Real entrepreneurs don't raise venture capital.

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No, we are not raising venture capital.

Now that Fred Wilson blogged my lunch with him, after

I asked him to make it off the record, people are speculating that I’m raising venture capital. We are *not* raising

venture capital, and for the record I think venture capital is”to be honest”for weak entrepreneurs. (Note: I’m fine

with Fred blogging it since he said very nice things, but special thanks to

Jeff for destroying the concept of off the record!)

Am I meeting with venture capitalist? All the time”as I have since 1996 when I started in this business. VCs are some

of the smartest, most plugged in people in the world. Getting time to break bread with them is always worth while, and

I take every chance I get to do so.

For background I created the second largest database of venture capital

(www.venturereporter.net) and sold it to Dow Jones, so I have a lot of

experience in this space”although I’ve never taken the offers to be a VC. Also, I have a lot very good friends who are

VCs, and they tell me the same thing over and over again: DON’T RAISE VENTURE CAPITAL! VCs tell me this!!!

Why are my friends who are VCs telling me not to raise venture capital all the time?!?!? Very simple, it is the most

expensive and explosive money you can raise. Of course, for those same reasons it is also the most powerful money you

can raise.

Venture capital money is highly combustible, and it can either propel you to heights of unimaginable fame and glory

(Google, EBAY, etc.)”or it can blow up in your face and destroy you (Kozmo, WebVan, etc.).

Now, there are some businesses that require investment, so you can exclude from my sweeping generalization that “real

entrepreneurs” don’t raise venture capital. Folks who need $50-$250M to run a biotech or chip company need to raise

money. You might even be able to leave out the folks who create enterprise software companies”although I’m not sure

that is a market anymore”and the folks who have $10M+ revenue a year companies who are looking to “go big.” That

requires capital, and capital has to come from somewhere. I get it, but startups can do better.

Why am I not raising venture capital for Weblogs, Inc? Let me count the reasons:

1. We don’t need the money. We are profitable, growing, and we have angel investors

(myself, my partner Brian, and Mark) who are all highly committed to the business for the long term because we love it

and we love working together. This is not just a business, it’s a passion.

2. VCs think their money is more important then you giving up your life. I know

some VCs might take offense to this, but VC believe in preferred shares and liquidation preferences. What these terms

mean is that the VCs get their investment out of the company before anyone else, and in some cases they get 2-4x their

money out before anyone else. If they invest $5M in your company and you sell for $10M some day that means they are

getting their $5M”or a multiple of that in many cases”out before you even start to split the money. Now, VCs are taking

risk, but aren’t the entrepreneurs taking risk as well (at least the ones who don’t pay themselves $300k a year in VC

money)? I’m a fan of everyone have the same stock, and everyone getting out at the same time”call me a communist if you

will, but I like everyone aligned. How does your money get in front of my money/giving up my life?

3. VCs are betting with OPM 90% of the time. There are very few VCs who are

actually betting their own money. Most of them raise money from limited partners (think CALPERS, University endowments,

etc), and those limited partners have very specific goals when they invest. VCs live and die by the window and returns

they set with their limited partners, if their investments don’t materialize according to those terms they can’t raise

their next fund (at least not in the market).

4. VCs are hunting for one EBAY in 20 companies, not 20 respectable, medium-sized

companies. OK, sure they will take respectable, medium sized business that get them back 2-3 their money, but

the truth is every VC is in the game so they can hit a Geocities, EBAY, or Google. What does that mean for the other 99

business in the life of a VC? It means they are just spending time with you until that special 200x investment comes”if

it ever does. Does that mean they don’t work hard for you or love you? Of course not, but it does mean that if the EBAY

shows up you can be sure that they are going to focus their energy on that”even if they wont admit it”and who can blame

them? They have an obligation to work this way, venture capital is a hits based business, much like the music or film

business. If you look at those industries you’re as good as the sales of your last record or your last box office

gross”do you want to live that way?

5. VCs have no problem shutting down your company. You know what the VCs most

prized asset is? It’s not money and it’s not their network: it’s their bandwidth. If your company is going to do OK or

good a VC isn’t going to waste the bandwidth on you”they can’t”because your slot could go to the next EBAY! An

individual VC can only be involved with three to five companies before they are spread so thin that they can’t stay on

top of their investments. In the boom years I remember VCs bragging about being on the boards of 12 companies! I’d say

to them “Oh, so if you invest in my company I get you for, what, two days a month?” Some of them would say how valuable

those two days a month were, but the truth is the human mind”no matter how brilliant”is limited to being able to juggle

7 +/- 2 items in short term memory. If you have a personal life you eat up half those slots, and what you have left is

three to five slots for your companies. It’s as simple as that.

6. Most entrepreneurs get three swings, most VCs get 30. In relation to issue five,

most entrepreneurs get three or four chances to swing the bat. Each company takes 3 to 5 years to play out, so you’re

looking 20-30 years of your life if you start a couple of companies. An average VC might do a half-dozen or dozen deals

in each fund, and do three to five funds in their life (funds take 5-7 years to play out, and they overlap). So, a VC

has a bunch of swings they can warm up with, as an entrepreneur you have to make every swing count”but you’re swing at

the same pitches! A VC might let your first or second business go by waiting for the right pitch (i.e. they shut your

company down).

I don’t hate VCs, like I said I’m great friends with many of them, and I respect what the venture process has done for

this country.

However, if you’re looking to build a real, sustainable business there are much, much better sources of income. I meet

so many entrepreneurs who are chasing VCs and when I sit down with them to look at their business I realize nine time

out of ten that they have not even considered alternate sources of capital, and that many of them don’t even need the

money.

Does this mean we will never take venture capital?

Of course not, like I said at some point we may have the need for large amount of capital to buy Gawker Media or

About.com (just kidding), and when we do we might look to VCs (and Fred is the first person who I would talk to).

However, when you are in the first two or three years of your business you should focus on one thing: building value

(translation: revenue).

I’m sure there are some comments coming to this post, but my be is that Fred agrees with much of what I’m saying

here”except for point two.

FYI: I’m in NYC for the rest of the week if any other VCs want to take a meeting. 🙂


My office today

is the lobby of the Chambers Hotel on 56th street between 5th and 6th. I’m in the back in an amazingly designed room

(TOWN), drinking amazing coffee, fresh cut flowers all around (Gordon loves them), and eating some pain au chocolate

while I surf the free high-speed wifi. I love my life!

Here is my exact view…

town at chambers hotel

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