Bootstrapper.com - Confessions of Serial Entrepreneurs

So I was invited to the DFJGotham.com dinner tonight. DFJ is a great VC firm with some of the nicest people I know running it (not just nicest investors). Genuinely good people. Besides for the good food and wine and getting to catch up with friends and hobnobbing with some of the great people of our little community, Danny the cofounder (and a fellow Yeshivah of Flatbush grad) went out of his way to talk about TakesAllTypes.org (TAT) my non profit with Ben Bergman. It’s really gratifying (and awesome) to see someone take time out of their speech at a capitalist affair to talk about a non profit cause (and even better when it’s mine). I wanted to thank Danny and the team at DFJ (Ross, Jed, Thatcher, Mark, Peter etc…) for the mention and the invite. I had a great time and I highly recommend DFJ.   Also congrats to Thatcher & Mark on your promotions.PS. I was not paid for this post. Go IZEA!  

So I was at a panel event that Howard did for NYSIA tonight and I was thinking…do we have any real power brokers in nyc tech? This of course led me to think of the Alley Insider list and also the Peoples’ Choice list which I proudly can say - I came in 5th. My answer is a big fat resounding NO. I don’t think there are any real power brokers in NYC tech - potentially one. So let’s look at what defines a power broker: according to American Heritage Dictionary, 

power broker or pow·er·brok·er   (pou’ər-brō’kər)  n.   A person who exerts strong political or economic influence, especially by virtue of the individuals and votes he or she controls. Then also we have to look at the Seminole Tome “Power Broker” about the life of Robert Moses. Robert Moses if you don’t know controlled and built NYC, he manipulated every mayor and governor for decades and is responsible for most of the bridges and roads in NY. He controlled power. So who controls the power in NYC tech? Is it the entrepreneurs? For the most part no - one mention of the word financing by someone and they usually become sheep.Is it the serial entrepreneurs? Nope. There’s not enough of them and most are too focused on their own startup to exert influence. Is it the investors? Not really, there’s really only one investor NYC that really has the reach and consumer influence and that’s Fred Wilson of course - but he’s one VC and is doing deals for his own firm. David Rose potentially with NY Angels and Angel Soft. Is it the connectors and event hosts? While I’m friends with most of them and am one myself, I don’t think any of us really wield a stick - though we do control a lot of information or deal flow in investor speak, it’s not in a way to really “CONTROL” the market.  Is it the tech analyst’s and bankers like the first time around? Not really. Who can actually name an ibank analyst these days? Which ibankers are known as tech/dot commers? not really anyone in NYC.In theory Scott Hieferman could be one, but he really doesn’t exert his influence beyond his meetup (he could if he chose too). Kevin Ryan is probably the closest thing to it as he has the track record, basically invented the industry that underpins web2 and runs a news service but still we are left with only a handful of people and out of them no one that really controls the underpinnings of our tech society. We have influencers not power brokers. So is there a problem with that? NO! That means anyone can get something done

This is why you’re friend whose company just sold for $50MM to Cisco is asking you for a loan.

The average company takes 5 years concept to exit.

The average company has 3 founders.
By the time a company gets past its Series C round, the average founders group has a total of 15% of the stock or 5% per founder.

The company sells for $50MM.

The founder has never taken a penny out besides his $100,000 salary. Meanwhile he gave up a $250,000 a year cushy job to start the company.

The founders take is only $2.5MM.

After Capital Gains Tax say he has $1.9MM left.

Now let’s take out $700,000 for paying off the mortgage he couldn’t afford. He’s left with $1.2MM. Still not bad.

Now let’s pay off the Ferrari and the Wifes S500. Down to a cool million.

Now let’s put $200k in the kids college fund: $800,000

Now he probably owes a lot of favors - so lets write off $250,000 in bad investments (I’m being generous) $550,000.

Now there’s vacations and spending: Down to $450,000

Now he’s bored and has ADD. None of his initial ideas will be successful because their done for the wrong reasons. Now we’re down to $200,000

Now he pays off his student loans (finally - the Ferrari of course was more important before), down to $100,000

$100,000 = that is all your friend the dot com millionaire has in the bank for 5 years of work.

You make $250,000. Sock away $100,000. You know tech and have the time to invest, you earn 25% a year, You sock away $125,000 - in 5 years you’ve put away $600,000, paid off your house and cars, worked half as many hours and had 1/1000 the stress of your friend the founder.

Whose worth more? You are and you’re at the same cushy job he walked away from 5 years ago.

This is why serial entrepreneurs never have enough cash. They’ve been nickeled and dime’d to death.

