Like the Wizard of Oz’s Dorothy, entrepreneurs are wildly misled by so many during their labyrinth search for funding. Sometimes the many misrepresentations are so discouraging that one feels like Dorothy and hopes that by clicking your heels they should bring you back to Kansas – in this case, back to planet Earth. Yet I keep seeing the same themes over and over again. I’ll try to point out the major ones here:
- “Having a meeting with a VC or any investment firm means that you are close to a financing.” Far from the truth. As I relate in earlier blogs, VC managing directors are compensated very well to look for deals by their limited partners. The more meetings they attend, the more they can prove that they earned their retainer from the limited partners. In one example, I know of one technology company that, as I related to the principals, it will be unlikely they will get any financing – or at least with terms they can live with. Still, they get appointments with potential investors; and, still, they get rejected. Since they do get the appointments, they are under the illusion that they will get that financing from venture firms. Meanwhile, they are burning through their cash reserves and are close to running out of capital in a month or so. It is sad to see this. However, I did point that out to the principals over a year ago that investor meetings do not inexorably lead to financing. In this case, I identified that this company has so many issues regarding management and its financial structure, that no worthwhile investor would enter in this deal because of terms that are totally outrageous, with cash management that needs to be controlled, and proper management that is absent. Since the technology company is unwilling to face these issues, they continue to meet constantly without getting anywhere. If the 5Ts are not there, don’t expect any positive results.
- “After a meeting with a VC, he/she relates that he/she will get back to you.” Don’t expect that call. Having done a single pitch to an investment firm, one should assume to take it easy with the expectations that those investors will offer a term sheet. That is another illusion. I have a saying: there are 3 major lies in America – 1) the check is in the mail, 2) we are the government and we’ll help you, and 3) we are a VC firm and “will get back to you.” Recently I made a pitch to a VC firm in Palo Alto. As I walked out, hearing those very same refrain mouthed at the end of the meeting. You know that they are listening to pitches that day since they had a followup meeting one hour after my meeting. Of course, I smile and shook hands. Right afterwards, ignoring this one pitch, I began my campaign to reach out to other investors. I shook off any ideas that the pitch would result in any call back. During and after that one hour meeting, there are many reasons why would they pass the deal: someone in that room did not like the color of my jacket, one observer in that room might consider myself to be too old or not qualified or not the graduate from the “right” school, or someone would think that I don’t have the right experience or expertise, or, from a comment on another presenter by a VC, the observer considered the pitch to be overly confident (Yes– I heard this from a Harvard MBA!). Or, at the next meeting these same investors attended, the other company offered better terms or higher returns. (And true enough, I never did get a call back.) Again, all VC firms look for reasons to say “no”. The only antidote for that mindset is to shake off any negativity and keep knocking on doors. There is a NYC saying, “you must throw enough sh*t against the wall, until something sticks.” And just like American football, a QB’s fortitude is the measured by his ability to come back from a previous loss, improve and win the next game. And don’t feel discouraged. Remember, also, that VC firms don’t always make the right decisions for whatever reason. In fact, over 90% fail to reach decent returns for their limited partners. It is apparent that their so-called screening process does not work so well. Then one hears stories from frustrated founders such as Uber failing to attract investors during their first year. So many successful companies have faced this impenetrable wall of negativity while attempting to raise capital. Those that continue to knock on doors are the ones that finally survive.
- “File for a patent and investors will come knocking on your door.” In this illusion, the lawyers always win – whether you get the investment or not. True – technology plays a major role in attracting investors but it is only one of several components. Over a month ago, I was actually asked about the IP on my recent pitch. I replied that the technology was a licensed one from a university. It seemed to be a spoiler to the pitch, but I know of one investor who lost over $100 million while relying on this technology IP platform as the sole basis for investment. Nowadays, a company will claim, as an example, that it has a patent on one carbon dioxide sensor. However, a Google search on patents reveals over 199 other patents granted for carbon dioxide sensors to other companies. In other words, a patent filing may not be all that unique: The United States Patent Trade Office has hundreds of examiners and the results from each examiner will vary upon experience and expertise. I have witnessed one mark being rejected by one examiner and the same mark, with one minor difference, being approved by another. Having a “patent” is no exclusivity comfort. The most important factor in business is to be the first to market. Yet lawyers believe that a patent is the equivalent of a Golden Goose. Far from the truth.
- “Register your company in Delaware as that will attract investors.” Another misinformation. I doubt that any of those lawyers have ever set foot in the State of Delaware. I am not adding more this misinformation as I have a couple of blogs addressing this fallacy.
- “Cold calling works to get to VCs.” I recently attended a breakfast seminar where all four VCs stated that their “best” deals were referred to them by someone they knew. Is it the “best” given the failure rates among VCs? While in Virginia, a VC commented that he only viewed those deals sent by his law or accounting firms, other colleagues, etc. I asked whether he bothered to look closely at any cold pitchdeck? He replied, no. Then I said what if the email was sent by a physicist who worked in a patent office with some new theory or application. He confirmed that he would ignore that email. The physicist I described as Albert Einstein. I knew of one engineer, whose previous career was at Apple, emailed his pitchdeck to over 80 firms in the NorCal area. Not one replied. Although time consuming, one has to attend as many events where VC appear, and followup with an email as introduction.