Venture Capital
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Saved by 3 people (0 private), first by anonymouse user on 2006-07-31
- Cburell on 2008-05-19 - Tags vc
- Jamescallmebrent on 2008-03-21 - Tags VC , capital , delicious_import , venture
- Wenxin on 2006-07-31 - Tags vc
Public Sticky notes
There are problems associated with attracting venture capital as well.
A venture capital firm will in most cases fire the
founder and founding team within months of a financing round.
The Wall Street Journal
pointed this out in a article by Barnaby
Federer from September 30th, 2002:
"If you ask a VC
what value they add, and you get
them after a few drinks, they'll say, 'We replace the CEO' ",
he said. And that, he indicated, does not vary
with the economic climate.
them after a few drinks, they'll say, 'We replace the CEO' ",
he said. And that, he indicated, does not vary
with the economic climate.
Highlighted by cburell
Venture capital brings with
it tremendous meddling and pressure from venture capitalists who in
this day and age typically lack both the operating and industry depth
of their predecessors. The effect of this on fledgling ventures is loss
of control by the entrepreneur which then frequently leads to bad--and
sometimes fatal--business decisions being made.
Highlighted by cburell
Here are ten drawbacks of venture
capital for the entrepreneur to mull over before making a
decision to pursue it.
* The decision to chase venture capital is often a tempting distraction from the much more complex and important entrepreneurial tasks of creating something to sell and persuading someone to buy it. The pursuit of venture capital is sometimes a means by which to postpone the day of reckoning when the marketplace finally decides if the idea will fly.
* The decision to chase venture capital is often a tempting distraction from the much more complex and important entrepreneurial tasks of creating something to sell and persuading someone to buy it. The pursuit of venture capital is sometimes a means by which to postpone the day of reckoning when the marketplace finally decides if the idea will fly.
Highlighted by cburell
* Once negotiations begin venture capitalists will
typically stall in order to push cash
short companies to the brink of
bankruptcy as a way of extracting additional equity and
concessions at
the last moment.
Highlighted by cburell
* Terms demanded by greedy venture capitalists
frequently work to erode and ultimately destroy the founding team’s
motivation and commitment to building a successful company.
Highlighted by cburell
* With the first dollar of venture capital accepted
the entrepreneur’s control slips
away to MBA wonder-boys
with only the shallowest of operating experience.
* As soon as venture capitalists become involved the founder’s role shifts from critical company building functions to preparing reports, attending endless meetings, writing memos, and hand-holding impatient and/or meddlesome investors.
* An infusion of capital often shifts the founding team’s focus away from selling to spending money in an effort to placate venture capitalists who often confuse bulking-up staff and assets with real growth.
* Venture capital brings with it tremendous pressure to create a liquidity event but this frequently results in bad decisions being made to launch products too early or enter into the wrong markets.
* The venture capitalist’s knee-jerk response to every problem faced by a portfolio company is to fire the founders and evade any personal responsibility for bad decisions.
* As soon as venture capitalists become involved the founder’s role shifts from critical company building functions to preparing reports, attending endless meetings, writing memos, and hand-holding impatient and/or meddlesome investors.
* An infusion of capital often shifts the founding team’s focus away from selling to spending money in an effort to placate venture capitalists who often confuse bulking-up staff and assets with real growth.
* Venture capital brings with it tremendous pressure to create a liquidity event but this frequently results in bad decisions being made to launch products too early or enter into the wrong markets.
* The venture capitalist’s knee-jerk response to every problem faced by a portfolio company is to fire the founders and evade any personal responsibility for bad decisions.
Highlighted by cburell
Here's a bonus 11th reason
why venture capital is bad. It is by far the
most expensive money an entrepreneur can ever tap into. Let's do the
math to see why this is. Suppose you and a venture capitalist agree to
a "pre-money" valuation of $1 million for your start-up, and the
venture capitalist then invests $1 million for 50% of the equity. After
the investment, the company is said to have a "post-money" valuation of
$2 million. Being 50/50 partners sounds acceptable, right?
Three years later the company is sold to a Fortune 500 corporation for $5 million. Do you and the venture capitalist each get $2.5 million from the proceeds? Not on your Nellie! The venture capitalist will have a so-called "liquidation preference" built into the original investment agreement which allows him to first take out 2 to 5 (or more) times his principal before anyone else sees a penny. So, let's say that in this example he takes out $3 million (i.e., a "3X liquidation preference"), plus any accrued dividends on his preferred stock. After exercising the liquidation preference and cashing in his dividends only $1 million is left. You, the founder, and your team, will then split this remaining money on a 50/50 basis with the venture capitalist.
This is a simplified example of what happens. In real life the founder and her team would probably receive far less than even the $500,000 due to all the fine print clauses.
Three years later the company is sold to a Fortune 500 corporation for $5 million. Do you and the venture capitalist each get $2.5 million from the proceeds? Not on your Nellie! The venture capitalist will have a so-called "liquidation preference" built into the original investment agreement which allows him to first take out 2 to 5 (or more) times his principal before anyone else sees a penny. So, let's say that in this example he takes out $3 million (i.e., a "3X liquidation preference"), plus any accrued dividends on his preferred stock. After exercising the liquidation preference and cashing in his dividends only $1 million is left. You, the founder, and your team, will then split this remaining money on a 50/50 basis with the venture capitalist.
This is a simplified example of what happens. In real life the founder and her team would probably receive far less than even the $500,000 due to all the fine print clauses.
Highlighted by cburell
The good news is that there is a wealth of academic research to support
the contention that anyone wishing to build a company for the long term
will be better off by not utilizing venture capital. As a result savvy
entrepreneurs devise startup strategies that allow them to focus on
generating cash flow during the first year instead of chasing venture
capital. Conversely, naive “entrepreneurial wanna-bees”, such as those
we observed in the recent dotcom era, have a philosophy which can be
summed up as, “Give me X million dollars or this idea is dead!”.
If your entrepreneurial goal is a company “built to last” it’s usually best to forgo venture capital. On the other hand, if your goal is a company “built to flip” for a fast buck use venture capital if it is available to you.
If your entrepreneurial goal is a company “built to last” it’s usually best to forgo venture capital. On the other hand, if your goal is a company “built to flip” for a fast buck use venture capital if it is available to you.
Highlighted by cburell
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