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Stop Playing Games and Be Real

TheFunded.com Open Letter

Posted by Garfield on 2012-07-21

PUBLIC:

Dear V.C.'s -

I am only speaking to Silicon Valley today. First, let's start with your track record: whatever you're doing, IT ISN'T WORKING! What's your average return over the last 10 years? How many articles and blogs detail your failing at really picking winners? So whatever you're doing today is not really hitting home runs. That said...

INNOVATION COMES FROM ALL OVER THE COUNTRY! It isn't just in Silicon Valley! This is an incestuous area, where you all want to hear a big name or some big initial investor. So much for "venture capital" investing in "seed stage, high risk, high reward" ventures. Whatever - show me a fund that actually does that.

I am a nobody from the middle of the country. I had an idea and worked for 3 years on it (still am). I have solved the problem I set out to solve, and it is big and it is national. When Walmart agrees, YOU SHOULD AT LEAST LISTEN TO ME! How sad it is that you want to hear all the ideas, be in on what's going on, sit on your high horse, and laugh at us for trying.

Here is a perfect analogy my fellow entrepreneurs will understand: It's like I'm in a marathon. I filled out the paperwork, trained, pulled a support team together, and I'm about halfway through and AHEAD OF EVERYONE. Then I meet you and say "I need a sponsor to finish this race and win."

Then you say "Hmmm...have you ever run a marathon before? Have you ever won one like (Jack Dorsey, Mark Zuckerberg, Brad Feld, blah blah blah)? Has your team ever supported a winner before? Do you know how to run across the finish line? Here...let me see your stats....and look at your team....and check your shoes and the car you drove to the race....."

I stand there in disbelief. I say "uh, I'm IN the race. And I'm winning. And my team helped get me this far. And, uh, I could win this with some help."

Then you come back: "Hmm....well, we agree you're ahead. And we agree you could win this. But I haven't heard of you before. And I haven't heard of anyone from your team. And you're too old. And you don't live here where the cool people live. And you don't have 100,000 users on your site or $5M in revenue (we call that "traction"). I like what you've done, and you should be commended for getting this far (which they'll follow with some BS story about how they understand and were once where you are now), but I just don't think this is the right team. You may be ahead now, but I just don't think you can sustain the pace. I think you'll make a left turn when you shouldn't, I think your team won't be able to keep up, and frankly, I'D FEEL BETTER INVESTING IN LAST YEARS WINNER EVEN THOUGH THEY KNOW NOTHING ABOUT THIS KIND OF RACE, LET ALONE SPENT THE LAST 3 YEARS RUNNING IN IT!"

Mr. VC investor reading this: Get real. How many success stories have there been where people like me get pissed off, tell you to go to hell, and build the business anyway? Ohhhhh....THEN you want in....THEN it looks like a good business you would invest in.

So stop saying your're seed stage. Bullshit. Stop saying that you don't make your decision based just on the team. Bullshit. Stop saying that you were once where I am now. Bullshit. I call bullshit on your entire industry - you've become an inbred trigger-shy self congratulating group of people that live to watch us squirm and treat us like crap. Like taking phone calls or texting WHILE WE'RE PITCHING YOU.

I do have a good idea. And I'm going to go sell it myself. I'm going to go get that 'traction' you want to see. And guess what? When I do, F### YOU. I'll build this in spite of you and your ilk. You can't think for yourself. You have rules and guidelines and formula's and a profile you want me to fit before you invest in me. Guess what? That's fair for later stage investors. But you people that say you invest in seed and early stage? Guess what? STARTUPS ARE SLOPPY! I've taken this idea and I've got Walmart saying they like it and VP's in the industry agree and the trends are all pointing to this. EVEN YOU SAY IT'S A GOOD BUSINESS AND WE'VE BROUGHT IT A LONG WAY.

