Following up on my post from Monday that rang like "reasons not to take VC money" here are some reasons you should:
1) You really like the investor and believe they can add more value than you give up in equity.
2) You are growing, and if you don't raise, you won't be able to build the infrastructure required not to come apart at the seams.
3) You have the team in place or identified to build the product, you've done your homework by talking to customers that it is, in fact, the right product, and you're the best person to lead the effort, but you can't fund the build of the product yourself.
4) You've identified the best team, and while they're asking for reasonable startup salaries, you can't afford to hire them quite yet.
5) You've figured out how to get a sales funnel going, the flywheel is turning, you've got positive ROI on incremental salespeople or customer acquisition dollars and now you want to put gas on the fire.
6) You're on your way to building a network effect, you know how you'll likely make money because you've spoken to lots of potential sources of revenue, but can't monetize without critical mass.
7) You're making a ton of money at the company level, but haven't really ever made any money yourself personally. Might be time to let someone you want to work with buy your equity.
8) You're doing something disruptive that is going to have some regulatory or other kinds of hurdles that require human hours of changing the playing field.
9) You're doing something physical in the real world that just requires a certain amount of capital overhead.
10) You're doing actual science and R&D to build something that doesn't exist yet, but could have a huge outcome.
If you take venture capital money...
1) You increase the chances that you may not be CEO of your own company one day--and that also might be the best thing for its long term success.
2) You are signing up to sell the company one day--to another company or to the public market, but definitely to someone.
3) You will almost certainly take more venture capital money after that.
4) You will almost certainly go cashflow negative, increasing the risk that your company will fail.
5) You now have the responsibility to report the progress of the company to others--and to consider their opinions and feedback.
6) You have prioritized growth and your company will be bigger next year than it is now.
7) Some of the people working for and with you now will not be suitable for a growth phase and will have to leave.
8) There are smaller exit opportunities you will not be able to take because your capital structure makes them financially unattractive.
9) You will own less and less of your company over time as you take on additional investment.
10) You will face more competition as venture investment signals that what you're doing may be attractive.
Three years ago today, I grabbed the domain name BrooklynBridgeVentures.com.
It's kind of a funny answer to "When did you start Brooklyn Bridge Ventures?"
What might be a more relevant date is May 22nd, 2007. That's the day I sat down for lunch at Coffee Shop with Henry Blodget, just six days after Silicon Alley Insider launched. Henry told me that I should start a fund--me, a 27 year old former VC analyst turned product manager with no MBA at a startup that wasn't really headed in any particular direction. It's probably the first time I'd really ever had the thought of starting my own fund.
So thanks for playing Inception, Henry.
I guess it's true what they say. It's easy to be right about market predictions eventually. It's just really hard to predict timing.
The stories we tell ourselves about how things get started are often much more linear than they actually happened. Who had what idea when? When did you actually commit to something?
Getting a domain name... I guess that's about as good a demarcation line as any, but that's never really the full story.
So when did I really start Brooklyn Bridge Ventures?
Well, I was born in 1979.
My godfather got me IBM stock right after that, so that's how I knew that a stock market and investing existed.
My dad brought home an IBM PS/2 in 1987.
I got an internship on the buy side at the GM pension fund in high school--in 1997.
I started a business newspaper in 1998 in college covering the stock market and the economy.
I got my first job in venture--at GM--in February 2001.
I tried to write a book for college kids in 2002-2003, couldn't get it published, so I started blogging in February of 2004.
I met Brad and Fred in the Summer of 2004, agreeing to join them later that year--my first job at a fund.
I started a company, failed at it, and joined First Round in 2009 to help them open up their NYC office. In the middle of that whole thing, I wrote a blog post about Foursquare that a lot of people noticed.
After my two year stint was up, I bought a domain name.
Yeah, so, somewhere in there.
Chances are, your story of starting something is already happening but you don't even realize it.
