Further to my own post

I just thought of something

we (the CEOs of TheFunded) can't be the only ones reading this article. The NY Times is not there just for us.

what happens when prospective LPs get hold of it?

I wonder what answers the up and coming VC funds are going to have?

Why are we beating this dead horse? What is the point? Isn't there more important issue to talk about anymore?

I agree with both #1 and #2. The article is good to distribute to build awareness of the real state of affairs in "VC-land" (#1's point). It's also important to focus on moving forward and getting good companies access to capital so that they can be properly funded, respond to market needs and grow to generate returns (#2's point). Both objectives are useful.

As I have mentioned in a few posts, private equity (PE) is one "way out". It's difficult, time consuming, requires dedication and discipline but PE is available and can provide the equity required for an enterprise to grow.

I have been asked to start an open discussion on this approach which I may do at some point. My previous posts, however, summarize an approach to getting PE that can work. I'll "cut and paste" one here for convenience:

As I have posted before (please forgive the repetition but I am trying to help out here), Private Equity (PE) is available. People are starting to agree that using the VC as an intermediary is not working out too well.

Of course, securing PE takes a lot more "bucket and shovel" work, but so what? If that's what you need to do to be successful, then get started. Complaining about the VC situation does not further your business very much so please do that for recreation, but never lose focus on why we are all here.

For what it's worth, here is a bit of a "tutorial" & my personal experience with securing PE:

\PE is very "geographically sensitive". So, what works where I am at (Cleveland, OH) may not work where you folks are at. Having said that, I'll tell you what I did and you can alter the process to suit local conditions.

Anyway, to get started, I got involved with various networks where the rich folks "hang out" & socialize. I did this through friends who were already a part of these "social networks" (BTW, these were not Linkedin or Facebook or any of that sort of "kid stuff", of course). These were more like professional organizations, social fundraisers, etc.

Since I was already known as a former professor, engineer and entrepreneur, I had a "head start" in meeting some of the key people - and I used that. Anyone can start this process with their own set of contacts & friends and using whatever relevant experience that they may have.

BTW, my first company (started in 7/88, sold in 5/99) was entirely self-funded, it operated in the black and made the top growth list a couple of years in a row. That helped with establishing my credibility.

Regardless of that success, I still continued to practice & refine my pitch. I am always working hard to improve in any way that I can. I worked with key friends in these organizations who introduced me to the COIs (Centers of Influence). They, in turn, took my pitch to individuals who they felt would have an appetite for an investment. That allowed me to inherit the "trust umbrella" of existing relationships that spanned decades - essential to success.

Over a period of about two years, individuals came forward to hear the pitch and a portion of those (about 70%) invested. The average level of investment was about $50,000. Most recently, we picked up another $360,000 during the past 2 months. We are also starting to attract "senior debt" with a convertible option as "back-end" protection.

This was a process and took a lot of time & effort, but it was worthwhile. The people who have invested have a deep, personal connection to what we are about and so they act as COIs for potential investors and - more importantly - potential customers.

This process can be repeated elsewhere. It is very hard work so do not get discouraged. It's all a matter of finding folks who can make the introductions. Look at your own databases and see who may be a candidate to jump start this process. Also, do not be afraid to "do the ask". If you do not ask, you will never get.

The bottom line is to have (or get) a great story and know how to tell it. That is essential.

That is all great, Dr. Steve, but your tale reminds in many ways me of the stories i hear from 22-year-olds who dropped out of MIT because Paul Graham threw $8,000 at them... your personal experiences are not generalizable. The prerequisites alone are daunting... Ph.D, high-growth prior company, professor, engineer....

i appreciate your effort but do not see how these anecdotes are any more actionable than the advice of 20-somethings who won the MIT-imprimatur lottery.

That is all great, Dr. Steve, but your tale reminds in many ways me of the stories i hear from 22-year-olds who dropped out of MIT because Paul Graham threw $8,000 at them... your personal experiences are not generalizable. The prerequisites alone are daunting... Ph.D, high-growth prior company, professor, engineer....

i appreciate your effort but do not see how these anecdotes are any more actionable than the advice of 20-somethings who won the MIT-imprimatur lottery.

Regarding #4/#5 - you raised a good point which is worthy of a response. So, here are some pragmatic tips/hints/concepts:

1) If you are 22 and still an undergraduate then stay in school and graduate. Taking "$8,000 from Paul Graham" to drop out of school and start a business is taking far too great a risk. Just don't do it. There's no backup plan. Never jump out of a plane without a reserve parachute.

2) Use whatever "tools" that you have. In this context, "tools" means academic currency (e.g., degrees, certifications, licenses, etc.), work experience, professional contacts, personal contacts, rich uncles, the bank of mom & dad, etc. These are all "tools in your toolbox". You must use them collectively to be successful. If you do not have them, then actively get them via personal effort (that's what I did - please keep reading). Yes, it's very hard work!

3) You do not need an advanced education (e.g., Ph.D./MD), but you had better not be a drop-out because all that says is that you could not complete a project / task. That does not look good to anyone. Would you write a check to someone who could not even get out of college or high school? If they can't do at least that much what are the odds of them succeeding in a new business?