So what are you shy about? How can you say we've done a good job, we've got it figured out, then spit on and insult me by telling my I'm not good enough to fund to continue on with it? That my team isn't strong enough to move it forward? We've taken it this far - what is your problem? I get that it's your money. BUT STOP WASTING MY TIME MAKING ME DO A SHOW AND TELL FOR YOU WHILE YOU PRETEND YOU'RE INTERESTED IN EARLY STAGE. I'd be better off taking that $1,000 I spent to fly out to see you and go talk to Walmart or Target and put this together myself.

So why don't I do that myself then? Because growth costs money! Because I'm coming to you to help me hit an artery! Because when the retailer says yes, I'm screwed and won't be able to execute because I'm not funded (..oh, but then I could come running to you to get funded only to get screwed because I'm excited and desperate and you know it). Because I'll open the door to competitors as soon as I have some succes. Because running a business (even close to) right takes time and money. Because my team can't keep working for free. Because my wife is wearing the same bra as 3 years ago and barely can pay the mortgage. Because my kids need braces. Because I need to put gas in my tank. I'm not some 23 year old naive kid that can live on beans, sleep in my mom's house, and be your indentured servant until I make something of value that you take credit for and somehow finagle out of my control.

So run your business your way - that's ok and totally fair. But stop building it on the backs of those of us that don't have the time or money to play your game. I know you don't think of yourself as this way, but you and your industry are. And I smile EVERY time someone builds a business right around you. We all laugh at you. Hail to the Americans that build businesses despite you and the government doing your best to suck the life out of entrepreneurship and dreams.

Posted by rktsci on 2012-07-21 01:58:42

I've done just what you described. And I'm still here 13 years later with 40% annual revenue growth and the best customer list in my industry. In other words, I created a *real* business that impacts *real* people.

Posted by Dr. Steve on 2012-07-21 11:46:49

A nasty rant - but quite accurate! That's why I have never taken one cent from a VC even with three term sheets. They do not comprehend what they are purporting to accomplish and that's one of the fundamental reasons why they are disappearing rapidly. PE is far better.

Posted by scorcher14 on 2012-07-21 12:55:40

I have to say nothing bothered me more than pitching a VC who was constantly typing on his or her phone the whole meeting. Unfortunately, that was the norm, not the exception, in the many pitches we did.

I always think of the saying, "Nothing succeeds like success." You have an easier time when you or someone on your team has already had a hit before. However, most hugely successful companies (Apple, MS, Google, FB, etc.) don't have founders that fall into that category, so you ask yourself what gives.

Anyway, it's like the old saying goes. The banker won't give you money unless you can prove you don't need it!

Posted by Garfield on 2012-07-21 13:51:16

#3 (scorcher14):
I've decided that I don't buy the premise the a successful team with necessarily be successful again. If that were the case, would you bet me $5,000 that last year's superbowl team will win again this year?

There are so many variables to a startup, and a good strong team is only ONE. It seems very logical that someone that has done it once successfully will be successful again. But I really don't think that applies in the startup world. Startups are so unpredictable, full of crazy things and variables and issues you can't control, no matter how good you are.

You know what I've noticed? I've noticed that people that HAVEN'T made it try harder, fight longer, and give up less. On the other hand, the people that start companies with millions in their pockets "really" don't need it to succeed or work. And many times some dumb company will acquire that "successful" person's company just because their name is on it, regardless of whether it's sustainable or has value.

So I encourage all of you to politely push back on V.C.'s: a previously experienced team will be successful managing a large company, or 'running' a business. But to start a business - to give birth to something that hasn't been done before - to create value out of thin air - THAT my friend takes passion, drive, desperation at times, and sheer fight. Successful people lose a small part of that, and even more quickly if they get big heads about it. Don't accept it folks - otherwise take a bet on next year's superbowl...

Posted by VenturiSaeculi on 2012-07-21 16:39:29

You might want to look into Angel List (www.angel.co) as a source of funds. It sounds like you've made enough progress to interest people who actually invest at the earliest stages, but you're not meeting them. Angel List might help with that.

