Mr. Entrepreneur – your equity is worthless!

 Richie Hecker Sep 15, 2008

So today’s post is very important because many people will disagree with it. If you are an entrepreneur, the cash equity you invest in your company is worthless in the eyes of VC’s. Sure, they will bitch about having skin in the game but it will not change your terms or valuation. Your investment will be looked as necessary seed money to get to that point and not as anything more. Yes, I have seen plenty of entrepreneurs investing alongside VC’s their own cash but at the end of the day, they are putting as much in as the follow on investors and thus are still their investors bitches, whether they started the company with $1 or $1,000,000. I’m sure many will disagree with me but when push comes to shove Bootstrapping is looked at with respect and just as valued as putting cash in. So if you’re an entrepreneur and deciding between pumping in a big chunk of cash or funding ad-hoc. Fund ad-hoc, it will save you cash personally and likely have the same valuation on your equity at the end of the day.

A friend of mine Allan Young, who was a cofounder of the University Venture Fund says “I think good entrepreneurs are going that way. put as little personal money in as possible. no middle ground basically, bootstrap or raise “hella” money so you can staff up and market big - the middle ground is dangerous because you give up too much anyway and you don’t really get enough resources to go to war with…bootstrapping instills a lot of discipline that most guys aren’t cut out for.” I happen to agree.

But the fundamental problem is a pricing issue. Personal investments are simply not properly valued by the next round. This is especially true in a place like NYC where there is a limited number of investors and relatively standard investing approaches. It simply does not pay for an entrepreneur to put in $100k when he can put in

PS. Yes, you can invest money as debt into the company but you gotta be friggin crazy if you think you’re getting it out anywhere but at the very end of the line. It works out the same way, save your money. Bootstrap.

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One Response to “Mr. Entrepreneur – your equity is worthless!”

  1. Kringle, A Corporation Sole Says:
    September 15th, 2008 at 3:04 pm

    Perspective is enlightening, is it not? The lessons learned by the bootstrap method, if applied with the tenacity of true entrepreneurial spirit are much more valuable to ensure the success of your venture model than all the material offering of the world might buy you to “shortcut”.

    If you go with investors, expect to give roughly 20% for their investment. There is a well-precedented, historical trend according to a brilliant presentation given by Josh Lerner (sorry if I hacked the spelling dude); that demonstrates that the “magic number” is roughly 20%, tracing back throughout history…like…WAY back in history.

    …but the point is…if you’re intelligent enough to be able to define a revenue stream for whatever it is you’re wanting to accomplish, shouldn’t you also be entrepreneurial enough to be able to determine a plan from going from A to B?

    Sell some T-Shirts or something…whatever it is in which you already have particular interests…so “work” is not as much “work”…

    Go for it…and keep going for it…and little by little…step by step…you innovate your way from A to B. Don’t be discouraged by the timeline…it is typical…reinforced in an excellent book, The Mythical Man-Month by Frederick P Brooks, Jr. (ISBN: 0-201-83595-9).

    Entrepreneurs are optimists, so we do not expect the delay between A and B, only that A to B is assured…our consciousness is certain, but the exact scope is likely unknown…the “terrain” has not been surveyed…and thus, it is truly impossibly to give an estimation of time…even if you might be able to justly defend your positive stance.

    Personally, I find myself facing the question:

    “Are my energies better spent in pursuit of my own interests, or in the pursuit of external capital?”

    The conclusion I reach each and every time is that my consideration of the pursuit of capital is a crazy notion…a waste of my time. If the money wants to be a part of the game, they will contact me.

    Good team environment is always more valuable than the money itself…so if you consider going the investor route, you must be prepared with your offering for the politics involved. There is significant cost for all that jazz…it diverts your energies from the goal you have set out to accomplish…distraction…noise…

    Drown out the noise and bootstrap!

    Much Love!

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