|Finding the Golden Needle
Netpreneurs Discuss Their First Funding Experiences
The Forum (part 2)
Q: Im Jeanne O'Kelley with Blueprint Technologies. My question
has to do with your management team. As you went out to meet with the venture community,
did any of you get the response, "I don't like somebody on your management
team," or, "I don't think you have the talent in a certain area and I want to
supplement your team with somebody?"
Mr. Schmonsees: Yes. Fortunately, I
wouldn't leave. As a matter of fact, we had very frank discussions about whether and when
to bring in a "number two" in our organization. It seemed to make sense, so, it
ended up as part of the deal.
Mr. Pittinsky: I look young, so when we
talk with investors, I explain I have been in school all my life and have lots of
experience in the education market which we serve. The first time that someone asked me
whether I would be willing to step down as Chairman and CEO of Blackboard, it took me by
surprise. It shouldn't have, because it's a legitimate question. There comes a time in
every company's growth when those issues come up. So just be prepared for it. I haven't
yet figured out if they ask you because they really want to know the answer or they're
interested in how you respond. It's probably a bit of both.
Ms. DeFife: We heard more advice along the
lines of, "You need a strong salesperson. We like what you have to offer, but let's
fill that gap." My belief has always been that if there comes a time where the
investors want to replace me, that's fine. I'll certainly step aside and find somebody who
can carry it to the next step. Also, if I'm not doing my job, I fully expect to be blown
out and should be.
Mr. Thomas: The answer I tend to give, and
which I really believe, is "I wear two hats, a shareholder's hat and a company hat,
but I'm a shareholder first and foremost. If you find someone who is going to make this
company grow faster than I can or any of the people that we have, I'm more than open to
talk about it."
Mr. Nelson: Bill Melton of CyberCash and
Veri-Fone, who is a considerable success, said: "I fired myself too early once. I
fired myself too late once. I have never done it at the right time." I have never
been quizzed about anybody on my team, but I have been quizzed about myself by investors.
Either you have the arrogance to say, "I'm running this thing until you yank me out
of here." Or you say, "Look, I'm a shareholder, and my top concern is having a
Q: My name is Monte Cole. I have a start-up doing custom
environmental systems. Do investors really care if copyrights and patents, for instance of
the source code, are held in the company's name or by an individual or individuals?
Mr. Schmonsees: I applied for a patent
before I formed the company, but as soon as I formed the company I put it in the company.
It is an asset of the company simply because I didn't want to have that discussion. If you
believe that the company is going to succeed, why would you want to keep it in your own
name? Give yourself some extra stock instead.
Ms. DeFife: The assets of the company are
what the investors are investing in. The copyright, trademark, everything on our side is
all held by the company.
Mr. Thomas: Besides the people, you have
to have a product to invest in. Its no good if the product is not part of the
Mr. Riechers: Unless there is some very
unique story behind this, I would suggest it needs to get assigned unilaterally to the
Q: My name is Scott McLoughlin from The Adrenaline Group. What do you
suggest for products like systems software or enabling technologies, where, without a
significant sum of financing, there aren't going to be any customers? Im thinking of
something that takes a significant amount of investment to bring to market.
Mr. Riechers: Torrent Networking Technologies is a great example of
a company locally that did a couple of rounds of financing prior to having any customers
or a completed product. Hemant Kanakia, the founder of the company, is clearly a genius at
designing switch equipment and software related to switching. The investors made a bet on
Hemant when there was no product to analyze. You are still looking for milestones. Bob
Nelson's point is right, that the milestones are different, and for the first few stages,
there are no customers. It's a difficult story for which to raise money. You need one
person or a couple of people around whom the money-raising revolves, because of their
remarkable track record.
Mr. Schmonsees: If it's a new idea, figure
out a way that you can mock up something that will show the revolutionary aspects of it.
At least you get something that's a prototype. It shows how it would work if you really
had enough money to build it. People need to see something tangible before they can take
the first step. We walked around with our idea in mock-up to get our first investors.
Mr. Riechers: That's a very good point.
Torrent had a synthetic version of the product. It showed the power of what they intended
to build, but it wasn't the product itself.
Mr. Nelson: If you havent built a
company before, you are probably not going to get a large amount of money to get to alpha.
Bring somebody in who has been successful and can attract that kind of money on an idea or
on sheer reputation.
Mr. Pittinsky: We developed the first
version of our product under contract for several different people. We didn't need a
product to get a customer, because we got our customer to pay us to build the product. We
got the product done on someone else's dime and we proved there really was a market for
it. You would be surprisedif you ask people to build your product, they will. It was
Q: My name is Sumant Hattikudur. In a competitive environment, how
much proprietary information does the company share with the VCs?
Mr. Schmonsees: Everything.
Mr. Nelson: Ditto.
Mr. Schmonsees: Yes. Except you wouldn't
go and tell them what the other VCs say youre worth, because they will talk.
Mr. Hattikudur: Okay. So how do you remain
competitive if that proprietary information gets out to 200 VCs, for example?
Mr. Thomas: When we first started, we were
afraid to show anyone our technology. We asked for non-disclosures, but VCs were turning
us down. Their reputations are based on this, too. Everyone has heard the horror story of
technology being stolen by a VC, but most VCs that we talked to have good reputations.