Posted by bryanrimmer on 2012-07-21 17:18:10

I feel some sympathy for this - we are at the beginning of our search for funds, and we too have a great concept, good initial clients, good initial cash flow : and we felt that traditional VCs had no clear understanding of our needs - or even the will to understand. Not through having a bad story or making a bad pitch. They just seem to have an irrelevant position in the "food chain". Betting on horses after they won the race is easy. Where is the risk in that ?
The comment above about AngelList - I have resisted continuing wiht my pages there, because I felt the same attitudes would be prevalent. Does AngelList really work ? Or is it the same old story ?

Posted by Anonymous on 2012-07-21 17:22:40

Hey Garfield, good on ya! Very accurate encapsulation of oft-repeated concerns - and with a tone which very appropriately points the finger in the face of those who have generated less than 2% annual returns for ten years. Just for a little historical perspective, in the early days of VC (I mean REAL early, like when KPCB was just K ...), any VC worth his salt would only take on associates who had actually successfully operated a business - imagine that! High time to return to an age of sensibility. So, who has an UBER-disintermediation model to totally cut out the venture crapitalists? Sign me up.

Posted by Ikea2011 on 2012-07-21 20:35:09

I'm sorry, but I wasn't aware that the investor community owed you anything Garfield. Was that listed somewhere on this site, or perhaps you read that somewhere else?

Was there an implicit agreement that if you created a product that Walmart liked (but obviously hasn't funded), that term sheets would be forthcoming?

Of course not. You knew that when you started on your journey, and your success or failure as an entrepreneur is now predicated on selling to investors - whether they're on the left coast, in Chicago, NY wherever. You've had to sell to others all through this process - your wife, your team, perhaps even your dentist. Get back in the game and make it happen.

Look for ways to succeed here - if they really like the product, get a Letter of Intent from Walmart...or someone else. Use this as leverage. It's frustrating, but that's a large part of what makes a successful entrepreneur - getting what needs to be done, done.

And if you don't like investors texting or emailing while your talking - say so; then get up, pack your bags and leave.

Good luck; hang tough.

Posted by jendrina on 2012-07-22 08:08:56

Completely agree with much of Garfield's message, but must say that VC's are not in the business of funding startups; they're in the business of generating returns for their private investors. Anything and everything they do is focused on this core purpose. So instead of thinking 'how can I get money from this VC?', perhaps the approach should be 'how can I show that my opportunity can help this VC meet its ROI targets?' VC's are not necessarily entrepreneurs but they are business people, and if we show them how our business can help their business succeed, maybe we can eliminate some of the miscommunication and misunderstanding.

Posted by Garfield on 2012-07-22 14:38:40

#8: You are absolutely - and pointedly - correct. Good feedback, and very fair. After thinking about it, here's my response/where my thinking comes from:

Investors don't owe us anything, true, but when they SAY "come on in and we'll take a look", you expect at least that much. After self-analysis, I think this is the heart of my problem with the industry and where the frustration/expectation comes from: IT'S NEVER ENOUGH.

We had investors tell us early on "good idea - you need to put a team together and come back." So I did. Then they say "good idea - you need to make a business model out of it." So I did. Then they say "good idea - but you need to make a working prototype." So I did. Then they say "good idea - but you need to get interested customers. So I did. Then they say "good idea - but you need to raise some money. The first $10,000 is the hardest..." So I did. Then they say "good idea - but you need to raise more money. The first $100k is the hardest." So I did. Then they say "good idea - you need to raise more money. The first $500k is the hardest." So I did. Then they say "you need LOI's from channel partners - get those." So I did.

Anyone noticing a pattern here? IT'S NEVER ENOUGH. And when I say "they", it really is a collective When you talk to these people, they all start to sound the same They almost finish each other's sentences. My question is "how much further can I de-risk the business before I've made it enough of a business that I don't need funding?" I THOUGHT that was teh gap that V.C. filled. The 'expectation' I have/had is the false thinking that "if I just did X or Y, THEN they'll listen. THEN they'll help me. They even said so." It's getting told you haven't done enough when you've done everything they've asked, only to come back and be asked for yet more. At some point, you realize they're just not going to take the risk, and I'd appreciate knowing that earlier than later...

