We recently asked you to send in questions about small businesses to OPEN Forum's expert, Guy Kawasaki, to help launch his new column. Today, he kicks off his Ask the Wise Guy column with an answer about venture capital. You can send your questions to Guy here.
Q: We have a well-researched product with plenty of upside potential. We are out of cash, but we are two techie geek dudes who are confused by the venture capital world. Some people tell us we must have a high-profile management team before we go to raise seed capital. Others tell us outside investors will fund a great product and help us recruit the team after investing. What do we do first: build a team or find an investor?
A: You need to understand that venture capital is like cocaine: It makes you feel good for a while, but it can kill you and involves dealing with unsavory characters. To the extent possible, you should delay, or even avoid, raising venture capital and instead bootstrap your company.
With Open Source tools, cloud-based infrastructure, Facebook and Twitter for marketing, and virtual employees (that is, no office space), it’s cheaper than ever to start a company.
If you ask most venture capitalists, they will tell you that they invest in teams, and they’d rather have an A team with a B product than vice versa. There’s only one thing wrong with this theory. The great, and I mean truly great, companies didn’t have proven teams at your stage.
Think Steve and Woz, Bill and Paul, Jerry and David, Larry and Sergei, Bill and Dave, and Mark Zuckerberg. None of these guys were proven compared to, say, Webvan’s team of seasoned executives.
The very first thing you should do is build a great product. The second thing you should do is get it to market. Then if all goes well, you will never need venture capital, or if you do, you will be in a position where you have the upper hand because you will need capital to expand a growing business as opposed to finishing a prototype. If your business is growing so fast that you need adult supervision, then by all means hire one (aka, your “Eric Schmidt” or “Meg Whitman”) at that point.
It’s very hard to get a definitive “no” from venture capitalists. There are two reasons for this: First, they lack the courage to be candid. Second, there’s little upside to saying “no.”
It’s smarter to use one of the standard turndowns like “When you have a world-class management team, come see us,” or “When you can show us traction, come see us,” or “If you get Sequoia or Kleiner, Perkins to invest, come see us.” This way they’ve left the door open in case you do take off like a rocket, and you’re dumb enough to circle back to them when you are the next Facebook or Twitter.
Whenever venture capitalists utter these classic lines, they are saying “no”instead of “not yet.” And believe me, if you showed up the next day with a world-class management team, they would find another excuse not to invest. So to make myself perfectly clear, the answer is to finish your product and get sales. If your company takes off, venture capitalists won’t care if you don’t have a window-dressing management team. And if your company doesn’t take off, it won’t matter if you do.
You might ask, “What if we don’t even have enough money to finish the product?” The answer to this is “Find a way” where a way = friends, family, fools, and angels. If entrepreneurship were easy, more people would succeed at it.