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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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A Rant on VCs, Financial Models, and Experience

Comments (11)

I love a good rant.  I got one several months ago from Janet Stites in reaction to a post I wrote about financial projections.  I asked her if I could publish it and she said "yup."  Here it is.  Janet’s thoughts are her own and come from her experience, but I thought her perspective on entrepreneurship and VC’s was a useful perspective to ruminate on.

Dear Brad: I’m Janet Stites, cofounder/ former publisher of AlleyCat News now founder/publisher of Talent Pool New [east]. I came across your posting on the issue of projections always being wrong and how you mentioned (in a small way) the value of creating a business which scales. I wish you could open this dialogue on a larger basis with VCs and particularly early stage investors because one’s company can go under while taking the time to create these models. If VCs, early stage and particularly angel investors, would begin to ask for the revenue model, price point, universe of the market, competitive advantage and, from there, try to ascertain how flexible & creative, in terms of tweaking the b-model, the entrepreneur might be if the market changes, war starts, economy falters.  Investors might see a lot better deal flow in terms of quality and management in terms of tenacity and the entrepreneur might be able to avoid having to walk away from a potentially great company because his/her credit line has run out…spouse left…child starts college (I remember when the founders of iVillage thought, in 1995, chat was their model and TheStreet.com, thought, in 1996, they would make their fortune off of subscriptions.).

As you mentioned, it often takes one and a half to two years to start accruing revenue. I bet what stands between entrepreneurs and the finish line a few months out is often about $75,000 to $100,000–which may be too much to come up with personally after two years of no income and, no doubt, already a second mortgage, college fund diminished, etc.

I wonder how many viable businesses have had to fold because the entrepreneur wasn’t a trust fund baby or student just dropping out of Harvard (often the same) and able to live with 6 friends in a closet for a year or so (don’t forget the Teva’s and the bike!) What missed opportunities for investments and innovations in general? VCs might say that "if it was really worth it, you would make the time," but that is easy for them because VCs get a money management fee–you don’t have to wait until one of your investments has been acquired, gone public, or is simply in the black, to make your money. During the dot.com boom any number of VCs made a fortune as their portfolio companies were acquired or went public and they could cash out, even though the companies were never profitable and shareholders lost their shirts.

Also, often VCs –based on the many I know–are not the primary care takers of their kids so they are not choosing between making sure there is something fresh and green on the table for dinner, all the permission slips are signed, etc. or sitting in front of a computer all night creating multiple case scenario spreadsheets. One VC who has a blog once wrote that if he wasn’t writing the blog, he’d be changing diapers. My heart went out to his wife. What if she wanted to start a blog or a business? That would be one stinky baby.

Unlike the west coast, many early-stage or angel investors didn’t make their money as entrepreneurs —never even sweated payroll or signed personally for a credit line, so it’s hard for them to understand the time-value ratio of seeking money vs. credit card debt, vs. just calling it a day.

Anyhoo–I wonder what would happen if someone with your visibility in the financial community would encourage VCs/angels to re-think what they want in terms of projections (given they’re always wrong). You are in a position to create change…but your audience has to be your peers, not the entrepreneurs.

  • http://davidduey.typepad.com David Duey

    WOW! A wonderful rant!

  • Tim Stephens

    Amen Sister! And if the Angel / VC community would focus on web companies that solve real problems and sell real products instead of the Web 2.0 / Social Networking / Widget craze, then a few more startups would make it to the finish line. Thanks for posting this thought provoking rant by Janet, Brad.

  • http://www.tools4php.com Jim Verzino

    That is one great post! Most (but not all) times I have dealt with a VC or angel investor they seem to be out of touch with the realities of day-to-day life of the founder that is over 30 years old (too late to live in a closet and has more to his life than staring at a computer screen).

    Although not always the case, the experience they bring can help in moving the company to the next level… but the trade off is that s/he has to have a personal life and/or dedicate time to a family. Your right… since the projections are never right (and everyone including the writer knows this) why not change the way we think about them.

    Jim Verzino
    (aka friend of Susan Ritter)

  • Chris

    Call me cynical but I've always just assumed if I'm asked to make multiple projections during fund raising its simply a way to avoid saying no. I play along for an iteration or two but at some point you have to say no. Once funding is in place financial projections have their place but you have to spend time and effort to get investors and other board members to view the projections for what they are; a plan against which you can measure progress. In the end isn't it about making progress towards a goal? If you don't know where you want to go then any route will get you there.

  • fewquid

    Amen to that! The thing that threw me was that I assumed everyone _knew_ the numbers were a guess. My tendancy is to be candid and I've been shocked at the response in pitch meetings if I say anything even close to “well this is just one way of looking at it and reality might be quite different”.

    It's fine to focus on the business model at a high level, but it seems to me that _not_ focusing on detailed financials is a sign of a _real_ early stage investor.