Posted by baracuda on 2012-07-23 01:34:32

I don't understand, why some folks keep writing rants. Just do not get engaged, then there is no need to rant. This is in my humble opinion serves no purpose.

Posted by kscruzen on 2012-07-23 09:45:38

I feel your pain and so does my wife. She made the 'bra' comment over the weekend without reading your posting. One point...make sure you are talking with VC's that are funding. Most of the Sand Hill road VC's have not been able to raise funds. So, although they take the meetings, they have no capacity to invest. Instead, they make comments like the ones you mention and waste our time.

Posted by Anonymous on 2012-07-23 13:28:58

Everyone gets pissed at some point in the funding game.
These tirades are funny, but predictable.

BTW, we are on our third round of funding, this time fro $2M, and all from individuals. No VCs.

Posted by goodform on 2012-07-23 19:50:59

On the one hand - ill bread, arrogant, self important . . . On the other hand - a systemic problem. Technology is global. Entrepreneurs are global. Validation is global. Funding is global.

All startups need both funding and validation.

What is needed is an open and transparent global marketplace that serves the self interest of all of the members of the Early Stage community.

Static demo - www.earlystagemarketplace.com

All comments, thoughts . . . .welcome

Posted by akraemer on 2012-07-25 14:59:10

While I don't agree with the choice of words, I can certainly relate to the frustration.

Given that only a fraction of companies seeking investment get funded by VCs, I am asking myself if there is a flaw in the system. Is the system itself efficient?

There are a lot of businesses out there that do not receive funding, yet they have viable business models that could potentially generate attractive cash flows. They are just not the next Google and might not be attractive IPOs or M&A candidates down the road, however create lots of cash and make some investors/owners mighty happy.

Without the public markets or a trade sale as exit, these companies will not be looked at by VCs. I do not see how else these companies can get funded. What, if anything, can be done to help young companies get funded that have a good business model, yet are not VC candidates because, for whatever reason, they are not prime IPO or M&A candidates? I am talking about businesses that can be valued (in the future) using EBITDA and not Revenue multiples because they are profitable and generate cash. Solid companies, not pie in the sky mirages. I'd be quite content with a $50-100m business down the road that generates a lot of cash for the owners every year, and that remains private. A lot of these potential businesses are not being looked at by VCs, however they could be a boost to the economy if they had access to other types of funding.

Posted by carlwimm on 2012-07-27 02:07:30

All of you know my views on VCs and the systemic dysfunction brought about by the conflict of interest that always obtains when you have a "2 and 20" compensation scheme for a VC. I do not need to repeat that here.

I am interested in the requirement of (seemingly all) VCs to only deal though and introduction and then only fund someone who has had a success before.

Garfield's comments that he has a company with all the ingredients yet cannot get serious consideration would be solved if he (Garfield) were one of the "already successful" that VCs seem to treasure.

But, upon reflection, there is a dysfunction here as well. First of all, the success record of hundreds of VCs, investing with their acceptable "jockeys" (instead of the horse) have an abysmal record of generating winners. It is like 1 in a thousand.

Why?

That rate of failure (an almost assured destiny, it seems) happens in spite of all the things that VCs say:
1) we (the VC) can sport winners
2) the deal had traction
3) the incoming CEO had a success record

How can this fail. How can it fail at all , let alone about 100% of the time?

There has to be a systemic dysfunction in the standard VC structure that guarantees failure on such a consistent basis.

So ... I did a little thinking. I had a thought.

Let us suppose that I was one of the "pre approved jockeys". My last deal put a nice 30 million in my account. Now I am back with a new deal.

Well. first of all .... with 30 million .. what do I need with some pain in the back passage VC?