The only people that cash in are people that have taken companies public or people that have been smart enough to sell shit for gold (Mark Cuban, Geocities guys, linkexchange guy etc….)

But i leave with one final question: Whose happier? The nearly broke founder or you, who has 5X as much cash in the bank as the founder?

The Founder because he loves it and is living the dream.

If you are in the start-up world, I’d bet you’ve heard that you’re fair share of times. VC’s hear it all the time, execs hear other execs wine about it all the time and I’ve even been guilty of it. I mean c’mon, everyones had at least one cash crunch in their life, usually more than one.

What does it mean? — That it’s time to be creative. As soon as you utter those magical words, that should be a wake up call to stand erect and get to work because it’s time to bootstrap. Don’t wine, win! If you think you need a million dollar, earn it, go out and sell more widgets. Take a second job as a mortgage broker and convince all your friends in the valley that it’s time to cash in on their million dollar mansions. Whatever you do, don’t just sit around and wine and hopefully to find an investor cause unless you’re in the been there done that crowd, don’t bet on it. Bootstrap on it.

So I’ve been pitch on a pile of “new” incubator type models for building companies lately. This led me to think through the venture process and my conclusion, though i may very well be wrong and I just thought of this so it’s not fully fleshed out, but i think that the general structure of venture funds today is wrong - at least for web tech. I mean the costs of building these companies are very low and the values to get from selling them are pretty low so I think it needs a new approach.

Yes, people are doing this now but it should be formalized.

I think the following are the stages of a company life cycle:

1) Choose the flower (plan the idea) = Limited to no cash required
2) Plant the seeds (get a product launched) = under 50k
3) Water The Plants (supporting cash for marketing, tweaking, 1 full time employee)
4) Sprouting (founders come on board full time and it takes the shape of a real company) = 250-750k
5) Flowers Grow (growth phase) = 500k - 2MM
6) Bloom (combination of Series A/B/C leading to an exit) = $X

There really isn’t a need for Series A, B & C anymore. Yes you can do it but there isn’t a need. The Bloom phase is essentially when you build a real sales force and get bit with the giant hosting bill but what more do you really need cash for in most internet plays today? Not much.

If I was starting a fund I would be in one of two places

1) Incubation Phase: Help people build a business model and get live. Up to 50k investments.

2) Development Phase: 50-500k - building the official team = you are a company now

3) Secondary Financing: 500k+ = most money goes to marketing and strategic deals

That’s my new 3 phases of VC.

Curious what everyone thinks…

Now most entrepreneurs don’t understand how to negotiate with investors. In fact unless they have had a previous success or can create a ton of venture competition, the entrepreneur should NEVER be negotiating a term sheet. There’s a simple reason why: professional investors are masters of structured finance. Structured finance implies structure. Entrepreneurs are unstructured people. Investors tend to have “standard” structures or term sheets. These structures in reality can often be negotiated - however they should never be negotiated by the entrepreneur because the entrepreneur will come off greedy and like an ass because they (we) don’t understand the structural details. This is where your lawyer comes in. No, I’m not talking about your roomates friends brother in law as a lawyer. If he’s your lawyer, unless he works at a venture related firm such as Wilson Sonsini, Fulbright etc… then you’re an idiot. A serious law firm is appreciated by venture capitalists and can get away with hard ball negotiation tactics. Your roomates friends brother in law may kill the deal trying the same tactics. You as the entrepreneur will likely shoot yourself in the foot even for trying to do it yourself because by default you don’t understand structure. If you did, you’d be an investor and not an entrepreneur. So go spend the $20,000 and get yourself a serious law firm or if your idea is really good, get the lawyer to take some equity instead of cash and then you really have a shark on your side.

There a number of ways to finance ventures. Here is my quick and dirty analysis of each funding mechanism.

Self Funded - you are in control and own it but unless you are discplined and have experience, entrepreneurs tend to lose their head in the clouds. This is great if you are an expert and experienced already - if not get to the point where you can sustain professional help fast - or you too will need professional help.

Partners - Partners are great as they can counter each other but two partners with no experience does not equal one with experience. Partners where one is at a higher level or more dedicated is bad. Most partnerships break up. They are only good with two experienced people on the same level.

Dumb Money Angel: This is the guy that runs the carwash. This is great if you know what you are doing. If you too are clueless - besides for being lucky at finding financing - you are going to waste his money. So the question is if you have a conscience or not? Many a fund managers can’t sleep when they lose OPM.

