what’s the real deal?
financing ideas to IPO
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So now that you have cut your hair, does this mean that you are
getting up before 10 a.m.?
Not today. Not
yesterday. I missed a
board meeting. Whatever.
We are just checking in on you.
This is interesting. A
company founder asks, “A competitor wants to buy us out while the
product is being developed. Should
I give them a price after the go-live date or see what they'll pay
Bulls win, bears win, hogs get slaughtered. Basically, the way you lose in a negotiation for selling your
company is by being greedy. That
is the primary thing. How
much money would you be happy walking away from it with?
There are a lot of people around here with big offers on the
table, and the first thing they think is, “Wow!
If they offered this much, I must be worth three times that!”
They end up walking away and running out of money.
If it's a lot of money to you, whoever you are, if it's a lot
of money to you and it would make your life really happy, and you'd
spend a long time working on it, then do it.
What’s the problem? If
we are talking $50, well, rethink it, but . . .
Can you lay out the topology of the various VC firms and where
you see Osborn Capital fitting in? Second, you talked about deal flow, yet there seems to be a
half dozen billion-dollar-plus funds being raised.
Do you think that will lead to a lot of dumb money flowing into
a lot of dumb ideas?
I don't know how to answer the first question, and the second
one is really interesting, though I don't know what the answer is
going to be. I think
what's happening is that there is so much money at the big VCs, most
of which they got from institutional investors like pension funds.
went from 2% to 4%, which is like trillions of dollars, and put it in
Benchmark, Kleiner Perkins and other VCs that are all closing
multibillion-dollar funds, yet the stuff is going away.
The exit strategy is going away on what they used to invest in.
The big question becomes, do they stop investing?
I don't know. I
don't know if they can. What
they tend to do is that the lousy deals out there aren't getting
funded, and the really good ones are getting oversubscribed like
crazy. The latest deal we
are doing is Bluetooth
in Boston, and people are yelling and begging on the phone, “Please,
let us get in this deal.” So
I don't know. They are so far away from the pain. It's like the dinosaur.
You hit one on the tail and two years later he flinches.
I don't know whether the big funds are going to figure it out,
or the big institutions are going to figure out they are being hurt
for a while. I don't
A radio show the other day quoted Jeremy Rifken’s book, Age
Of Access, and said that the Internet economy has to find a way to
make money off of the so-called “network economy.”
You create a big pool of users, a shared experience and then
it's no longer a simple matter of selling something or doing an
Internet version of something that happens today in the marketplace.
One obvious revenue source would be subscriptions, where people
pay to come to a site. Can
you think of any other, and have you or your VC friends, prophets or
soothsayers in the business thought about where the Internet network
economy is going?
We approach it from a completely different direction.
The way we like to approach it is, is there someone out there
with a big budget who is pulling out her hair because of a problem
that this product or service will solve? That's pretty much what we are looking for.
To quote John Sidgmore, if you can save somebody 90% of the
expense of doing something and make it easier to do, it's probably a
good idea. We tend to
come at it not just from “wouldn't it be cool to do this thing,”
but “are there people with a bunch of money who would pay for it?” I'd suggest that's really a better way to look at it.
Subscription models have really not done well yet.
If you are right about your prophecy of recession, are VCs
taking an increasing look at recession-proof industries like
education, for example?
I don't know. I
don't know what other people are doing.
I'm looking at land, gold and bonds.
You heard it here first.
You heard it here first. I
hope it's temporary.
We are seeing billions of dollars going into infrastructure
investments such as all-optical networks.
People are touting the fact that the Internet will be sped up
hundreds of times. Who
really needs an Internet, right now, that is hundreds of times faster?
I know plenty of people who are happy with their 56K dialup
connection; and corporate users, like NBC where I work, can get fiber
dropped in for a couple of hundred bucks a month.
What's the product that is going to drive the average person to
get a broadband connection in their home?
I don't know. You
have a product that I think is an interesting . . .
The stock market?
The stock market? It's
not bandwidth-intensive. At
UUNET, we spent a lot of time trying to think about this, and we were
really surprised. The Web
and the browser really surprised a lot of people.
I thought email was going to be the killer application of the
Internet for the next however many years.
I remember seeing that browser out of the University of
Illinois for the first time and thinking, “Everything's changed; the
whole world is different.” By definition, you can't predict it because, if we knew what
it was, we would be doing it.
Here is a philosophical question.
