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This is part of my Series' on Venture Capital and Entrepreneurial Culture.
Over the years it’s been real privilege for me to mentor
friends and acquaintances of mine who at one point or another in their careers have
decided to make the leap into the start-up game. I happened to have had the particular advantage
of starting early and so carry with me the proverbial scars on my back and
psychic black-and-blue marks so reminiscent of the trade. It’s these same lumps that I always hope to
help first-time entrepreneurs avoid.
Perhaps the most valuable counsel I can ever give to
someone occurs right around the time they begin to raise capital to fund their
company. This may well be the most vulnerable point of all in the life-cycle of
a start-up for many reasons. One wrong move can literally mean the difference
between success and a world of pain. Here’s truly where lack of experience,
even in the smartest of people, can mean sheer disaster. I’ll start with the most important rule of all:
You need to know
who you are dealing with.
Through no fault of their own, first time entrepreneurs fresh
out of school, an academic lab or who have worked for years at big companies generally
have no concept of the cast of characters that populate the early-stage
ecosystem. If you have just emerged from this sort of cocoon, you no longer
enjoy the invisible “protection” your old position or firm’s name provided and hardly
realize how vulnerable you are. Essentially,
you’ve arrived at a sort of Masked Ball, eyes wide shut, with no concept of who
is around you.
Inevitably you will run into certain masked characters
that may appear in any number of guises. Their firm might have the words “Capital”
or “Ventures” in it, or they may say
that they are part of a “group of investors”, and they will talk about the many
startup companies they have “worked with”.
Certainly they will discuss how much they would like to help you with your
funding needs. But beware…
You may be in the midst of being initiated into the shadowy world
of the “broker-dealer”, the “investment banker”, the “middle-man”. At some
point you may well discover that he has no money to invest in your company
whatsoever. Instead, he will want to “help you” raise capital for a fee, taking
a percentage of the money raised for himself and perhaps a retainer and
warrants to boot. It’s perfectly legal and I will say that there are indeed
some reputable people operating in this business. But these are few and far
between.
Jason Calcanis and Fred Wilson have recently published
some posts, (here and here), describing yet another masked character on the
scene- namely, the type of angel group that charges extremely hefty fees, (thousands
of dollars), to entrepreneurs who wish to pitch them. This is definitely a character to avoid. Another type that needs to be vetted carefully is the one who tells you he's got a bunch of shell companies on the bulletin board stock exchanges and that with a flourish of his cape he can take your company public with a reverse merger. Warning bells should go off immediately.
The bottom line is that although there are some notable exceptions, most of these masked characters generally
do not have your best interest in mind and I have both witnessed and been told
of dozens of situations where unwitting entrepreneurs have been victimized by
them. My advice is simple. If you are trying to raise capital for your
start-up, ask around first, do your homework and talk to half a dozen or more
entrepreneurs with funded startups about their experiences. Also, try to find a
good mentor while you’re at it. In every community there are reputable angel
investors, legitimate angel groups and of course a handful of early-stage
venture firms that have money to invest if they like what they see.
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