I can afford it myself. And who knows better how to spend every penny of my money since I did so well the first time.?

But here I am, back again, at the VC's door all ready to step in and take a VC term sheet.

I do that because I will be goddamned if I spend one penny of my money on this Hollywood storefront deal. My money is invested in T-bills.

And, not only would I not put myself in the trenches again personally, but I realize something the VC does not realize. The reason that I succeeded was that I got bit , big time, by the Butterfly of LUCK.

500 social networks out there and mine was the one that got bought out.

I realize that my reputation as a "winner" is a little bit shaky. So I want a no risk deal where there is enough money to float things for 24 months and I can pay people to do all the work. My job is to drink coffee and give advice (and attend industry conferences, first class, of course).

The result of combining a winner VC form, a project that is willing to take a VC term sheet and a superstar "jockey" who will not risk himself is a deal that looks absolutely great. A winner VC firm puts a flavour of the moment project in play, gives it money and signs up a name Valley superstar.

And everyone hopes that when it comes to box office time, it works.

Just like the movie business (another business with name superstars, and a well worn procedure for packaging a film so that it attracts funding) the VC business has about the same success record, 1 in a thousand..... (the rest of the VC tech deals end up in the Valley version of "it went straight to video disk").

In Hollywood, the system tries to break this logjam and creates a new studio every once in a while. In 10 years the new studio looks just like an old studio where people have forgotten how to bet on themselves and try to de risk by "packaging" a film.

In the Valley, there is a lot of kerfuffle about Mark Andreessen and his partner who are the "new type of VC". I guess they are the "new studio". Let us see if they can stay "new".

Summary

My point is that not only is the funding from LPs brought in on a basis that introduces a conflict of interest but the VC habit of screening projects by the introduction protocol AND insisting that a project can only go ahead with the addition of a pre approved "jockey" ends up as a recipe , not for success but for disaster.

The ones that do work out, seem to have a bit of the "stopped clock is right twice a day" flavour to them.

So what does that mean for us?

It means ... don't waste your time. Don't run your project trying to get their attention and then their money. You are better off buying lottery tickets.

best wishes

Posted by carlwimm on 2012-07-27 02:22:42

I just noticed that our comments are viewable by the public on this thread.

I will bet you (my colleagues on TheFunded) that those who do read this thread are going to ask themselves, who are these lunatics who try to be entrepreneurs.

To explain entrepreneurship to civilians, I recently stole the line from Pretty Woman where Richard Gere talks about the opera. Paraphrased for entrepreneurship, it can be revised something like this:

"The first time you come in close contact with a start up is very interesting. You either love it or you hate it. If you love it, you will always love it. If you hate it, you can learn to like it but it will never be part of your soul."

The start up people are the real "1%" in this and any other country. The future of each country is entirely in their hands. Don't believe me ... then stop to ponder this .. everyone of the 99% is replaceable. once something has been explored, people can be trained to do the work.

But a start up person has to explore and discover new territory. He has to do "the impossible with the unavailable". He must risk himself, profoundly risk himself, to finish his exploration.

And, like all great explorers , he must be prepared to die lost.

And that need to explore, that need to hold the reins in his/her own hands is what sets him/her apart from the other 99%.

And that is why we take all the guff from the peripheral people, flitting about our flame. Dealing with those who cannot and will not understand is what frustrates us.

I hope that helps any civilians who cannot accept that life to at least understand why.

best wishes

Posted by htroche on 2012-08-01 05:15:12

I share the frustration with the original poster. Having just gone through a seed fund raising round, all I can say is, I feel your pain.

On the other hand he is forgetting or not admitting the number one characteristic of VCs:

They are followers! The only way to get them to invest is if somebody else is already investing. There is no point in trying to fight the fact they are followers or to try to change their mind. You could be the greatest startup ever with a rock star team, traction, growing revenues and good press and still most VCs will sit on your deal until they feel somebody else will do it.