threats when they do emerge.

If you were walking home at night in an area full of muggers, alone, with your pockets full of money, and a bright future ahead of you, wouldn't you be looking over your shoulder?

Wednesday, June 4, 2008

Romance Isn't Dead - The Passion of The Entrepreneur

People often ask me:
"Paul, what is the first thing a VC like you looks for in an entrepreneur?"
So much can go wrong in a startup - problems with technology, customer, market, execution etc... And in adherence with Murphy's Law, if something can go wrong, it will go wrong. Successful entrepreneurs are able to navigate those issues, often with different backgrounds and skillsets. The common thread is always the passion that they bring to the table, to get through the hard times, and supercharge a company's growth when times are good.

Thus, when a first-time entrepreneur walks through the door, VCs are looking for a little romance. They are looking for someone who loves what they do, who is passionate about their business. VCs are actively judging you on this. Be respectful and polite, but if a VC doesn't feel like you even care, then why should he? The passion for your business should ooze out of every pore, and affect not only what you say, but how you say it. If you are passionate about your business, there is a much greater chance the VC will become passionate about it as well. 

To hammer the point home, let's look at this from an economic perspective. The reality is that VCs can't be satisfied with returning 5 or 6 percent to their limited partners. Venture capital funds must produce returns (IRR) of 30% or more over their lifetime. The consequence of that is that the average exit needs to be very big. A 10M-20M exit on a 4M investment just doesn't cut it unless the VC is holding 95% of the company. The reality is that VCs make their living on the homeruns. Therefore, we look for entrepreneurs who have the passion, drive and vision required to swing for the fences.

Be realistic in your assumptions and projections, but don't be afraid to think big. Passion will get you everywhere, and most importantly, it is contagious. Passionate CEOs create a culture that not only attracts the best people, but imbues them with a passion of their own. Prove to the VCs you meet that romance isn't dead.

Monday, June 2, 2008

No One Understands What You're Saying - Keep It Simple Stupid

People often ask me:
"Paul, why don't VCs or customers understand my pitch?"
I will let you in on a little secret. VCs see lots of entrepreneurs, with lots of complex ideas. The way to stand out from the crowd, is to keep things simple - simple to communicate, and simple to understand. In other words,

I can't emphasize the "keep it simple stupid" (KISS) mantra enough. Too many entrepreneurs walk through the door with good ideas, but if you can't clearly communicate the value of your product, then VCs won't bite, and customers definitely won't bite. In the same vein, it should be crystal clear to anyone listening exactly what pain you're solving and how you're solving it. It's not good enough to just list features. VCs see hundreds or thousands of deals each year, and simply don't have the time to translate cryptic, convoluted and long-winded messages.

Most books talk about refining your elevator pitch. While I think that's a critically important tool in communicating the value of your product, I strongly believe that it has to be even simpler than that. I should be able to see how you're going to solve someone's pain in 3 sentences or less:
  1. The pain is _____.
  2. My product/service does _____, thus solving the pain.
  3. You should care/buy because ______. 
I challenge my readers to drastically simplify all of the messages they create around their new business. And if you're not the type who can connect with people based on a simple message, told succinctly, then hire someone who can. They are worth their weight in gold.

Get to the point. Show VCs the pain. Show them how you solve it. Show them why they should care. Keep it simple, so they can understand. If you can get it down to 3 sentences, VC money and customer money will follow.

Saturday, May 31, 2008

VCs Need to Eat The Dog Food - Quoted in The Montreal Gazette

People often ask me:
"Paul, is it true that the VC Whisperer was quoted in Friday's Montreal Gazette, speaking out about the state of the venture capital industry in Canada? Is there anything that can be done to solve all of the problems the industry is facing?"

I have been attending the annual CVCA (Canadian Venture Capital Association) conference over the last couple of days. A great reporter from the Montreal Gazette, Roberto Rocha, wrote a very interesting article about some of the troubles facing the canadian venture capital industry at the moment. Here is an excerpt from the article:
While the outlook for private equity deals looks grim in the midst of a credit crunch and the still-fresh wounds of failed mega-deals, VCs see their future in a more positive light. Investors have built better management teams and made strong ties with powerful U.S. funds, said Gilles Duruflé, an independent consultant who advises VC and private equity funds.
However, returns in Canada remain far below U.S. averages, prompting some VCs to wonder if success necessarily means emulating the American way - taking bigger risks, investing in late-stage startups and holding companies longer before selling.
Paul Dawalibi of Garage Technology Ventures believes this is the way. To achieve this, Canada needs VC funds with the critical mass to attract top management talent and foreign investors.
"This will take some time," Dawalibi concedes. Some funds we have here are so new we don't know that track record."

