Good stuff. I might add (if I may) "Define Victory". Knowing what you want as an outcome is important and often overlooked. In my experience, most entrepreneurs are not great at raising money, and leave it until it is late in the process (guilty as charged). That means that they spend more time trying to understand term sheets, talking to counsel, etc. rather than making sure that the outcome of the VC investment is supportive of what the entrepreneurs wants to do ("victory").
Interesting post. Let me ask you a question. I don't see a VC's adding any real value other than money and connections. This runs counter to everything you read - but you shouldn't believe everything you read. Take successful companies like Sun, Yahoo, whoever. Are you going to tell me that the VC's were giving them tangible advice on product development. Were they giving those companies advice that the founders or executives didn't already know. I think for marginal startups that make it to an IPO and then the stock doesnt go anywhere probably would not have made it to an IPO if it wasnt for the VC's. New industries like the internet in the 90's and nanotechnology today are not well understood by the VC's when they arise so where exactly does the VC add value. I understand there are lessons learned that the VC can pass along and that is worth something. Did Google need VC's/ My guess is far less than the vC's think they are needed. Venture Capitalists do not add anywhere near the value they think they add and I am looking to find any study that quantifies exactly what this profession does to earn the perception that people have of them. I sense smoke and mirrors MBA style but I don't know. Any thoughts?
Damn good post and essential reading for start-up entrepreneurs!
And, early stage startups ought to closely pay attention to your (hard-won) experience "...my ongoing efforts to convince early-stage entrepreneurs (particularly those building software companies) to forego venture capital for as long as possible...".
Dharmesh, I've Dugg this article and I'm going to post to my blog because your observations as expressed within this article are essential reading, especially for software and Web 2.0 entrepreneurs.
Dharmesh, you are right on about the "costless option," where an investor strings you along while you scramble to reduce risk. Many firms will simply never tell you "no," only "maybe." Your only recourse is to get a term sheet from another potential investor.
Herman, Sun Micro absolutely got good advice from their investors about product development. You better believe it! Dharmesh, you're quite right that partners at top-tier VC firms are highly intelligent and accomplished people. Like you said, if the people you are talking to at a VC firm don't seem intelligent to you, it's really a bad idea to take that firm's money. You WILL regret it later on.
Some more advice fwiw. Get to know a potential VC's geographic preference. It seems extrememly odd to someone sitting in the middle of a major research university in the Midwest or the UK but VC's are just not interested in investing in any company that involves air flight to visit. You can argue that this has got to be short sighted, that they are going to limit their options, that there are great programmers at lower cost in Ames Iowa, but the VC is only interested in funding companies in their back yard. So be prepared to move. If you need early VC funding go ahead and move *before* seeking money. Borrow office space from some one at 2800 Sand Hill Road. That should be close enough.
No, Herman, VCs don't give you product advice. They give you business advice. They know the industry, so their advice is much better than your average MBA, who know how to manage the cost side, but not the upside of businesses.
If you get VC money, you get VC people on your board.
Great blog. I could have made this comment on many of your posts, and the fact it ended on one as far back as November tells you I spent a lot of time here.
I'm a VC and promoting transparency is one of my goals with my blog. This is more difficult than one might think, largely because we are all small partnerships with opaque internal working proactices, but I'm going to use your post here to try and help bring some clarity.
Would looking like your VC help? I am referring to this advice: http://smartstartup.typepad.com/my_weblog/2007/09/secrets-of-rais.html
Is this hot on the east coast too?
I recently returned to the uk after 30 years in Hollywood. I have been in showbiz since 57 and want to make great low budget movies here. I need a successful broker to raise the £££.