30 West 3rd

Very Early Stage Technology Investing

Posts Tagged ‘Early Stage Financing

Shark Tank – How not to raise money…

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I had heard about the show “Shark Tank” from someone last week, and my kids were also badgering me to watch it.

The premise is would-be entrepreneurs pitching their ideas to a panel of five “Sharks”, successful entrepreneurs who will evaluate the idea and possibly offer to fund the company.  During the two segments I watched it has the usual “acting out” problems of most reality shows.  The Sharks try to act cool and heartless, the entrepreneurs act coy and play hard-to-get.

In the most interesting segment two women with a patented slip-cover for porta-cribs agreed verbally to give up 40% of their company to a real estate entrepreneur in exchange for $350,000.  That puts the pre-money at $525,000 without considering any options.  Forgetting the absurdity of focusing entirely on the valuation (we don’t know whether they are selling preferred, etc.), I thought they got a raw deal.  They had 200k in revenue, plus distribution through Target and a handful of hotel chains.  And, as an analyst in my office pointed out today, they have now had free exposure to boatloads of prospective buyers and investors.  They’ll get a much better offer now that everyone knows how little it would take to get them to play ball.  And they might get it from someone with more experience in pushing out such a product than the real estate Shark.

Which made me wonder if these poor souls had signed any restrictive contracts in exchange for appearing on the show.  The reality TV world is famous for driving hard term on contestants at the beginning, before they make them famous.  Would they really be able to just walk away, or would the panelists have the right to match any offer they received based on the exposure they received on the show.  Let’s hope not, because the co-founders of the porta-crib slip cover company deserve a better term sheet and board members.

I have to give the show credit for at least having a credible panel.  They were also willing to discuss the issue of patent assignment in this instance, which made me wonder what other rather technical issues they would delve into on other episodes.  Could next week bring a dispute over liquidation preferences?  Ratchets?  Redemption rights?

What’s bad about the show?  That they imply that investment decisions among people like the Sharks – professional investors – can be boiled down into a few minutes of product presentation and chit chat.  TV oversimplified the process.  Imagine that.

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Written by Mike Venerable

September 1, 2009 at 9:00 am

Real Entrepreneurs Wanted

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There is a great post on Growthology that raises more questions than I can answer in one post (thanks to David Willbrand at Thompson Hine for pointing it out), but let’s start with this provocative quote:

Admittedly if you are so nervous about becoming an entrepreneur that you want to take a few years out of your life to learn in a business school about being an entrepreneur then maybe you’re more interested in the idea of being an entrepreneur than in actually being an entrepreneur.”

I have had that thought a number of times in the last decade, and especially since working on early stage investments.  There are a fair number of people in any large metro area who are mostly infatuated with being an entrepreneur, but who seem to make little real progress towards building a new business.  Mixed in among them – fewer in number, less visible, less vocal – are the real entrepreneurs.

Entrepreneurial events/programs/investors attract both types, but a pattern forms quickly.  The pretenders attend and attend, but never seem to get beyond the plan stage.  They expect the idea to be so compelling that others will jump on board and drive capital and energy into the business.  They propose to do little of the heavy lifting on their own.  They frequently lack the domain expertise required to properly self-vet their idea.  They may stumble into family/friends money, grants, win a business plan competition, but their trajectory flattens quickly when execution of the plan is required.  There they languish, consuming time and resources in the community that could be applied to the real article.

Real entrepreneurs seek outside capital and assistance grudgingly.  Some of the best are combative, informed negotiators over terms.  They know their market, buyer, and competitors better than their prospective investors.  They knock down doors on their own.  Sure, they need help and guidance, but they have a commitment to get to product, revenue, and an exit that makes attending entrepreneurial events and entering business plan competitions a luxury.

Most successful entrepreneurs I know are introverted and actually don’t like to sell.  They force themselves against instinct to do these tasks to calm the compulsion.  It’s admirable, is often done without venture capital, and is the principal job engine of the economy since WWII.  Finding them in the crowd, or away from the crowd, is the real challenge.

Written by Mike Venerable

August 13, 2009 at 3:53 am