Somebody wants to know, “If we were going to start all over,
what would the Internet be like now?
I'm trying to remember who said, “We are never allowed to
know what might have happened.”
That's an ancient quote and I can't think of who said it.
I have no clue. It
could be wireless. I have
no clue. Do you?
I can't even imagine.
Yes, it's hard to think about it, but, boy, if we knew, you
would be making more money and I would have better stories.
Should an entrepreneur take more money than he needs?
This person says, “I was told by an angel group to ask for
$10 million, not $3 million, because VCs don't want a company to be
That goes back to the idea that there is too much money chasing
deals, if you ask me. It's
changed a lot, and I think people are more willing to invest small
amounts now. People are
willing to seed. It used
to be that under $5 million and over $1 million was the dead zone.
I think that people are willing to come down a whole lot more.
Don't fund yourself to the nickel of what you need, but three
and a half times as much? I
think that's kind of overkill. 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.
The bigger issue is not to take too long.
If somebody offers you money, just say yes politely and
consider taking it. The
worst thing in the world is to say, “Hmmm, I don't know.
Can you go back and change this?”
They change it and you say, “Uh, I don't know, how about
that?” You are doomed. Pull
that and you are doomed. It's
never going to happen. Figure
out up front what you are willing to deal with, and, when you get it,
say yes, please, thank you and take your money. . . . And run to the
bank to make sure it clears.
How long will they wait? They
say two weeks.
I have heard a lot of entrepreneurs complain about the VCs,
saying, “Well, maybe.”
They say it all the time, because what if it's a good idea?
You just heard my Critical Path story.
I would have dragged them along for years if I could have.
It's in the VC’s best interest not to have you talk to
anybody else and not to do anything.
A friend of mine, Barry Unger, who sits on a zillion boards and
is a Boston University professor, has a quote.
When they come to you with a term sheet, they make you sign
something that says you won't talk to anybody about this for 30 days.
Barry always says that the only people who ask you not to talk
are child molesters. I'll
never do it, and that's the piece of it that's the harshest, if you
ask me. It's called the
“no-shop clause.” Basically,
they give you a term sheet and if you say, “Thanks, I'm going to
keep looking,” that would be fine, but you can't talk to anybody
else. That will kill you
because, at the end of the month, they go, “Kidding!”
And now you are out a month’s more cash.
If you are looking to a VC, is it okay to tell them who else
are you talking to? Sometimes
they ask you to test the waters.
Is that a good thing to say or not?
If you are asked point blank, you'd have to lie not to say;
and, if you say that you can't disclose it, I think you would look
pretty disingenuous. It’s
a good question. I don't
know. What do you think,
Janszen (of Osborn Capital):
In my experience, it depends on the situation.
You have to be aware that some of the VCs you are talking to
are competing with other VCs you are talking to, and not avoid that
fact. It's good to do
your homework and know what VCs have done work together.
So, basically, be diplomatic about it.
If you are working with Accel or NEA or Kleiner Perkins or
somebody like that, it's a little better to say it than if you are
dealing with a guy who owns a chain of pizza joints.
As a group, they stink as investors.
Where do strategic investors and incubators fit into all of
know what? You turn up
the heat on an incubator and you get an incinerator.
I don't like incubators at all.
It was a good idea as initially conceived, and currently it's
one of the stupidest wastes of money I know of.
It tends to be four bankers and a
broker who get together to lease space, and they are willing to
lease it to you. What possible value do they add?
When it’s a guy like Bill Gross at IdeaLab!,
that’s different. He
had brilliant ideas three times a month and would walk in and go
“You guys, be a company. Here's a great idea, now go.
And, I’ve got another idea.”
That made a lot of sense, but many incubators now, the
incinerators, are just real estate plays, if you ask me.
Not that I have a strong opinion.
What about strategic investors, like the corporations that have
set up investment arms?
They are great to do and hard to get into. I don't know of anybody who has gotten a strategic round
without a VC round first, but it may have happened.
Your VCs will get you in on stuff like that, and that's where
having a really topnotch VC helps a lot.
My question is about VC syndicates.
For example, if you are trying to raise, say, $3 million, and
you approach a VC who normally invests, say, $1-1.5 million, will they
invest as part of a syndicate? Who should take the lead in forming the syndicate?
Will it be VCs who will drive it or is it on the entrepreneur
who should contact other VCs and make sure that the total money raised
is what he needs?
