Jeff Osborn Explains The Facts Of Life
The Birds & the Bees, And The “Real Deal” On
Financing Ideas To IPO
VA -- September 20, 2000) Most
funders will tell you not to look for money too far away from your
business. They want to be
close so they can check in every once and while, but not Jeff Osborn.
“There’s someone who showed up here
tonight,” said Osborn, speaking to a crowd of Internet entrepreneurs
at this evening’s Netpreneur.org
Coffee & DoughNets meeting, “I've put six figures into his
company and I’ve never met him before tonight.”
It’s one of several companies Osborn said he has funded, sold
and cashed out of, and, “still never seen the faces of the people
who did it.”
Osborn is the founder of Osborn
Capital, a seed capital investing firm that has done deals in over
40 startups, including such successes as Aptis, which was sold to Nortel
Networks; Compatible Systems, which was told to Cisco
for $567 million; and ArrowPoint Communications, which was also sold
to Cisco for $5.7 billion dollars.
In addition to Osborn Boats, a manufacturer of racing crafts
that Osborn also founded, Osborn Capital has invested in local
netpreneurs including Broad IP
Networks, eHarbor, EyeCast,
Netwhistle.com and altaVoz.
Granted, he may be atypical in his ideas about
distance, but it’s that kind of iconoclasm that has powered his
success. And his
straight-talking style is why his topic was “The Real Deal” about
financing a startup company.
Take the subject of valuations, for example,
something that bedevils all entrepreneurs. When you’re an unfunded
startup going for your very first round of money “One of the rules
you learn with VCs is that you have to be absolutely confident that
your pre-money value is now [for example] $1.7 million.
Why? For all the analytical reasons discussed in your business
plan. You are making it
up. He knows it. You know it. You
just have to act like you are not
making it up. There is no
magic to it. Everybody
makes it up.”
With similar pointed comments, more than a few
wise cracks and only a modicum of confusion, Osborn took listeners,
step-by-step, through the arcane process of calculating pre- and
post-money valuations and ownership shares, round-by-round.
His ultimate objective? To
shatter an erroneous bit of conventional wisdom that too-often plagues
first time entrepreneurs in their search for cash. “Somebody
wrote a book once,” he joked, “and left it in a public bathroom
that said never to go under 51% [ownership for the founders].
Nobody has been able to track down who wrote this book, but the
guy ought to be taken out and shot because this is what people all get
Osborne’s point, once he finished stepping
through his calculations, is that, in most cases, by the time a
first-time entrepreneur gets to his first VC round, the founders’
interests will almost certainly drop below that mark.
Get over it, he advised, and, if it bothers you, go to therapy. “Everybody wants grandkids, but nobody wants some guy
sleeping with their daughter.”
how it works,” he explained, “If you want to raise money and not
give away any of your company, the Commonwealth of Virginia runs a
lottery. I suggest you
buy tickets. They will
not ask for equity; they will just give you money.
It's a longer shot than raising VC money, but you won't have to
give anything away.”
But if you’ve done the process right and found
the right investors, giving up equity is a good thing because,
although you have a smaller piece, the whole pie is worth a lot more. Of course, in the best of all possible worlds, you find a way
to get the cash to stay in business and
keep ownership, but that’s also atypical.
One way to do this kind of bootstrapping is to follow the lead
of Gold Wire Technology,
an Osborn Capital portfolio company that was able to bring in money
through consulting services while they built their eventual product. According to Osborn, “That's the kind of company that
doesn't need a VC.”
While some might take issue with elements of
Osborn’s view, his no-nonsense approach is something netpreneurs
need to hear, especially in today’s funding climate.
The Internet space has always been in flux, but never more so
than now when entrepreneurs, VCs, angels and everybody else are still
reeling from Wall Street’s plummet in April and subsequent
Fran Witzel opened the meeting citing recent data from
survey, which reported that while the overall amount of VC money
invested for the second quarter of this year increased, the number of
seed and early stage investments dropped by 25%.
There are changes going on in both the public and
private markets, and everyone’s trying to figure out what they mean
for the future. B2C and
B2B plays, each, in turn, once the darlings of the industry, are now
out of favor, and VCs seem only interested in the most esoteric
infrastructure deals, such as optical networking.
