February 15, 2005

"Real startup entrepreneurs don’t raise VC"

Jason Calacanis, who created and sold VentureReporter.net to Dow Jones:

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...

...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.).

..(VCs) 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?

...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).

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.