They are not trying to lose that just to share your idea. We were confident in ourselves,
but we aren't so important that a VC is going to risk its whole reputation to steal our
Mr. Schmonsees: I have never had the VC
ask a question so deep in the technology that it worried me.
Q: Gary Honig with Creative Capital. What is the vehicle to find out
who is investing in what and how they are doing?
Ms. DeFife: Most of these funds have
Web sites which list their portfolio companies. You can take a look to see if there are
companies like yours. We did a lot of research on the Web. If its not there, ask
them who their portfolio companies are, and what they think about them. They're not going
to give you numbers, but they will tell you honestly how they feel. If they say that they
are not confident, so they can make another investment like yours, move on, because they
are not going to invest in you.
Mr. Schmonsees: If you do get to the point
where you are actually talking to VCs, call their portfolio companies and ask them some
questions. "How are these people when it gets tough? What happens at a board meeting
if there are some tough issues? Are these people rowing in the same direction?" You
want to understand prior experience if you get lucky enough to get into the negotiation.
Ms. DeFife: We were two weeks from
shutting down the first time and we were going to take any money that came in, to be quite
honest with you, but I would still agree with Bob. Don't talk to the companies they
invested in very recently, because that's still the honeymoon period. Talk to the company
nine months or a year down the road, when they haven't met their projections. Find out
what the investors are like to do business with at that point.
Q: Im Paul Lyons. Bob, I was looking at your chart, and you
give some estimates for time spent raising money. I currently have two firms running and I
Mr. Nelson: You can outsource that
Mr. Lyons: You'll sleep for me? Cool. How
do you balance running the company and raising the money?
Mr. Schmonsees: I found a person who
served as our arms and legs for a lot of the early-stage discussions with VCs. He ended up
participating in the company when we were successfully funded. Even though I had a lot of
contacts, I needed somebody who could be more objective. There are people who can do that.
Some are pretty bad, but there are some good ones around.
Mr. Nelson: Some investment bankers in
Washington will raise money for you for a percentage of the money raised. Raising the
amount of money you need, from the kind of investors you need, for the kind of business
you have, is time and money well spent.
Ms. DeFife: At some point you say, "I
have to raise this money and I have to run a business, too. How many hours in a day do I
have and how little can I sleep?" I've got two teenage kids who expect to see me at
least occasionally. I walked away from everything else I was doing besides my business and
family to make more hours. You just do it.
Mr. Pittinsky: It may be a platitude, but
there is probably a problem if you are the only one in the company who can both raise
money and run the company. I always try to make sure that I am completely replaceable in
the company. I benefited from starting with a fantastic partner whose strengths complement
mine very nicely. If there is someone in your management team or in your company who can
develop into that role, it's an invaluable relationship.
Mr. Thomas: You've got to have other
people in your company who can do it in your absence. When my partner and I first started,
the company shut down when we went anywhere. No one would be doing anything. When we
finally had someone we could leave and not have to worry about the business running, it
was our best day. On the other side, I surrounded myself with really good mentors. From
VCs, to legal advisors, to friends, everyone I surrounded myself with helped us on all
phases. Its incredibly difficult to do by yourself. Youve got two companies.
That's hard for me to picture.
Mr. Lyons: Im getting lots of gray
hair out of this one. Brandy, you said you have brought on and surrounded yourself with
very good people. Has anybody on the panel looked at angels or bringing in people who will
take a more active role?
Ms. DeFife: My business partner was a
partner in a major law firm and worked for nothing for six months.
Mr. Pittinsky: Don't look for an angel
investor to do that, because they are investing in the management team. Look for them to
be mentors. One of our initial investors came to us right away with three other investors.
Another one showed up with two Fortune 500 companies who wanted our products. You want
those sorts of relationships.
Q: Hi, my name is Mark Dorf. I'm with Digital Cities and AOL Studios.
Was there a formula or percentage to arrive at a line item for your salary?
Mr. Schmonsees: There wasn't really a
formula. I get paid far too little, but other than that, no. VCs want to see skin in the
game, at least until you are making the money. Most of them don't want to see you spending
more time worrying about how you feed your kids than in building the business. They do
want to be reasonable.
Q: Everybody leaves the impression that if you get your financing,
things are fine and everybody is happy. Realistically, after you get your funding, are you
under more pressure to perform? How much pressure have you been put under by the investors
to meet your goals?
Mr. Schmonsees: We are meeting some
goals, beating some and not meeting others. You are not going to make any headway if you
cant have open, honest discussions with your investors. We probably spent too much
time on a couple of issues where we were jockeying around trying to be nice. After two or
three meetings we had to jump in and figure things out. You are consistently learning in a
new business. People who wont work through the tough problems with you are not the
right investors. 99% of the deals that VCs do have problems.
Mr. Riechers: To cite one successful
venture investor, 51 out of 52 deals he invested in did not make their near-term numbers.
Ms. DeFife: I'm one of them. We did not
make our numbers in the first year. Honesty is incredibly important. Investors can help
you more than anyone. You may just be creating stress because you haven't sat down with
your investor and really talked about your problem. It also depends on how long your
investors are willing to wait before you are actually showing some good numbers.
Mr. Schmonsees: You and your investors are
going to expend a lot of energy trying to figure out the whole story if you are not
honest. You don't have time to deal with that. Facts are facts.