Smart Money Angels: This is generally the best way to start a company, esp. if smart money is from the industry you are targeting. Usually you’ll get a fair valuation and validation on your concept and expert help achieving your goals and be able to leverage their network. It’s a win-win all around.

Tier 1 VC: This is good if you need a LOT of cash and is second best to smart money angels. Names like Softbank, Seq, DFJ etc… are great. These leads will take a lot of equity, rip you to shreds on due diligence but be fair and add value. If you can get them to invest that means something.

Tier 3 VC / Vulture Capital: Tier 2/3 VC = people playing VC’s that aren’t in it for building real value. Vulture Capital is selfish money that screws entrepreneurs (short term approach since our industry is small and word gets around). If you take on this capital, have a great friggin lawyer and make sure you are protected. Always ask for references of successful exits and failures from your investor and see what happened. Do your research. These guys will take 95% of your company if you are not careful.

Debt Financing: Take it if you can get it. It can be free. Mortgaging your house is self financing and not debt financing. Debt is actual real debt. Debt can kill a company as fast as it can help though so watch your ass. Sometimes you can get a mix of debt & equity. If you are careful this is great - if you are not careful you will give away your whole company. Why? Equity/Debt hybrids usually have a convertible clause where if you don’t pay it back in X debt converts to equity - you lose control and your equity is worthless. Then again if you can’t pay it back - your equity probably is worthless anyway.

Reverse Merger Financing: This can great (access to debt, liquidity, stock to acquire companies and incentivize employees) or horrible (work with shady people who stick you with nasty convertible debt and consulting fees and then convert the debt into equity, take control and kick you out. This is shady finance though can be extremely productive if you are careful - or it will destroy your business and make mortal enemies of the people pulling the strings.

As for me - I’m a serial entrepreneur, run BootStrapper.com, have self funded a couple ventures, taken on partners and broken up hard, run a seed capital group and am involved in some interesting ventures now.

Networking today is flawed.

Most events are flawed.

Most events are boring.

Most events are a waste of time.

Why?

Take for example an investor panel. You have 4 investors on a panel and 40 entrepreneurs in the audience. The panel lasts 2 hours, followed by Q&A, followed by every entrepreneur going over to every investor shaking his or her hand and asking for money. The investor usually says “sounds interesting” or “no” or “ok”, no real feedback is provided in those 20 second and often times the investors feels / looks annoyed being approached.

Let me go further.

The entrepreneur doesn’t give a shit what the panel has to say. He really doesn’t. He doesn’t want to hear about how you turned a $2MM investment into $100MM. He doesn’t want to hear how you fucked up investing in pets.com. (except maybe because then he may think you’re dumb enough to invest in his bad idea)

The entrepreneur wants to find out 3 things:
1) How can i get the investors attention?
2) How can i get a meeting with the investor?
3) How can I get the investors money?

Does the panel serve any of these purposes? No.

Now let’s look at what the investor wants…
1) Network with his peers
2) occassionally meet a smart entrepreneur to invest in

What he doesn’t want it a hoard of gold diggers looking for cash.

The standard panel networking format does not help anyone. It is a waste of time - though you can still meet people and I still go to them - i just disagree with them.

A VC friend of mine always says “Always appeal to the lowest common denominator” no one cares how fancy your tech is if its too complicated for them to use it.

So what’s the solution?

Now this is a shameless plug for my own investor networking events - however I DARE you to find anyone who has gone to one of them that doesn’t love it.

Have a quick speaker or two make a simple speech on a specific topic. Limit it to 5 minutes per speaker, 1-3 speakers max. Followed by Q&A. Cut out the panel discussion no one cares about.

Then let anyone get up and give their elevator pitch to the group for FEEDBACK. PROACTIVE feedback. Let anyone there chime in with advice, questions, comments etc…max of 5 minutes per person total. Then after, if any investor is interested he can approach the person who had the idea separately after.

This way the entrepreneur gets real and quality feedback and the potential to interest investors WITHOUT pitching them directly.

This also does another thing. It allows people to build relationships. Maybe the idea is bad but because it wasn’t a straight shoot down, real advice can be given and accepted without hard feelings. Nothing kills a conversation quicker between an entrepreneur and a VC than the words “i’ll pass”.

This way the open forum serves to quality people for one another and provide real feedback and advice. it also is stress free and pitch free networking and involves no bullshit hobnobbing.

just my 2 cents…

Most people looking for funding want to go the MD of a VC fund. They want to track down the big fish. They will go to a panel discussion and go after the guys on the panel and try to shake their hand, pass off a card and beg for money. However, I beg to differ.

I would like to offer a different approach.

