Ron Conway is the Tiger Woods/Michael Jordan/Wayne Gretzky/Joe Montana of angel investing. Just to make it even more clear: Ron Conyway knows a lot more about entrepreneurs, startups etc. in his pinky than I do in my entire brain.
I’m not sure if he’s lumping the Founders’ Fund into the lower tier VCs, but today Conway comes out gunning…
And I’m not sure I fully agree with Mr. Conway when he says:
What’s happening is third-tier VCs are trying to get deals away from Sequoia and KP and offering entrepreneurs some cash as part of the deal. I firmly believe that all the cash going into a company belongs in the company. I don’t want entrepreneurs to be bought off. All the money raised belongs in the company, so the entrepreneur can hire more people and build the company faster, and test out their idea. The entrepreneur taking a million bucks out of the company that should have stayed in the company says the company doesn’t have as much a potential for success.
For the record I also think that cash should remain in the company, but I do think that in some cases it’s not unacceptable to do otherwise.
1. By the Time Outside Investors Come In, Risk Profile Has Reduced
When I launched WatchMojo.com, I spent 80% of my time on sales and business development, and 20% examining M&A opportunities and financing options. Things never went far, but generally speaking: ALL investors (be it VC or angels) loved my background and my “vision” for why we were building WatchMojo.com, the largest producer, publisher and syndicator of video content for wireless, web and out-of-home digital markets (let alone also develop search products, matching applications and other media properties) but ultimately said: “We don’t really invest in content, stay in touch, when you don’t need us, we’ll invest plenty-of-cash.”
Suffice to say I gave up on VCs and angel and just got the company to generate revenues and be self-sustaining because it was a waste of time.
So I spent 18 months and my own funds to get the company to where it is now. If tomorrow an investor comes and wants to invest, it is really a travesty for the founder to get some of his money back? Why should it all be “sweat equity”? That’s what so-called first-tier VCs tell easily-impressed entrepreneurs to get them to agree to nonsense clauses.
2. It Helps Investors Get a Bigger Chunk
Nowadays, everything we read seems to suggest that an entrepreneur can build a company sooner, faster and with less resources. Sure over time you need money - lots of it - to really build a multi-million dollar company, but if you play your cards right, then you can probably finance through sales.
But say a VC or angel comes along and wants to have 20, 25, 33, 35% but that implies that they plunk down way more money than you need.
Why keep it all in the bank? Why not give a slice (a slice Ron, a slice) to the entrepreneur, to pay off bills, buy his supporting wife a gift, etc.?
3. Misaligned Timeline
I also have news for VCs and angels. Companies - even startups, money losing or not - have timelines, histories, DNAs before outside investors walk into the door, an investor that comes in and introduces a lot of draconian clauses needs to take somewhat of a greater risk than most VC term sheets call for. One simple way to do that is for them to actually - yes, brace yourself - part with some dough.
4 - It Allows for Patience
Mr. Conway then blasts Zuckerberg because by virtue of having cashed in at financing rounds, he’s less inclined to sell for $1B. Well, Facebook notwithstanding (I thought everyone was giving props to Mark for passing up Viacom and Yahoo!’s offers these days?), isn’t it a good thing for entrepreneurs not to want to cash in early? If I could secure $X in a financing deal, would that not give me the appetite to hold out a bit longer, bust my ass a tad more, so that the company could sell for many times X and dare I say it, do an IPO one day?
Anyway, like I said, I’m no expert, but just because some things have been a certain way does not mean that they should remain.
If you disagree, that’s why we have comments.
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