The only way to solve many of these issues is for Canadian VCs to "eat the dog food" - that is, start putting into practice the same advice we give to entrepreneurs on a daily basis. On that note, I want to highlight a few thoughts that didn't make it into the final cut of this article, and emphasize the ones that did:
  • Be different. Like any other startup, it is important for Canadian VCs to stand out from the crowd. Some are doing this. In the case of my fund (Garage), we realize that we are too small to be effective on our own. Thus, we partner regularly with premiere VCs in the US to plug our companies into the resource rich environments of Silicon Valley, Boston, New York etc... The BlackBerry fund that's been created by JLA is another good example of differentiation that will pay dividends. 
  • Think big. It's not good enough to want to do business in Canada or build a Canadian company. The big money is made with big ideas that have global reach. 
  • Cash is king. Politics are rampant in the Canadian venture capital industry. Everyone seems to have lost track of what's actually important - not making friends, but making money. 
  • People matter most. I tell my companies this all the time. But Canadian funds don't always remember how important people really are. Small funds have difficulty attracting the best talent because they simply can't afford it. But a simple solution exists - change the rules. Give the best and brightest young talent more responsibility than they would get elsewhere (read: in the US). Pull them out of the best MBA programs and give them full reign to make things happen, and the proper incentives (carry) to do well. It's a riskier strategy in the short term, but will pay huge dividends in the long run. Failing on this front will spell the end of the Canadian venture capital industry, or at least banish it to an eternity of poor returns. 
If VCs in Canada start eating the dog food, there's no reason good returns shouldn't follow. But it will take lots of work, and a focus on attracting the most talented people to run the funds. To achieve that, old ways of thinking need to be thrown out, and replaced with drive, ambition and fresh perspectives.

Thursday, May 29, 2008

You're Not Perfect - Surround Yourself With Greatness And Own Up To What You Suck At

People often ask me:
"Why are VCs always on my case to hire more people? I'm doing all of the jobs they're hiring for just fine."
The unfortunate reality is that startups are complex. To be successful, they require a variety of backgrounds, skillsets, and expertise. Previously, I blogged about walking the factory floor. It was one of the things a founder could do to try to keep the CEO job after getting funded.

However, the most critical skill to have when you're at the top of a startup is self-awareness. No founder/CEO is perfect. Know your weaknesses, and be able to admit them. In other words, know yourself. The best entrepreneurs are the ones who can recognize the exact holes they have to fill in their organizations.
What the entrepreneur says: "I don't need to hire a dedicated business development guy, because I've been doing that job since the day we started."

What the VC is thinking: "This guy obviously doesn't have the skills to be a great CEO, because he can't even see the holes in his own organization. He can't fill gaps he doesn't even see. Looks like we'll have to replace him."
In fact, if you really want to impress a VC, communicate where you think you need expertise, and potentially how the VC could help. Be proactive and do this before they have even funded you. VCs love hearing an entrepreneur asking for help, especially when it comes to finding good people. The faster you can recognize your weaknesses, the better. You'll more easily avoid a lot of the problems that plague early stage ventures, create a vastly stronger team, and live to fight another day as CEO.

Wednesday, May 28, 2008

Your Startup's Revenue Projections Are Wrong

People often ask me:
"Paul, what should our revenue projections look like to attract venture capital?"
I believe there is no good answer to that question. There’s no “right” projected number that makes us all want to throw money at a startup. Most VCs are savvy enough to ignore the number itself because frankly, most of the time, it's wrong. Not through any fault of the entrepreneur, but simply because if the future could be predicted, we would all be buying lottery tickets, and not starting (or investing in) companies.

What is important to understand and convey to a VC are the assumptions underlying the forecasts, because that’s what we go digging for when we look at those things. In other words, is the underlying assumption some formula about growth in page views (for example)? And if so, show me that those user growth projections tie directly back to the revenue projections. Then, take it one step further, and think about a basic sensitivity analysis. Show me three scenarios of user growth, and how that affects the revenue projections.
What the entrepreneur says: "Our revenue is projected at $25M for next year, because we think this is going to take off in a big way."

What the VC is thinking: "Looks like that number was just pulled out of thin air. This person didn't do their homework. I'm going to tune you out and get back to answering emails on my BlackBerry."

What the entrepreneur should have said: "Our revenue is projected at $15M for next year, because if we assume signed distribution deals with these 10 blogs, we should generate 100M pageviews, and with an assumed clickthrough rate of 3% etc..."
You get the point. The VC would rather see a smaller number built on a foundation of assumptions that you've verified, rather than a huge number which you pulled out of thin air. 

See where I’m going with this? It’s not about getting the right number, or even getting the number you think the VC wants to hear. It’s about identifying the assumptions, explaining them, testing them, and justifying them.

