At a San Mateo conference dealing with mobile healthcare, I met a gentleman, whom I asked about his current job status. His reply was that he was a “CEO of one startup, the CFO of another, but I make my living selling insurance.” I guess that answer covers everything about the going-ons in Silicon Valley: a great deal of social activity, plethora of startups, meager revenues, portfolio approach to startups, office incubators/accelerators charging $300 per desk or 10% of the company, and frequent breakfast/lunch/dinner meetings with pitches and evaluations.
Of course, a $17 billion investment in a 4 year (“Whatsup”) company with less than 50 employees fuels the feeding frenzy for Silicon Valley bound startups. How realistically feasible is that going to happen? One leading VC analyst stated last week that he reads over 200 business plans a week, or 10,000 a year. Generally, they invest about 8 early stage companies a year, or less than 1% of what they see. So yes, if one plays the multi-state lottery one has a chance to win hundreds of millions of dollars. And if one brings a company in Silicon Valley, one can be bought out for hundreds of millions. While the lottery is built on chance, a startup must be designed and constructed: it does require a lot more effort to increase the chances to win than buying a $2 lottery ticket.
From the many international companies coming to this geographic entrepreneurship cornucopia, they all arrive with the preconception that pitching their idea or business will get them an investment. Far from the truth. Their pitch is one of hundreds every week. They must do scores of high quality presentations to have a decent chance at financing. Unless it is a well thought business, has a well drafted pitchdeck, and generates enough revenues to be defined as traction, then it has a much better chance at getting such funding from many others. But is that company ready?
I must say that I get a few companies asking to be introduced to investors. With no due diligence on the quality of the pitchdeck, the management team, or the presentation skills, I simply don’t understand why that company sincerely believes that the introduction will lead to financing. Every company undergoes the strict due diligence, regardless of the introduction. The introduction might increase the chances that the analyst will review the company; however, the introduction does not lead to an investment.
In an earlier blog, I detailed the workings of a VC fund. All VC analysts are compensated by the limited partners. I doubt that the rest of the Silicon Valley, the consulting, law and accounting firms, does anything without some form of compensation. Just at Stanford parking lot, I saw several high priced cars — Maserati, Mercedes, and Porches — all parked next to each other. And I doubt that these autos were purchased by giving away services for free. Any company arriving in Silicon Valley, seeking capital, will need to take advantage of the local, experienced resources in order to succeed.