  • Don Jones

    I think that the investors that I interact with (I'm an angel investor myself) want to see that the entrepreneur can present his or her assumptions about revenues and expenses, and how those assumptions relate to the business opportunity, and decide for ourselves if it makes sense. We all know about the revenue hockey stick, but we want to see if the team leader knows how the pieces fit together and how the goals are most likely going to be scored.

  • maricela morales

    Very worth reading. I think the exercise of creating a detailed enough business model is a must for any entrepreneur because during this process all possible “what if” scenarios should be considered. This is like an entrepreneur’ soul search activity. The more “what if” answers to any model idea the better.

    With that said, I think Janet’s most important point is “from there, try to ascertain how flexible & creative, in terms of tweaking the b-model, the entrepreneur might be if the market changes, war starts, economy falters.”

    Creating a business model layout is like planning the route to take for a very long trip with the family. Seldom do you get to stay within budget, convince everyone to move according to your schedule (those damp bathroom stops), and guarantee the weather or car troubles do not mess up any of your plans. Oh, and sometimes, you do get lost.

  • http://www.whygosolo.com/blog/aboutus Ann Bernard

    Thank you Janet for properly representing and ranting for all the entrepreneurs out there!! Kudos to you.

    There's only one thing fund raising has made me…more and more determined to work every angle to make it work without having to be a beggar for money. There's so much about those projections that don't tell you anything about the type of entrepreneur you're dealing with. It's been extremely frustrating to hear that it's the idea and the management team they care about when all they look at is the bottom line. What are great projections with a team that doesn't know how to adapt, be creative, stay innovative handle real competition, take their product to market, and work under extreme conditions?

    The way I see it entrepreneurs are sitting on the good side of the table. VCs need us (entrepreneurs) they will always need us…but the day will come I will no longer need VCs. Then someday, the day will come when they will need me to help fund their funds. Or even better…they'll want to throw money at my next idea. I much rather be in my shoes…however delirious they might make me.

  • http://startupglutton.blogspot.com/ Jamie

    AMEN! As a long-time modeler (for VCs, corporate decision-makers, and myself) I know that putting together a financial model is key to discovering whether there's a workable business model behind an idea BUT what gets my hackles up is when someone (with the money) wants to see what-if scenarios run out to 5 years. What a waste of time.

    Unless you're a farmer, or manufacturing toilet seats you can't possibly foresee what your business is likely to look like in 5 years' time! As Janet points out, the wold is full of risks that can change the complexion of a business entirely in the span of one morning (reference travel and 9/11). Even if the world doesn't change, your worldview very well may – meaning a whole new business model as you mature and refine after early-stage funding.

    Sure, it's easy enough to copy and drag your cells over for a couple more columns in Excel, but it feels yucky to me to do so – like admitting that I'm kidding myself and the potential investors that these numbers are meaningful.

  • Hal Etterman

    I understand everyone's issues about fund raising. I've been helping entrepreneurs build financial plans for the past 15 years. I've also personally made over 100 VC presentations for my employers and past clients. As a result, I just finish my book “Financial Planning for the Early Stage Business – How Silicon Valley Businesses Develop Financial Projections for Venture Capitalists and Angel Investors.”

    I teach how to do it and how to impress investors. See a book preview by pasting this link in your browser.

    http://www.blurb.com/bookstore/invited/151309/29a

  • http://intensedebate.com/people/tim_stephen3899 tim_stephen3899

    Amen Sister! And if the Angel / VC community would focus on web companies that solve real problems and sell real products instead of the Web 2.0 / Social Networking / Widget craze, then a few more startups would make it to the finish line. Thanks for posting this thought provoking rant by Janet, Brad.

  • http://intensedebate.com/people/david_duey david_duey

    WOW! A wonderful rant!

  • fewquid

    Amen to that! The thing that threw me was that I assumed everyone _knew_ the numbers were a guess. My tendancy is to be candid and I've been shocked at the response in pitch meetings if I say anything even close to "well this is just one way of looking at it and reality might be quite different".

    It's fine to focus on the business model at a high level, but it seems to me that _not_ focusing on detailed financials is a sign of a _real_ early stage investor.

  • http://intensedebate.com/people/maricela_mo3922 maricela_mo3922

    Very worth reading. I think the exercise of creating a detailed enough business model is a must for any entrepreneur because during this process all possible “what if” scenarios should be considered. This is like an entrepreneur’ soul search activity. The more “what if” answers to any model idea the better.

    With that said, I think Janet’s most important point is “from there, try to ascertain how flexible & creative, in terms of tweaking the b-model, the entrepreneur might be if the market changes, war starts, economy falters.”

    Creating a business model layout is like planning the route to take for a very long trip with the family. Seldom do you get to stay within budget, convince everyone to move according to your schedule (those damp bathroom stops), and guarantee the weather or car troubles do not mess up any of your plans. Oh, and sometimes, you do get lost.