I think it's a good idea to keep looking yourself, because it's
a really good selling point to say so-and-so's going to come in, but
they don't want to lead. Rather
than saying, “I'm Joe Nobody,” if you walk in and say, “Goldman
Sachs is going to put money in my company, but somebody else has to
lead,” you will immediately move to the front of the line and get
their interest. I would
say it's generally a good sign. People
used to syndicate more, then they stopped because they had too much
money to throw at things. Syndicates
are a good thing because you get more VCs for the buck and that way
you get more contacts. I
would say to keep looking. Don't
just let them do it, because they have a million things going on.
If it's a syndicate of three or four VCs, will everybody want
to be on the board?
VCs rarely put in money without a board seat. I can't think of any of ours. The lead investor will,
certainly, but usually all of them want a board seat, which isn't bad.
They sit on boards all the time.
They know a lot, and it's very useful having a VC on your
board. They will
criticize your food at the meetings, though.
They always do.
From the outside, you get the impression that VCs decide what
to invest in by picking up The Wall Street Journal and deciding which stocks are going up
Or The Washington Post.
At Osborn Capital, we read The
Is the VC system capable of looking at something like intrinsic
value or something that has potential for profitability regardless of
what Wall Street is doing?
Of course. You are
I have never made this statement before, but I guess it's true¾when
you are talking about VCs at top ranking firms, you are talking about
some of the smartest, best-educated minds in America.
There are some really bright people, and it's a really great
job to have. They are
looking to maximize the value of the limited partner’s and the
general partner's investment, so they don't do lockstep anything.
If they are doing a good job, they earn nine figures a year. It's a bunch of kids, who are usually younger than me by a
lot. Anything that works,
they are going to do. They
have very little religion or orthodoxy about, “We only do this.” As you come down the tiers there are some real jokers, but
the really good ones are some of the best minds going.
And it’s also people who have done it before.
Exactly. They are
very well trained or, better, they are people who have done it before,
and that's a great VC.
We have an arrangement with a bank that might possibly want to
invest but doesn’t want to lead.
What do you suggest?
We get that all the time.
Somebody wants to invest and they don't want to lead because
investors are sheep, unfortunately.
They never want to be the first one in; they want to be the
last. You basically have
to do a lot of talking and find somebody else to do it.
One of the frustrating things people miss is that if you do a
first round of, say, a million bucks with 10 people at $100,000 each,
the first person is taking a much bigger risk than the tenth.
Entrepreneurs rarely remember this.
If you are trying to raise $1 million and I walk in and like
the idea, my incentive is great.
Go get the other nine to write the checks and come see me.
If I'm the first person to write the check, I'm hugely exposed,
so what usually happens with the first person is that you will get
warrants or options or a pony or something like that to mitigate the
risk. This is a common
problem. Sometimes I
think they say they don't want to lead because they don't want to say
No, they have already said yes.
They don't say yes until the check clears. No funder has done squat until the check clears.
Everything else is fluff.
Generally speaking, I have always been told not to even bother
talking to a VC who is more than 30-90 miles away because the money
guys want to be able to drop in at 5 a.m. and make sure that you are
chained to the drawing table. Do
you agree with that?
Look for money on the West Coast?
There’s someone who showed up here tonight. I've put six figures into his company and I’ve never met
him before tonight. Seriously.
He walked up and I saw the name tag.
I said, “Dave, how are you doing?”
I have funded, sold and cashed out of companies and have still
never seen the faces of the people who did it.
That's as a VC or as an angel?
As an angel. I
sit on boards in Virginia with guys who live in Mountain View and
Has that changed in the past few years?
Yes. They didn’t
like to come to this area before, and now they realize . . .
We're seeing a lot more of VC funds and offices opening up
Part of that is just me. We
got the sales force at UUNET up to a billion dollars in sales without
a remote sales office. We
did everything from one floor in Virginia, so I prefer to do things on
the phone rather than fly places and wear suits and other silly,
We are going to have to wrap up.
I'm sorry I didn't get to all these great questions, but
we’ll have more time at the chat tomorrow, which will also be archived.
Let’s have a hand for Jeff and for Shannon. We got a lot of straight talk tonight. On behalf of the Netpreneur.org team and UUNET's Head Start
program, thank you very much. Thanks,
also, to everyone in the audience for being part of the Netpreneur.org
program. We look forward
to seeing you at the next event and online.
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