More from the Trenches

About a month ago, I met up with a young entrepreneur who had just graduated from university. He had developed an interesting piece of code/social app widget that a couple of east coast Venture guys were giving out one of those 1 million dollars on a 1 million valuation, preferred shares, ESOP pre, etc, etc.  Basically, he was giving up over half the company when hhe was looking for about 100 grand to get commercial, etc. 

When he came into our office and gave me the demo, I said, wow, amazing, this should be part of any one of these three products and not really a stand alone application, in my opinion.  If you'd like, I know a bunch of these other folks and would be happy to introduce you.  My guess is that you'd get bought for some cash, a gig inside that entity, some options, and the the ability to score one in the victory column. 

He showed me the proposed (unsigned) term sheets and I said you have a decision to make.

If you believe you can and want to build out the company and you are okay with the valuation, take a shot and good luck to you.  If you want to basically take a shot at value adding another thing and getting some reasonable cash/options out for a short investment of your time, happy to help you.

In the end, he sold to one of the big guys. Small (super rounding error small) deal, all hush hush, nice chunk of cash, options and some love from BigCo. He is extremely happy, kids are happy with the new bikes, etc.

The other two VC's went bouncing off the walls (mostly on me), not happy that I gave out that advice and helped him vs. syndicating a financing.  They believed that with a bunch of pref shares, etc, we could all have had a nice flip after a year.  Maybe.

My view, however, is that he will no doubt do other great things and I'm confident JLA will be a first stop for financing. 

In addition, I believe that giving an entrepreneur straight up advice and seeing that entrepreneur have a positive outcome trumps all because we VC's are supposed to be in a long term game.

I wish more people in my industry thought like this but: I could be totally wrong, stay tuned.

Comments

[fewquid]

I think you were absolutely right to take this approach.

Let's say the VCs did invest. Some months down the line, someone realizes that you were right and product A is actually a feature that needs to be in bigger product B. But now you don't have the flexibility to sell out to a company that makes product B, because you have investors to placate. So you have to build product B yourself, which most likely means more money in, a new direction and a new product. Which of course increases everyone's risk by some huge percentage...

I recently had the pleasure of having an email conversation with another VC who is similarly ethical and long term in his thinking. I just wish more VCs saw things the same way -- but then you probably wish more entrepreneurs had _good_ ideas too ;-)

[Dave]

On my previous company, another VC advised me in exactly the same way you did. And, in retrospect, without a big partner, I think we may have failed, losing the VCs would would have invested money (then again, we learn fast, so who knows what direction we'd have gone in).

When I leave BigCo and start the next company, provided said VC can come reasonably close to the terms others offer, he's getting the entire round...

[Dave]

(and, I think it will be 20x bigger than what the first co would have been)

[Ron]

Gee Rick, you're not as evil as I've given you credit for. ;)

Good job!

[Jason Vu]

You are great VC Rick.