In 1998 I quit my job to do a “startup”. We were one of the first companies in Dallas funded by a new incubator called “Startech”, which was focused on helping companies in the North Dallas suburb of Richardson (the “Telecom Corridor”) get started. Startech operated a seed fund which provided “quit your job” capital to young entrepreneurs with startups that had promise to be funded by a VC firm. In fact, at the time, most of the Venture Capital in Texas had backed Startech. Everyone from Sevin Rosen, Interwest, Austin Ventures, Centerpoint Ventures, Star Ventures and others had contributed to the seed fund.
I had put together a powerpoint and connected with the right guys and “boom”, we were accepted into this program and receiving a $250,000 “seed check” and we were on the cover of the Dallas Business Journal.
I had no idea what I was doing.
Six months later, I had toured the famous Sand Hill road, and again armed with nothing but a power point and a pretty good skill at pitching ideas, landed a 4.2M commitment from the top venture firms in Texas and the valley. I thought my shit didn’t stink. I was 33 and the CEO of a Venture-Backed startup.
We developed a first product for less than $500,000 of our $4.2M bucket of money and sold our product to two leading enterprise customers. In fact, both were global leaders with huge influence over the market. Thinking I was some sort of genius, we “amped it up” and went to raise another round, this time of approximately $16M, with one catch, we needed a “proven CEO”. Again, with our investors we could recruit a quality guy to run the business. Which we did. Don’t forget, I was 34 by now and my inexperience was really starting to show. I agreed.
That’s when it got interesting. Through the access and “credibility” provided by our investors, we could attract the best staff, advisors, and press. At one point, I was featured at a press event alongside the CIO of Visa like we had done something. We hadn’t. We had developed some software and sold it twice. So what.
Our expenses were out of control, our business was creating revenue, but not enough to sustain our marketing and development costs. Then 2002 happened, our customers dried up, our investors got cold feet and that was it. We closed the business. The details of this process is a much longer post than this, but let’s just say that laying off 85 people in one day that signed up to your leadership pretty much was a humbling experience.
Suddenly, I was the biggest moron in town.
The number of people willing to kick me at this point is long. But there’s a precious few that didn’t, and that’s when you know who you friends are for sure.
This company was overfunded.
Why? We grew too fast, focusing on “market penetration” rather than focused, disciplined financial growth. Taking some money to develop the product is one thing and probably a good idea, but spending at the levels we did was foolish. When the inevitable “scud” of 2002 came along, we were so dependent on our investors putting more money in we couldn’t survive.
While my experience may or may not be typical, I did learn some things about taking money, a few of which are here:
|Venture Capitalists are Sharks||But they are YOUR sharks|
|Remember that your customer in your customer||Not your investors|
|Growing too fast can be dangerous||And in our case, fatal|
|When you think you are smart||Remember that there is always someone else smarter, faster and probably with more money to beat you to your end-game|
|Your investors have bosses too||They don’t just have free money. They are signed up to provide high risk, high returns to their “limited partners” and they can’t afford to get it wrong very often and still have a job.|
|Know who you are in the business||Don’t get enamored with being the “CEO”. That’s where ego gets out of whack. Sometimes the entrepreneur is the right person for the job. Mostly, it’s not.|
Believe me, I share a load of the blame for that failure, but at the end of the day, when the company failed, I and my co-founders owned less than 10% of the company we had started.
Our board, our team, and our product, to this date, I believe were some of the best in my career. But, at the end of the day, it was a job. I worked for the company and despite my delusions otherwise, I really didn’t have any control, only influence. My “bosses”, our board and CEO could let me go on a whim. To me, this isn’t entrepreneurship. This is a job.
In my next post, the “UNDER” I will talk about real entrepreneurship and what it takes to scratch a business out of nothing into profitability. Those are the real heroes.