I've been getting involved with a couple of different models related to labor marketplaces and platforms lately. My interest dates back to my 2010 investment in chloe + isabel back when I was with First Round. I was still at FRC when we invested in TaskRabbit and Uber, even though I wasn't on those deals. I've also run about 30 Kitchensurfing dinners across NYC for tech and startup folks in the last two years. My two most recent deals involve a distribution of labor or direct sales, and two of my upcoming deals are similarly structured.
Yet, I'm quick to turn many of these types of deals down, too--and I've started noticing which ones I like and which ones I'm less interested in.
Here are my two main rules:
1. The labor supply has to get enough out of the platform not to want to go around it.
Your Handy cleaner is undoubtedly going to want to get paid directly if you seem satisfied with them for sure--and why not? Once you like them, you'll just want them to show up at the same time and day each week or every other week or whatever. The platform is providing little value after the initial intro.
This is highly unlikely to happen with your Uber driver, however. Who knows where they'll be the next time you need a cab, and you're not likely to use the same driver twice. In this case, it's not about the cash, but about their ability to replicate the volumes off platform.
Recently, I've gotten interested in two models where the marketplace was cutting the provider in for a slice of the sales, whereas they used to just get paid a flat, hourly wage. Being on the platform would be a huge boost to their net income.
2. You need to get a nice chunk of the transaction to make it worth it as a marketplace.
With some platforms, I can't help but think that a heck of a lot of human effort was expended to net the platform not a lot of cash. If you're only taking a small cut, you've got to have huge volumes to make up for it, and that just takes a long time.
How can you provide enough to the labor so that they accept giving up 25% or more? Otherwise, the land of the 5-15% cut is just really tough to make a lot of money on.
I had some other rules down, but they really always seemed to come down to the two above.
When I was coming out of college, working in finance, I used to think a lot about my salary. I wanted the best offer out of my classmates. I wanted the biggest signing bonus. I liked maxing out on raises and I liked the feeling I got getting to a six figure salary.
The funny thing was that I didn't even particularly care about the money itself. It was, in my mind, what the salary meant. It was a way of measuring performance. It was score keeping.
I missed the bigger picture of the other things that should go into career score keeping--autonomy, growth paths, equity/revenue sharing, the ability to gain public visibility, opportunities for learning, network building, etc.
As an investor, I get very involved in the hiring process of some of my earliest stage companies. One thing that comes through consistently is that salary--specifically how someone goes about the salary negotiation process--can be a consistent predictor of performance.
Nearly every time a company I've seen has had to stretch to accomodate someone's base salary, the person hasn't worked out. When canidates have had the opportunity to choose between more equity and more salary, the people who equity greedy versus cash greedy tend to be better fits for a startup. And when things at a startup aren't going well, it's your best employees that show up first with offers to cut their salary.
That isn't to say that you should accept getting underpaid just because you work for a startup--but acknowledging the reality that, especially early on, dollars given to you shorten the potential lifespan of this company, is key to understanding how things work.
At the end of the day, we could all make a lot more money at hedge funds and banks anyway, right? But, we value other things. We score keep in other ways.
Founders, I think the best thing you can do with your earliest employees is to be transparent. Show your employees how their salary effects the finances of a company. If someone looks at that situation, and requests a base pay that puts a serious strain on the company--then they're probably not a good fit. The same is true when things aren't going well and your senior folks ride their pay all the way down without being flexible about trying to make things work.
It's the equivalent of someone who sits down in the subway while watching an elderly or pregnant person stand right in front of them.
They see what's going on and they just don't care.
Working at a startup means putting others and the company before yourself--because you know you'll have the best experience when everyone else wins, too. It means being flexible about all sorts of things, like salary, that used to be your number one priority.
No one wants you to live in a barrel or your kids to go hungry, but startups are all about being a part of something bigger than money.
Statistically, and practically, it's a bad way to make a lot of money, other than by exception.