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 (www.praizedmedia.com) 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 (http://answers.praized.com). 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 (www.vcplaces.com). 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. 

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.

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).

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.