The “Venture” in Venture Capital
What Drives Startup Funding
tl; dr: you need a REAL company with a REAL CEO, otherwise don’t waste peoples time.
That magic “free money” we’re hearing about that seems to have the word “million” attached to it seems to be everywhere. Imagine, millions of dollars handed to you early in your career, instead of working for 20+ years and trying to get ahead. It’s the new American Dream.
With almost $100 billion available every year, why not?
Motivation for this article…
- The driving force of my industry — high technology — has always been the availability of venture capital and willingness of those who control it to spread it around.
- The number one reason entrepreneurs want to connect with me (besides my wit and charm) is because I’m well connected to the VC and startup worlds and they want access to some of that “free” capital. I hear from people almost every day… and most of them go about the process of raising money all wrong.
When you contatenate #1 and #2 above, you can see where I got the idea for this article.
“A billion here, a billion there, pretty soon, you’re talking real money.”
The recent growth in venture investing in tech startups and peripheral cottage industries would have been unbelievable a decade ago, or even half a decade ago. The types of companes that are getting funded are also dropping jaws.
For example, a coffee company in Silicon Valley has raised $120 million, Facebook raised $2.4 billion before they went public, Pinterest has raised $1.3 billion, and on and on. Raising “a billion” is not such a big deal anymore. $100 million is becoming a medium amount.
Where is all this money coming from? You.
Who’s Taking the Risks?
Startup funding has been on a strong run now for almost a decade, which is unprecedented in high tech venture capital. It seems to be feeding itself, like a Turing machine. Why is this happening?
The short explanation for this perfect storm is the unique economy we’ve had for the past 9 years.
The crash that began in 2007 can actually be seen as the beginning of a very long run up of the stock market, and it’s still going.
VCs are receiving tons on money from NASDAQ proceeds
All that new wealth generated has caused people to seek more updside for their money beyong buying public stocks, so they become limited partners in venture funds, or feeder funds, or invest as angels. Also, the thousands of new muti-millionaires created by the “long tech boom” are now able to invest six or seven figures directly into startups and not worry if they lose it all.
Scary? A bit. Crazy? Not really. The plethora of data available and rapid spread of the Internet into every crevice of life makes it much easier to make educated bets on young companies. The web is maturing, so micro adjustments on successful business models can work like never before to create sutainable companies.
There’s a lot of market and a lot of moneny out there.
Creating a REAL CEO.
Venture capitalists aren’t haphazard; that’s a misconception many would-be entrepreneurs have.
VCs are very careful about whom they give money to. After all it’s not their money, they’re agents for limited partners.
Sure, they look for high growth, rapid scalability, potential market domination in big markets and they want strong, intelligent management.
But most of all, they look for exceptional leaders to be the CEOs of their companies. A REAL CEO. That’s how you get funded. The CEO will essentially be managing their money for them.
In a recent article I answered a question I often get: “What’s it like to be a startup CEO?” People’s ego causes them to ask that question; they want to know how to capture that glory for themselves and attain what has become such an important social moniker “Startup CEO”. They want to be the person that venture capitalists will invest in.
I emphasize the word REAL, a REAL CEO of a REAL company, not the title someone decided to put on a business card. Don’t ask for venture capital if your company isn’t real or doesn’t have a real CEO. You might fool a family member but that will cause you major problems down the road. Do the proper work to learn how to be an amazing CEO or find one; there are many around.
Venture Capital: Free Money! Instant Wealth!
How do I raise Venture Capital? Can you raise it for me?
It’s not that simple and the money is not free. Also, it’s very difficult to come by if you’re not one of the chosen few who are already in the “club”. VCs don’t need to win much, so they pick entrepreneurs to fund based on some intangible factors — what the buzz is, who they know, how naive they are. If you’re in San Francisco and have a track record, or you’re an ex-Googler, or you’re a developer who has built your own widget, you’re probably fundable. That’s the club. You could get a wide variety of startups funded (even a coffee company). If not, it can be pretty lonely.
The ROW [Rest of the World]. Where to find $$$.
If you’re part of the other 99% of the world, not in San Fran or Silicon Valley, it’s much more difficult to get funded. I get approached often from L.A. and NYC founders who feel that they should be treated like Silicon Valley people, but those are two very different animals. Other places like So Cal and New York and Seattle have venture capital, but the appetite for risk is much different. They don’t think like Silicon Valley.
Then there’s a whole world of non-tech money — hedge funds, real estate, family trusts, private equity. They’ve adapted thier rules to invest in tech and that money is more prevelant than in the past. I call this unsophisticated money. They do it themselves without VCs. They start accelerators, code schools, feel they have just as much right to play.
Tech executives are another source; they are recycling their wins back into startups aggressively now, ther are several in every major city. Often they win either way — if they lose the money it’s great write off for them. And if they strike gold they help build an ecosystem and make more money. Vancouver, Austin, Portland, Kansas City, several other towns have several of these angels running around.
There is also a consencious that anything with a decent team of developers will probably pay off eventually; I run into these groups all the time.
The bottom line is do your homework, build something real, based on your expertise and passions, no matter what it is. And be or find the right leader.
Don’t waste anybody's time, including your own. Make it about sharing your passion and money will come.