  • Jim Verzino

    That is one great post! Most (but not all) times I have dealt with a VC or angel investor they seem to be out of touch with the realities of day-to-day life of the founder that is over 30 years old (too late to live in a closet and has more to his life than staring at a computer screen).

    Although not always the case, the experience they bring can help in moving the company to the next level… but the trade off is that s/he has to have a personal life and/or dedicate time to a family. Your right… since the projections are never right (and everyone including the writer knows this) why not change the way we think about them.

    Jim Verzino
    (aka friend of Susan Ritter)

  • Chris

    Call me cynical but I've always just assumed if I'm asked to make multiple projections during fund raising its simply a way to avoid saying no. I play along for an iteration or two but at some point you have to say no. Once funding is in place financial projections have their place but you have to spend time and effort to get investors and other board members to view the projections for what they are; a plan against which you can measure progress. In the end isn't it about making progress towards a goal? If you don't know where you want to go then any route will get you there.

  • http://intensedebate.com/people/ann_bernard3938 ann_bernard3938

    Thank you Janet for properly representing and ranting for all the entrepreneurs out there!! Kudos to you.

    There's only one thing fund raising has made me…more and more determined to work every angle to make it work without having to be a beggar for money. There's so much about those projections that don't tell you anything about the type of entrepreneur you're dealing with. It's been extremely frustrating to hear that it's the idea and the management team they care about when all they look at is the bottom line. What are great projections with a team that doesn't know how to adapt, be creative, stay innovative handle real competition, take their product to market, and work under extreme conditions?

    The way I see it entrepreneurs are sitting on the good side of the table. VCs need us (entrepreneurs) they will always need us…but the day will come I will no longer need VCs. Then someday, the day will come when they will need me to help fund their funds. Or even better…they'll want to throw money at my next idea. I much rather be in my shoes…however delirious they might make me.

  • http://intensedebate.com/people/don_jones3607 don_jones3607

    I think that the investors that I interact with (I'm an angel investor myself) want to see that the entrepreneur can present his or her assumptions about revenues and expenses, and how those assumptions relate to the business opportunity, and decide for ourselves if it makes sense. We all know about the revenue hockey stick, but we want to see if the team leader knows how the pieces fit together and how the goals are most likely going to be scored.

  • Jamie

    AMEN! As a long-time modeler (for VCs, corporate decision-makers, and myself) I know that putting together a financial model is key to discovering whether there's a workable business model behind an idea BUT what gets my hackles up is when someone (with the money) wants to see what-if scenarios run out to 5 years. What a waste of time.

    Unless you're a farmer, or manufacturing toilet seats you can't possibly foresee what your business is likely to look like in 5 years' time! As Janet points out, the wold is full of risks that can change the complexion of a business entirely in the span of one morning (reference travel and 9/11). Even if the world doesn't change, your worldview very well may – meaning a whole new business model as you mature and refine after early-stage funding.

    Sure, it's easy enough to copy and drag your cells over for a couple more columns in Excel, but it feels yucky to me to do so – like admitting that I'm kidding myself and the potential investors that these numbers are meaningful.

  • Hal Etterman

    I understand everyone's issues about fund raising. I've been helping entrepreneurs build financial plans for the past 15 years. I've also personally made over 100 VC presentations for my employers and past clients. As a result, I just finish my book "Financial Planning for the Early Stage Business – How Silicon Valley Businesses Develop Financial Projections for Venture Capitalists and Angel Investors."

    I teach how to do it and how to impress investors. See a book preview by pasting this link in your browser.

    http://www.blurb.com/bookstore/invited/151309/29a

  • http://www.facebook.com/rogertoennis Roger L. Toennis

    Though I do think it's important for a startup CEO to be able to think through and create a pro forma for a company extending out 2 years, I do agree totally with Janet's point about VC's not being dialed in the the challenges of the more mature entrepreneur with kids/mortgage who can't "Live in a closet with 6 friends".

    I think VC's too quickly write off people with a little grey in their hair. Seems to me we older folk, I'm mid 40s, who are suffering the simultaneous slings and arrows of entrepreneurship, parenthood, mortgages and 20+ year marriages are much tougher mentally and have overall better management skills than the late 20-something code jockey's.

    A 40+ year old entrepreneur with kids, spouse and mortgage responsibilities has to live in a very real and demanding world while the late 20-something single entrepreneur with no kids can live in a "much less real" world with much fewer demands for them to grow from pressure. When a company gets to critical mass and grows it's the 40-something entrepreneur who is going to scale up as CEO and be able to take the venture to the promised land.

    My wife had to go back to work for me to be an entrepreneur so I'm both startup CEO and full-time stay at home dad plus I'm doing contract work on the side to generate cash to keep the mortgage paid.

    You want to learn what it takes to be tough and resilient and stay focused on what matters so you don't lose your mind?

    Try doing my *jobs* for a few months. ;-).

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