Without VCs many start-ups wouldn’t have a chance. Unfortunately with VCs many entrepreneurs also don’t have a chance. There will always be a power struggle between investors and entrepreneurs. Sure, they have a common goal: make the company successful. But unfortunately they also have a goal that is completely opposed to each others goals: they both want to make as much money as possible. If that means screwing each other out of some, so be it. Unfortunately, again, the entrepreneur is usually the one with less power in the relationship and so more likely to be screwed, if there is screwing to be done.
Last week Scott Rafer wrote a guest post with his ideas on the current economic crisis and what it means for entrepreneurs. One quote stuck with me:
“Instead, the Valley is delivering grimy voyeurism from ‘A-list bloggers’ or transient opportunism from VCs seeking to negotiate better inside deals with their portfolio companies over the next six months.”
Yep, what that says is that there is screwing to be done and if you are an entrepreneur there is a good chance that some venture capitalist has his cross hairs aimed at your ass.
So how can you defend yourself if you are starting your company? Here are some tips:
1: Be Independent
Yeah, easier said than done. And true in any situation. Still, try to stay away from the “We need 1 million upfront to build our infrastructure” ideas and focus on stuff you can build out of your basement. Once you have traction (cashflow & users) then talk to investors. You will be in a better position to make demands.
2: Think Different
Every VC out there is currently blogging, talking and tweeting about how bad the economy is and how we should all stock up on money if we can and accept any deal we can get. Very friendly advice indeed! Fact is, entrepreneurs are counter-cyclical thinkers. If there is an economic slump we of all people should be seeing opportunities! In a bull market anyone can make it. This is our finest hour and don’t let those blood sucking parasites tell you otherwise!
3: Be Prepared
When you are talking to a VC they will always make it seem like they want to buy a part of your company. Switch that thing around! Don’t be too cocky about it but think of it this way: you are buying a part of their money and are using your company to pay for it. It is a simple trick but will make your perspective completely different when talking to them.
4: Be Patient
With everybody else panicking now is the time for you to relax. Observe what is happening in your industry and who will panic first. Basically this market is now a huge game of chicken: who is going to fold first? Grow your company, concentrate on cashflow and focus on the future.
5: Ignore Everyone
Ignore all the naysayers around you. Don’t matter if they are bloggers, investors or family. You have a company with a product that people want. Focus on that! Unless you have a lot of shareholders you are the only individual who is truly independent. No pink slips for you because you are your own boss! Cover your ears, keep your eyes on the road and blow those competitors who only have eyes for their stock portfolios out of the water!
Economic crisis? Bring it on! This is the era of the entrepreneur and nothing can stop us!
Totally agree! Especially with 1 and 5.
Really try to bootstrap your company as long as possible! This will not only give you the best position in negotiations with possible investors, but also learn you how to be as cost efficient as possible. (of course make sure you do have enough cash for bread and water to last during the negotiations :P)
Don’t avoid naysayers, just don’t listen too hard! They usually are good filters for your plans and keep your vision wide…
Truly great post, especially no. 5 hits home. Hats off !
More of these please! Thanks for sharing your experiences
The notion of counter cyclical got me reminiscing about market economy and beta coefficients again. Trying to come up with some product or service with a solid base beta between 0 and 1 (long term), though with enough aspects with higher than 1 beta (short term) to stand out in the crowd of high return on investments.
Serendipity, not luck, you mentioned several times. Sudden innovations, though based on being well positioned. VC’s don’t come ringing your doorbell, they must at least know you have a doorbell…
Regarding point 5, I’d like to add: “Learn from others, but go to your own school”
Regarding credit crunch, economic down-turn, … I concur, smart tools and services are needed in survival kits as much as in turbo charge profit kits.
Back in the 1.0 days (or what would you call it?), I remember watching several of our competitors get VC funding. We were sure they would pound us into the ground. What happened? They imploded – well some did anyway. We kept chugging along and were finally bought. It was a scary and crazy ride. But well worth it in the end.
And: I agree with thinking counter-cyclical – although I also think that it makes sense to watch for waves when they’re in their infancy. Pick with care and then enjoy the ride.
Great post. This is definitely what I’m trying to live by with my current startup. Despite the downturn in the economy, there is always opportunity for those who can create value. We’re getting traction — users & cashflow — and the investors are starting to knock on the door.
Nothing in life is easy, but if you keep strong and never give up and continue your passion you will be able to achieve success sooner or later.
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