Meet the Associates in the crowd, the people that work for the guys and gals on stage.

Here’s why: They are the gatekeepers.

Who do you think reads your pitches and plans first?

Also, who do you think is hungrier?

Should the fund fail, there’s a good chance, the MD has X millions in the bank and associate has far less. Who is more motivated for success.

Let me go further. The MD already has proven himself (or at least convinced instititutional investors he’s a big swinging dick), the Associate is trying to impress the MD and bring in deals to prove his or her worth.

Often times, the Associate may be just as much in awe and want to impress the MD as you are.

So would you rather have an Associate that is in your corner, believing in your deal and pressing his or her bosses to fund it or be another spec on the radar for the MD, and possibly even an annoyance to talk to?

Influence the influencers, make friends with the gatekeepers and doors will open. Even if you know the king, that doesn’t mean you can get a meeting without first going through his consigliere.

Think about it …

If you are pre-revenue, what are you really selling?

Potential ROI? No.
Potential Revenue? No.
Your idea? Maybe
You? YES

The single most important thing trying to raise napkin money is you. What is your background, why will you be successful. Why are you the guy to take THIS idea to the promised land. Do you have relevant domain experience or a successful exit? If the answer is no, it will be pretty dam hard to raise capital….unless…

You have a demo or IP and are willing to replace yourself as CEO….

In general the TEAM is most important
Second is the idea, as part of the idea is the size of the potential market
Third is the IP
Fourth - how you found the investor

Those 4 things together will determine if you get capital. If you don’t have good answers, you probably won’t raise a cent…

Yes and No.

There are less than 10 real early stage VC’s and very few that invest pre-revenue in NYC. There also are about a dozen angel groups.

How do you reach them? Network.

Then network some more.

You will rarely ever be able to raise financing cold without an intro. Before pitching anyone on an idea, get to know them. People want to know who they are putting money into.

There are a LOT of rich people in NYC. Tap into that…

Some things to keep in mind

1) Always do research and have some numbers behind you. Even if they are full of crap, numbers help sell.

2) Lead into your pitch with a story or have a demo or an inspiring use case. A few seconds is fine but people like to hear a story.

3) Keep it under 3 minutes for the full pitch and 60 seconds for the quick pitch. If it’s too complicated odds are you won’t be able to execute it because you won’t be able to focus on the core or articulate your vision. More importantly, people get bored fast.

4) Have an exec summary and a PPT and a video. The plan itself is more of a right of passage. It probably wont’ get read. If it’s read it probably won’t matter but investors want to see that you can create one. In the end your vision sells, not your recycled paper.

5) Get professional help/advice. If you are serious about your startup call in a favor, give a point of equity or spend $1000 and get it done right. Also the people that can help probably have connections to capital as well.

6) Network. Always be positive and try making friends. If you cold pitch people and they don’t bite you’ll never talk to them again and it’ll be awkward. Make friends, be nice, talk. Casual pitch in passing if you can.Always ask for referrals if they know anyone that might be interested if they aren’t. If they say no, means they think its a bad idea probably.

7) There are 2 ways to get turned down. 1) That’s a bad idea 2) It’s a good idea but not for me. If it’s the first one, don’t push, you won’t change their mind. If its the second ask for referrals, you may just get one that leads to capital.

The team is as important as the idea. Make sure you have a team or are impressive enough to stand on your own 2 foot. If you work in a retail store, are solo and need money to build a brilliant web idea, you probably won’t get it. If you are an ex amazon marketing guy and need money to build a web idea, you might. If you have success under your belt then your odds are much higher and you probably don’t need my advice. (if this is you, why are you reading this? Go focus on your own startup, maybe you can teach me something new)

9) before you make your first pitch, do at least 10 practice pitches on people you trust. Be able to answer their questions and critique. Do not get defensive. Defensiveness is a sign of weakness and stubborness. Even if you are right! Being defensive will screw you. You need to know how to take advice and rough feedback, and learn from it - a) to better your idea b) to save you time/money if its a bad idea c) to refine your pitch itself for next time because you’ll learn the questions people ask

10) Due Diligence. There are 2 types of due diligence. One is the kind we all do all the time. We judge. We poke holes. We as a people are a negative bunch of aholes. We do it all the time. (except for the rare person). The second you pitch anything even if its not business and ask a question you will be judged. Make sure you are presentable when you pitch and look the part you are looking to fill. Second admit when you don’t have an answer but you better dam well be able to answer the following questions:
- How will the product will be built? By Who? Why are you competant to build it?
- What domain experience do you have?
- How will it be marketed?
- What are your competitive advantages? What barriers to entry can you create?
- why should i invest in you?

the second type of due diligence is basically digging. This is when they are serious about putting money in. They will research you, your team, your product and industry and make sure you are not full of shit or fleas.

