Tuesday, May 22, 2007

Real Entrepreneur Story #2: It is about making money NOT raising money

The entrepreneurs were clearly fatigued when they waked into my office. They had raised close to a $1,000,000 at a whopping valuation of close to $10,000,000. The friends and family investors were joined by a couple of angels who were fortunately (as the entrepreneurs claimed) very hands off. Unfortunately, the bank balance was almost $2000. The product is almost there they claimed and the patent was almost approved. The product a video / picture tool was indeed slick, but I had to scratch my head as how to make money from it. The exit was rather unclear and the deal was over shopped; as almost every VC had looked at it and passed – the problem; the valuation was too high for the progress made, the exit was not clear, and the had no idea as to how to making money.

Nice tool! How have you tried to monetize? the answer was “we are trying to build a community” also, “we can offer the tool as an ASP model to enterprise customers”, “we have a customer that uses the tool on his website” , “we feel that when we develop the next version with mobile capabilities it will really pick up” were some of the answers provided in a span of a 30 minute conversation. I guess the best answer was the last answer they gave me “we really don’t know”. The answer to how you tried to sell it was telling also: “we hired some sales people to go out and sell the enterprise version at a price point of $300 to $500” - the sales people never produced any results.

A very cool tool, about a million bucks, and a lot of sweat and tears was about to go to waste and you could clearly see the entrepreneurs frustrated and in distress.

1- So here is the quick diagnosis and feedback:
2- So what if you have the coolest tool, can it make money?
3- Do not spend all your money on product development, build something that can sell and then improve the hell out of it.
If you over value the company, the chances of getting additional funding when you really need it will significantly diminish.
4- Building a sales model is entirely different that hiring some sales people. If the sales people can not make money, the efforts will fail every time. How could sales people make any money in a direct sales model going door to door - paying for over $3.0 per gallon for gas to drive to the customers and close sale that will produce a couple of hundred dollars of commissions at most - the math must work out for the sales force or they are not a force!
5- It is not only about money, the fact that angels are hands off is not always a good thing.
6- And at the end, it is not about making money NOT raising money.

Sunday, May 6, 2007

Real Entrepreneur Story #1 – What to do next?

Over the weekend, I met with a very hardworking and smart entrepreneur. He operates a business in the medical devices space. He is the founder, has over 20 patents to his name and yes, they are making money! The dogs are in fact eating the dog food. He has successfully raised over $5 million and has managed to put the company on the path to make close to $10 million in revenues this year. The company was in a terrible shape a year ago as he had hired a very ineffective CEO and was dealing with a weak Board of Directors (a story for another time!) – no questions asked the man can execute and deliver!

We spent a few hours together and he and his partner outlined their strategy of raising about $20 million from VC’s at a valuation of over $40 Million (because they thought it was worth that much!) – after discussions it became apparent that that they really did not need that much money to further increase revenues by over 5 fold and they just wanted to be safe! Not considering that this being safe is costing them valuable equity; besides because they were looking for so much money they had to increase the valuation so that they don’t give up the whole company.

Digging deeper, it became apparent that they can increase the revenues by close to 3 fold in a couple of three years without any more money !!! and can get the revenues to five fold and develop a few more innovative products with $5.0 million.

Quick calculation considering an exit in 3 years revealed that they would make more money as founders if they take the lesser amount and that they would not have to value the company at a point where a deal is difficult to make.

The moral of the story is that more money is not always better and a higher valuation is not always to the benefit of the founders. If you make bad assumptions you end up with bad deals; if you can consummate the deal in the first place!