Your Investment Raised Today May Be Your Last!

How many times have you heard either by the start-up entrepreneur or the young venture capitalist about their portfolio company, "Once we achieve these milestones, we will go out and raise another round!". I have heard that so many times but don't believe it. Ten years after the internet bubble and its subsequent implosion, people still believe it. Well don't!

That's like trying to time the stock market. You just can not. But what you can do is manage for today and make sure you have another day to fight. I have sat in so many presentations where an entrepreneur says "We will raise a $500,000 seed round today and in March of 2012 we will raise our Series A round for $3 million at a $15 million valuation." HOGWASH!!!
If you can predict this then forget about starting a company. Go to Wall Street and pick stocks. Trust me you will do better! But who can predict things like this. NO ONE. SO DON'T! I tend to hear such ridiculous predictions from the young CEO or entrepreneur who were too young to remember or experience first hand the dot com implosion and subsequent losses of fortunes. They tend to say that was then and this is now. They imply the entrepreneurs then were not as savvy or smart because they were Web 1.0 vs today Web 3.0. The misfortunates of entitlement by this generation is clouding their judgement, in my opinion.

However, if your company is fortunate enough to raise a seed or Series A venture round, there are a couple of things to remember:

1. Raise enough capital to meet SIGNIFICANT MILESTONE. A milestone that will drive investors to your company. That milestone can be a lot of things but I like the acquisition of a SIGNIFICANT CUSTOMER WHO IS PAYING FOR THE PRODUCT OR SERVICE and not a free beta user. A technical milestone is great but if no one is paying for it then no one values it.

2. Raise enough capital to execute objectives WHILE REACHING CASH FLOW BREAKEVEN. What a luxury it is to be cash flow breakeven. You may not have the top line growth but you have the freedom to make decisions without a financial time bomb ticking. Keep your burn low.

3. Don't turn away investment. If your company is fortunate enough to be oversubscribed in its round or have current prospects wanting to increase their investments. TAKE IT! Too many times I see entrepreneurs worried about valuations and dilution of their stake. The dilution the company or founders will take will be far greater if you miss projections and run out of money. You have a better chance of negotiating more favorable terms when the "jury is still out" and investors WANT and DONT NEED TO make an investment. Success with perhaps dilution will reap longer term valuation and exit results.

4. Drive your company for the double and triples. You may hit the home run! If you set out trying to hit the home run with company expansion from the initial seed investment you will likely strike out and run out of money. A smart well thought out plan in the hopes of a double or triple may may even reap the grandslam as you are running your business in a thoughtful way. Remember most companies are acquired and dont go public. Large public companies who acquire smaller startups typically want to manage risk (remember they are stockholder and SEC driven). The more lockstep sales and true customers you can demonstrate will drive value.

5. The FACEBOOKs, GROUPONs, LINKED INs are the exception not the norm. Many entrepreneurs believe that their cutomers can easily mirror those successes and attract high valuations and dollars AND SUBSEQUENT INVESTMENT ROUNDS. Don't believe it. There are many "dead bodies" on the side of the road to success.

So when you are out fund raising and investors want to invest today at a higher amount, consider it really hard. Today's investment may be your last!

Company Advisors? Asset or Liability? Depends if they are In or Out.

Last week, I had the pleasure to participate and speak at the annual South Florida FundingPost event at the University of Miami in Florida. A question was posed from an attendee where he referred to his Board of Advisors as strong assets. The Board he described was impressive. A Who's Who of industry players. With that Board he was trying to validate that his emerging company had "legs" beyond his competitors. I listened to his pitch on his company and yes it was interesting, I dont know about "game changing" but yes interesting.

Then I posed the following question, " Your company sounds interesting and compelling". He replied "Yes and thank you". "Your Board of Advisors is impressive". His reply, "Thanks". Then the tough question, "How many of your Board of Advisors are investors in your company? They seem committed and seem to have the means to assist you in launching", I asked.

His reply, "None, but they are contributing a lot of time to the project for no pay".

When I heard that, my interest immediately shut off. If such a good company that was going to skyrocket. If such a great company, that it would exit with great returns. Then why are the Advisors investing? That is very telling. If they thought such a great investment that they were seeking other peoples capital why wouldn't they invest if they believed in the success?

My feeling is that entrepreneurs should be careful about recruiting Boards of Advisors or Directors of noteworthy individuals who dont invest. Especially if they are high networth cashed out successful entrepreneurs. Its a telling sign that they are not confident enough to put "skin in the game" especially if these are individuals of means. To me it is a red flag.

Yes, as a start up or growth entrepreneur it is great to have a "Who's Who" on your Advisory Board or Board or Directors, however, when inviting them to participate solicit some investment level even if small. A $5,000 or $10,000 investment from a wealthy individual may not seem alot but it is still a vacation (albeit modest) for a wealthy individual. But it speaks volumes of confidence that they are willing to "put their money where their mouth is".

I always ask this question of investment. If nothing at all it certainly leads to an interesting conversation.

Now there are exceptions to the rule. For example, individuals from Academia who are thought leaders in a field may not have the means. Individuals from industry trade organizations may be in similar situation. Government or regulated industry persons may be precluded by law. But define clearly what they are contributing to their respective boards. (In one of my portfolio companies, the academia board member, an expert in the field, is a small investor in the company but yes it says alot).

All in all, Boards of Advisors and Directors can bring a lot of value, creative ideas, contacts, vision and support. But it speaks volumes, loud volumes, when they couple that with any size of meaningful investment dollars in a company.