I have a dirty, little secret, and I am going to share it because this startup racket is hard enough without being knowingly conned or misled. Herewith is a tale from the crypt.
Over the past few weeks, I have talked with several venture capital firms in San Diego and in Silicon Valley. What I have found is that firms that have no money to invest still take meetings with entrepreneurs. Huh, you mean you invite people to pitch and you take meetings, even though you have no new money to invest. You hold out the possibility of the silver chalice, even though you know that there is no wine in the cellar, and what is left there is only reserved for “follow-on rounds” – which is code for trying to save the dogs that have already barked and are running out of dog food.
Recently, I attended the WBT (World’s Best Technology) Innovation Marketplace conference in San Diego, and when I mentioned this story to my table at lunch, the five entrepreneurs nearly threw up their chicken pasta in their zeal to tell me, “This has also happened to me.” They were furious. They were angry that their time was wasted. They visited venture capitalists who said, “We have just enough money for one last investment,” even though, the truth is that the VC cupboard was bare, and Mother Hubbard was not going to be able to raise another fund, based on the rather disappointing/miserable returns generated from the previous fund.
This is like me going to a bar, taking off my wedding ring, and telling the girl next to me that I am there for you, baby. It is a lie.
Now, forsooth, allow me to present the venture capitalist’s rationale. “Look, Neil, if we tell people we have no money for new deals, then we don’t see any new deals, and if we are not seeing new deals, then we become marginalized, we are forgotten, so we take meetings because if we don’t take meetings, then how can we justify taking the fees that we charge the limited partners so we need the fees, so we take the meetings, because we need to try to stay relevant and in the mix.”
I get it. The emperor has no clothes, but the entrepreneur who comes to visit doesn’t know that because the VCs are all wrapped in togas on that day, giving the excuse that their stuff is at the cleaners and will be back next week.
The system is a bit rotten. I have great compassion and empathy for the entrepreneur. I still stand in those shoes. One guy at my lunch table wanted to raise $4 million but his last round was at a $20 million pre-money and that is never going to happen again so the infamous “ratchet” is about to come into play. Another guy needed $500,000 (that seems to be the magic number today), but it is a generic drug play, and he will ultimately need $50 million and FDA approval. The San Diego Convention Center was filled with over 100 companies, all looking for a small plastic cup with a bit of wine (Two Buck Chuck would be ok; they were not asking for Silver Oak).
The day was a bit sad, a bit daunting and very competitive. I know that only the best get funded. But the entrepreneur’s time is just as valuable as the investor’s. So, it is not right to mislead because raising money is a bone crushing exercise even in the best of times. I know it’s a game, and I know the rules. I just wish sometimes the ruling on the field were reversed.
Luke 6:31 – “Do unto others as you would have them do unto you.”