What’s more, as dizzying IPOs have become a thing of the
past, investors struggle with a dilemma: they have more money to
invest than ever before, but their exit strategies are drying up.
That means that they have to support companies through
additional rounds of funding that they thought would go public much
Post business reporter and columnist Shannon Henry, who
moderated the question and answer session following Osborn’s talk,
noted, “I have heard a lot of the VCs start to say there is denial
Entrepreneurs have always found the funding hunt
arduous, but now it’s downright precarious.
The money’s out there, but entrepreneurs will have to work
harder to get it. Investors
are choosier, and Osborn said that the private market is currently in
a deflationary period. “While
it was all going up,” he observed, “there was a big incentive to
buy quick. If you didn't
put your money in early, you were going to miss the next step, the
next uptick. I think that
the general feeling now is that it's all drifting downward. . . . In a
deflationary time, there is every incentive in the world to wait. Why invest today when it's going to be cheaper next week and
the week after and even cheaper the week after?”
Osborn believes that not only will things get
tougher and valuations go lower, he is even predicting a recession by
the end of the year. For
netpreneurs, this all means that the largesse of the Internet’s
early days are over. It’s
back to scratching tooth-and-nail to keep your enterprise afloat, like
entrepreneurs had to do traditionally.
And it means finding creative, outside-the-lines techniques for
finding capital. In April, Osborn’s team began making phone calls to their
portfolio companies advising them to develop plans for how they will
succeed if they aren’t able to raise more money.
“If you don't have a plan to end up making
money without raising another nickel, you really, really
need to think about just what it is you are doing, the livelihood of
the people working for you, the security of your marriage and all
those other pieces.”
His words may sound ominous, but entrepreneurs of
earlier days would simply recognize them as a return to
knows what it’s like in a world where VCs don’t stand in line with
ready checkbooks. He was
a serial entrepreneur himself, starting out in the early 1980s with
seminal networking and data communications companies.
That was back when you had to sign an agreement not use the
Internet for commercial purposes before you could get online.
(Don’t forget, that was only a few years ago.)
One venture he started, Wilder Systems, which failed for lack
of capital, cost him a bankruptcy, his car and a home foreclosure.
That part is not atypical.
Statistics show that most first-timers fail, which is why the
good ones have resilience, courage and a seemingly endless well of
The sixth startup Osborn worked at was a little
startup called UUNET, now the
country’s largest ISP and part of WorldCom,
where he was that company’s first VP of Sales & Marketing.
“Here is the Horatio Alger portion of my little story,” he
told the crowd, saying that three years later, “to the day,” that
they foreclosed on his home, “I made about $10 million in one day.
Yes, because this is America.”
Know your industry. Osborn
spent more that 15 years in data communications before hitting it big
at UUNET. What he knew
about his industry is what helped Wilder Systems get off the ground
and kept it going for as long as it did.
It’s how he got hooked up with UUNET in the first place, and
it’s one of the few ways that you’re going to find angels for
those earliest funding rounds. “If
you know your industry really well, then you are a known entity in it.
You can talk to people in your industry who have become
successful and moved on and are funding little companies.”
The stories about overnight mega-wealth for
22-year olds like Marc Andreessen may get all the headlines (although
fewer now than a year ago), but entrepreneurship is a “grinding
proposition.” In the
recent years of the Internet gold rush, people have forgotten some of
those basic rules of business.
“There is such a correlation between people
crashing their companies and not having known squat about their
industry beforehand that I'm amazed more people don't figure it
out,” Osborn said, “If you have been a librarian for 20 years and
you now want to do optical networking switches with forward-looking
routing, that's probably a bad idea.”
Today, Osborn sits on the other side of the deal
table and tries to help first-time entrepreneurs navigate the complex
path to startup success. At
tonight’s event, the edited transcript of which is available at the
Netpreneur.org site, he discussed topics that ranged from pre-money
vs. post money, incubators vs. incinerators, how to lie with stock
shares, why “stealth mode” is stupid and why pizza guys make the
worst investors. It was
hard-won advice for any entrepreneur trying to navigate a shifting
landscape. And if some of
it goes against the flow of conventional wisdom, as Osborn said,
“Never go on the advice of one person.
Try to get a little consensus because there is so much
information about this running around right now, and you have just
heard a bunch of it.” Good advice regardless of the topic.
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