Yes, I know that Bill Gates did that but please recall that he was blessed with two very unusual parents who were both phenomenally well-connected - and he (and they) used those connections very well. That was one of his "tools". In sharp contrast to Bill Gates, I didn't have that luxury (although my parents gave me the most important tools of all: discipline and motivation). I had to start building my own reputation because I could not leverage another's. If you are in that situation, then that's what you will have to do as well.

So, if you cannot leverage mom & dad (or "Uncle Bob") then you had best start generating your own reputation for hard work, discipline, intelligence, etc. You must have this in order for someone to invest in what you are attempting to do. That sort of reputation has to come from somewhere. You can't "come to the table" empty-handed and expect a business deal. You accomplish this in part by school, training and working in your field. You've got to pay your dues.

4) You have to put yourself in a position to manage risk by both design and by effort. If you do not have any so-called "raw startup funds" (e.g., $10,000, $20,000) then get a job, live cheaply and save those funds. It's not that hard, but it does require significant personal sacrifice. So what? That's the price of starting a business. BTW, that's exactly what I did. I worked, lived really cheaply, saved and then got started at age 28 in 1988. i also put myself through private schools (including four years of high school, undergraduate, graduate, etc.). I paid 100% of my high school & college expenses (tuition, books, etc.) by being a janitor. I still clean quite well, as my wife (and my current employees) will readily admit!

I bring this up only to illustrate the level of planning and sheer sacrifice that is normally required to make a lot of money. BTW, I lost several girlfriends during that time because they loved the "wine and dine" but had little or no appreciation for the sheer amount of work that it took to achieve success. This is the level of sacrifice that I am talking about. It is not easy and you have to make choices and (especially) live with the consequences. I regret none of it.

5) You have to be willing to go out of your way to meet people and talk to them about what you wish to do and to listen to them about what they do. Personal contacts are at the core of any successful startup (e.g., Bill Gates & Microsoft through mom & dad) so do not ignore them. These contacts must be nurtured (for all you EE geeks, that means periodic RAS & CAS signals) and that will take time and effort. Lots of time, especially. So, get started.

6) Look for opportunities that are "leverage-able" (= reusable). As an example, I got a consulting gig to do some research on electro-forming drums. I completed the project (and got paid) but I also generalized the software to what I really wanted to use it for which allowed consulting funds to, in effect, "jump start" my first business. The customer got what he wanted, I got paid and also ended up with something usable for my business. There are a LOT of those opportunities out there - you just have to be creative.

7) Folks, there's simply no "fast track" here. Yes, there are tall tales of great successes but these are dwarfed by the real stories of people like you and I who "crawled through glass" and slogged it out. In fact the stories of "instant success" are a lot like teenage sex: many claim to be doing it, few people really are doing it, and the stories of success are mostly wild exaggerations.

As always, I welcome further dialog.

That RAS and CAS comment is funny.

Dr. Steve - that's more like it. That's how I did it. To start my first company I had a couple of thousand dollars to my name, and knowledge. The basic rule was that I had to make more money every day than I spent. This made for some long days and some very worried times, but it worked out.

Didn't mean to spoil the thread with an anecdote... this is going in the right direction now - general principles applicable to anyone, not anecdotes about individual "success" that can't be replicated by others...

What the VCs' tax bracket has to do with their success?! VCs will survive. Specially the good ones. And the bad angle groups, who are a revolving door for destruction of value and capital.

What is killing VCs are 2 things:
1) long term to exit -- used to be 2.5 years, now it is 7.5. Since RIO is compounded, this is a big one. But even otherwise, a 30% return in 2000 is now 10%.
2) lower exit prices.
Both 1 and 2 are results of SoX. The M&A's know the IP option is off the table, so they can wait and offer less.
3) deflation in the technology space, means entrepreneurs do not need the money! Look at Zoho. As for contacts, that is fo the top VCs. The third tier ones and the angel groups are useless.

Believe me I used to work for Angels' Forum, and they destroyed more companies, than you could imagine. Unfortunately, there is always a fool that would join the group, as they lose a ton of money each and leave later -- a revolving door of failure.

Re: Comment #6 from Dr. Steve:
Bill Gates' parent's network had absolutely nothing to do with his ultimate success -- just as your parent's network had nothing to do with your success, Dr. Steve :-)

Since this is a thread started by Carl Wimm, the God of bootstrapping, of course I have to add that Microsoft is *the* bootstrapped company for the ages. Bill Gates never took a penny from his parents nor from a VC (ok, he took a few penny's from an investor long after he had become cash-flow positive and he took the money totally on his own terms). He and Paul Allen wrote a basic interpreter that worked across the myriad microprocessors of the day (late 1970's) and built a functioning business that was well positioned when the Goliath of the day (IBM) made it's move into PC's. Bill Gates was relentlessly obsessed with maintaining control of his company, dominating markets, and writing good software. Sucking up to ignorant VC's working for dysfunctional partnerships was the last thing on his mind.

to # 10 mathew.okeefe

the last two sentences of your post are worth re posting

Bill Gates was relentlessly obsessed with maintaining control of his company, dominating markets, and writing good software. Sucking up to ignorant VC's working for dysfunctional partnerships was the last thing on his mind.

make a list of the points in those two sentences.

Learn, them, live them, love them.

BW