Tuesday, June 13, 2006

Money is money right? No, bad money stings!

I have been talking to people recently, following Barcamp Boston, about my initial days of first round of funding. So its time to talk about my bad money experience :-)

When enterpreneurs start out the first time, they see all money as good money. Some stop to think whether they want to raise angel money vs VC money. In all these, there is good money and bad money.

My first round money was good money, infact great money, Second round was bad money.

Good Money is:
- Money from investors with a strategic fit to your business. This means money from people who can help grow your business, people who have experience and contacts in certain verticals that can help your business.
I got some money from a Director from Amazon, GM of Intuit, Director from Exodus, who were all good people who were excited about my company and willing to help me.

-Money from people who will guide you as advisors to grow your company.
All my select angel investors were true angels who guided me. Again, its not about their brandname, but your mutual respect to work together.

-Money from geographical areas that help your business.
My lead VC was from west coast while we were based out of east coast. So that helped reach companies for partnerships and lead to VCs at next round.

- You do not want small change from several wealthy angels who do not understand your business.
I had some money from a financial planner. When things went south he was the first to be worried. In all fairness, I had to spend time to keep him updated on my decisions. Think of "being your own boss"! I have a friend who raised $2 million from an angel group of 30 wealthy doctors etc and spent a day every month updating them.
In fact there are several consultants who would get you your first $250K within a week, but its all $10K etc from people unrelated to your business. I have seen this work for another friend who got his first $250K, then went on to raise VC money.

-As best as possible you should raise money from a group of investors who can work well together, be it two VCs or set of angels and VCs.
After I closed on my first $1million, I met Howard Anderson and he said he wanted to invest $1millin more and asked to increase my round and I declined because there was no fit with my led investors. Howard's money would have been good as the lead money.

- Finally comes the terms of the money. What is the catch?
I had a local Boston area VC who looked me in the eye during my second round funding and asked if I would step down as CEO beause he would bring his own guy as CEO. The relationship was not at any stage of respect, I declined to him, was hurt at th anti-feminist sentiments, but I honestly fretted about what I should do purely in the interest of the company. Of course, it was a bait and not real followup so it didn't get me money.

There are some inherent market valuations and percentages that VCs get for different stages of a business. In 2000, companies got 30 and 50 million valuations easily. So, I made the mistake of building product, launching it, building user base (palm users in our case) and initial paying customers, and thought I'd raise next round money to scale the sales team to grow the business. So I went to VCs asking for $15million and got the same polite reasons of grow some more, this or that is missing. Then, I came across a honest VC who said, asking for $15 million implies a valuation of $30 million as a Series B would give VCs 50% of the company. This was early 2001 and since the bust was beginning, VCs were getting cautious of high valuations.

Finally we got our Series B from West coast for $5 pre at 20mill valuation. It was the worst terms possible.

Our terms were such that our VCs get everything if we sell the company within 2 years. Specifically in our business, mobile and wireless were crashing ahead of rest of IT as soon as Palm split as two companies. So it was not sensible to believe we could survive towards an IPO without even finding a buyer for 2 years.

The terms could get more money to the second round of investors while leaving the first round of investors in the same terms as founders. Most VCs act in trusted cirlces and won't let this happen but during the bust times, this was common in the terms.

Again the basics of dealing with real people towards a common vision at the closing of the round is important just to keep it fun through the process and bearable when things get tough.

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