For those of you who don’t know, I’m a huge met fan. If you’ve ever been to Shea, occassionally you see a guy in a crazy blue/orange mets mask. That guy is me. I picked it up for $8 in the playoffs last year and its a hoot. Of course my GF thinks its stupid and tried to throw it out but I’m a Met fan through & through. LIke always though, I know how to stand out.

So back to the topic and I will explain my baseball analogy.

1) Prepare. Get your materials together, work through them, get them down. Make sure you’re warmed up.

The Art of Pitching Edit | Delete
Guy Kawasaki wrote the Art of the Start - which is a great book btw. Here is my simpler version - the Art of Pitching…

1) Always stretch first. = be prepared and warmed up

2) Practice makes perfect. Light bullpen sessions in your spare time are a good idea. = rehearsh your pitch

3) Video tape yourself so you can see your mechanics in action. = this serves 2 purposes, one you can see if you�re persuasive and show it to pepople for feedback and secondarily you can send it around as a teaser

4) Get a coach that will critique you and make suggestions = get an adviser to help you with your plan, even if you�ve done it before, a second opinion never hurts

5) Throw = go for it

6) if you see a flaw while you’re in a game, try a different pitch and correct it later. Don’t go back to square one in the middle of a game = if you�re in the middle of pitching and someone brings up a problem, don�t get defensive, deal with it, answer and keep pitching

7) Stretch again after = recap your pitches and critique yourself and edit your pitch for the next time

Rest for 5 days and hit the mound again = rest and try again

9) Repeat

10) W = hopefully close a few bucks

Guy Kawasaki wrote the Art of the Start - which is a great book btw. Here is my simpler version - the Art of Pitching…

1) Always stretch first.

2) Practice makes perfect. Light bullpen sessions in your spare time are a good idea.

3) Video tape yourself so you can see your mechanics in action.

4) Get a coach that will critique you and make suggestions

5) Throw

6) if you see a flaw while you’re in a game, try a different pitch and correct it later. Don’t go back to square one in the middle of a game

7) Stretch again after

Rest for 5 days and hit the mound again

9) Repeat

10) W

When you’re a serial entrepreneur there’s always a question that every possible investor asks “Why don’t you fund it yourself?” I’ve been asked it myself and so have lots of my friends.

Simple question right? Not so simple answer…

Here’s why: Serial Entrepreneurs Dilemma.

There are 2 parts to serial entrepreneurs dilemma.

The first is our tendency to spread ourselves too thin. One success usually mean we invest in 5 more great ideas before cashing out of the first and thus end up in a cash crunch. I know a lot of people that started quality valuable companies but not exit-able companies and thus the founders are worth $5MM, $10MM, $50MM but are basically broke. It’s a funny thing but there’s a good chance that your neighbor that founded a company you hear about all the time and that the papers say is worth X zillions of $ but isn’t public has a lot less money then you in the bank. So when your billionaire neighbor doesnt offer to pick up the check understand - he may need a loan. But one day he’ll cash out and hopefully remember that you picked up the check when you pitch him to invest in your great idea.

The other problem with serial entrepreneurs dilemma I addressed in my last post. We are a rare breed of trustworthy quick thinking people. Our enthusiasm gets the better of us and we tend to get screwed even if other people make a lot of money. We also don’t like to admit that we got fucked getting other people rich. Sure we made money but a $50MM company doesn’t mean we made $50MM. Odds are we made money, saved some, put some in more startups and are trying to double down (not out of greed but out of love for the startup life)

Between the two reasons, we tend to have a lot of paper money and a lot of people owe us favors but not have a ton of cash - though we’re always willing to invest what we can.

So now to answer the initial question “If you are so successful, why don’t you invest your own money” … a lot of times we don’t have a liquid $5MM to invest. Sure we usually can seed fund it but beyond that better to bring on other people’s money then stress yourself out.

Of course there are exceptions. Some people have huge payday’s their companies go public or get bought by Yahoo. Those people are lucky and the exception - they get serious cash out. Most even successful companies don’t sell for huge multiples and most serial entrepreneurs are good guys and like to give cash back to their employees when they cash out (out of their own pockets basically) so for every Peter Thiel, there are a million successful but not quie as successful entrepreneurs that by reading their resume you’d think they have tens of millions of dollars but really did well but not quite THAT well.