Tuesday, May 27, 2008

Walk The Factory Floor And You Might Not Get Fired

People often ask me:
"Paul, what is one thing I can do to avoid getting fired as CEO after I get funded?"
Most VCs know that the entrepreneur who walks in the door will likely not stay on as CEO forever. Most first-time entrepreneurs have deep domain knowledge, but lack the leadership qualities that are necessary at that stage. However, this doesn't mean that an entrepreneur shouldn't work to develop their leadership and CEO qualities.

One quality in particular that might keep you in the CEO job longer is the ability to "walk the factory floor". At the highest level, it means that you're a leader who is engaged with and aware of everything going on in your business. On a more practical level, here are some steps you can take to be a CEO/entrepreneur/leader who walks the factory floor:
  • Be open. Keep your office door open 90% of the time.
  • Be visible. Make sure you're the first one in and the last one out of the office.
  • Be there. Don't be away from the office if you don't have to be. Generals direct best on the battlefield.
  • Be mindful. Always be conscious of how people react to your words and your presence. Never shoot the messenger.
  • Hold Monday meetings. Take a couple of hours to catch up at the beginning of the week.
  • Take the company's pulse. Know the mood of your employees. You're only going to accomplish this by talking to them (and not just your senior executives).
  • Speak their language. If you're going to walk the factory floor, make sure you speak the factory worker's language. Understand your employees' needs and talk to them about things that matter to them, not to you.
  • Listen. Your employees know what your customers want better than you do. If you're going to take the time to walk the factory floor, the least you can do is listen. More about the importance of being a great listener in a future post. 
If you've got the experience to back it up, make sure you articulate to your VC how deftly you walk the factory floor. Walking the factory floor is a major component in the creation of a corporate culture. Showing that you can do it well is music to a VC's ears...

Monday, May 26, 2008

Hand Over Your Company and No One Gets Hurt

People often ask me:
Paul, is it true that venture capitalists are out to seize control of my company?

This is in fact not the primary goal for an early stage venture capitalist. While most will take significant positions to account for the significant risk involved, VCs do not want to take away the financial incentive for founding management teams to succeed.

For a venture capitalist, there is a delicate balance that needs to be reached between 3 goals:
  1. Capitalizing on the upside
  2. Protecting against downside (managing risk)
  3. Ensuring the entrepreneur is motivated to make the business successful
Stay tuned for a more extensive post about the 3 goals of VCs. But it is clear that taking complete control of a company achieves only the first goal, and runs contrary to achieving the others.

Early stage VCs don't want your company, because they would rather rely on you to make it successful. They want you motivated and engaged. Just don't screw up, and definitely don't check out...

Saturday, May 24, 2008

Your Product Doesn't Sell Itself

People often ask me:
Paul, why don't VCs seem to understand that my product virtually sells itself?

I sat through a pitch the other day, and the entrepreneur said one of the many phrases that makes me cringe: "my product sells itself". Never say this. It's suicide.

VCs don't understand it because we know it to be completely untrue. We would all be printing money if we just invested in products that sold themselves. NOTHING sells itself. Separating people from their money is one of the toughest things to do, and selling is an art-form.

Instead of claiming that your product sells itself, explain why there's a compelling reason for people to buy or sign up. Talk about incentives, benefits, ROI and motivation. That's the kind of realistic pitch a VC wants to hear, and one that won't fall on deaf ears.

VCs Won't Sign Your NDA

People often ask me:

Paul, will you sign an NDA before I send you my business plan?

As a VC, I am often asked by entrepreneurs to sign an NDA before they send me their business plans. I think entrepreneurs should understand that this is an unreasonable request. We see dozens of opportunities each week, and there's no way we could sign an NDA before looking at each one.

The reality is that confidentiality is guaranteed by all of the VCs I know (and certainly by me). There's no motivation for a VC to steal an idea or use the information contained in a business plan inappropriately. Reputation is everything in our business. We rely on it to source deals and to build relationships with entrepreneurs. VCs, more so than almost any other professionals, are men of their word. 

So, send those business plans with confidence, and don't worry about NDAs. Ideas sent to The VC Whisperer remain 100% confidential.

Stay tuned for some examples of how and why reputation matters to a VC. 

Welcome to The VC Whisperer!

People often ask me:

Paul, who is the VC Whisperer?

I am the VC Whisperer - your front row seat to the world of venture capital. 

I will show you not only how to talk to VCs, but how to understand them. And most importantly, I will listen. Every post on The VC Whisperer, including this one, will be a direct response to a question brought forward by you, the reader. 

The VC Whisperer is also much larger than just a blog project. It is the first stage of my upcoming book project. So stay tuned for that as well, and send lots of questions and comments to the VC Whisperer.

The VC Whisperer is going to launch with some of the best posts from my old blog (slightly revamped), and brand new posts coming today and in the next few days.