The realistic entrepreneur’s guide to venture capital

Optimism is a key to success, but it doesn’t necessarily work so well when it comes to VC. Because this is a cottage industry with thousands of players, all with different objectives, it’s very easy to keep knocking on doors, just waiting to find the right match. It’s also easy to spend a year or more adjusting your business to what each VC asks for ("bring me the broomstick of the wicked witch!" while you could have been out there building a real organization.)

Here are a bunch of conditions that you ought to take seriously before you invest the time and the energy to track down outside money for your great idea:

  1. Investors like to invest in categories they’ve already invested in. If your business is so new that it’s never been tested before, or is in a category VCs hate, think twice.
  2. Investors want you to sell out. As soon as possible. For as much as possible. They have no desire to own part of your company forever.
  3. Investors want to invest in a project that’s tested. If you can’t make it work in the ‘small’, why do you think it’ll work when it’s big?
  4. Being a little better than the market leader is worthless.
  5. Investors don’t want you to use their money to cover your losses. They want you to build an asset (a patent, an audience, channel relationships) that’s actually worth something.
  6. Investors want someone to run your company who has successfully run a company before.
  7. Investors want to be able to come to one of your board meetings and still make it home in time for dinner.
  8. VCs like curves more than they like cliffs.
  9. There are actually very very few business problems that can be solved with money.
  10. You will probably have to replace many of your employees if you raise money from someone.
  11. VCs understand that being the best in the world (#1) is the place with the biggest rewards, so it’s unlikely they will settle for any performance (even a profitable one) that puts you in second or third place.
  12. VCs are very smart and very connected, but they’re smart enough to know that their connections and their insights can’t fix a broken business.
  13. Investors are very focused on the company, not you. They’re not interested in having you take out your original investment or paying you a large salary as profits go up.
  14. Business plans are bogus. The act of writing one is critical, but no one is going to read more than three pages of what you write before they make a decision.
  15. The companies that VCs most want to invest in are the companies that don’t need their investment to survive.

[For those keeping track (and I wasn’t one of them) this is the #2,000th post since I started this blog a long time ago. Which goes to show you–you can build a really big wall if you start early enough and have enough little bricks].