From: Linda (joelinda1@home.com)
Date: Tue Jun 13 2000 - 21:37:17 PDT
http://www.redherring.com/vc/2000/0614/vc-vcps061400.html
VC P.S.: Ten myths and realities of VC
By Lawrence Aragon
Redherring.com, June 14, 2000
Bill Reichert's brother is a doctor. His father also was a
doc. So were his grandfather and his great-great
grandfather. So how could it be that Mr. Reichert is sitting
and talking about venture capital over a plate of bacon and
eggs at the Peninsula Creamery coffee shop in downtown Palo
Alto? As I join him in the high-cholesterol meal, I can
almost see the family of physicians staring down, wagging
their fingers. "I'm the first Reichert male not to be
doctor," he says, munching on a piece of bacon. "We figure
it was my other grandfather's genes that sent me on this
path."
Not the path to the coffee shop. The entrepreneurial path.
His mother's father, Robert McElroy, built two companies --
one that eventually became the multibillion dollar American
Hospital Supply. Following in granddad's footsteps, Mr.
Reichert founded five companies of his own, including a
software company while he was getting his MBA at Stanford,
and he was instrumental in helping turn around The Learning
Company (now part of Mattel [NYSE: MAT]). Now, as president
of Garage.com, he helps seed- and early-stage companies
raise money from angels and VCs. Along his entrepreneurial
journey, the lean 46-year-old picked up a lot of Roy
Rogers-style wisdom about the venture capital business. He
distilled it into a top ten list of myths and realities that
are guaranteed to raise someone's ire.
* Myth No. 10: The Internet changes everything. *
The reality: The Internet touches everything but doesn't
necessarily change it.
"Conventional wisdom is that the Internet is the biggest
technological phenomenon in the history of mankind," Mr.
Reichert says, clicking on a Powerpoint presentation to
prove it wrong. The computer screen shows a big ski slope
and a smaller one. The big slope? I guessed television.
Wrong. It's actually radio. In its first seven years on the
planet, radio was adopted by 45 percent of the U.S. public.
In that same time frame the Internet has penetrated just 25
percent of American households.
Slide shows aside, Mr. Reichert makes an excellent point for
would-be entrepreneurs: "Just because you're part of the Net
doesn't mean that the laws of economics have been repealed.
You've got to have a real business."
Careful not to alienate Vint Cerf, Mr. Reichert notes that
he "would never want to come across as someone who doesn't
think the Internet is important. The Internet clearly can
have a dramatic effect on the way business is done, but it's
still business. That means it's still about creating value
and creating profits."
* Myth No. 9: Venture capitalists fund startups. *
The reality: Venture capitalists fund established companies.
Angel investors fund startups.
OK, this one's self-serving. Garage.com, which Mr. Reichert
dubs a "venture gapitalist," hooks up seed- and early-stage
startups with angel investors. Still, I must agree that
early-stage companies are much more likely to find backing
from angels than even those VCs who say they focus on
early-stage deals.
"There is a whole bunch of mythology that has evolved that
says, 'You find a couple of grad students, have a clever
idea, go to Benchmark Capital, and get $15 million,'" Mr.
Reichert says. "If you're serious about starting a company,
you've got to be realistic. You scrape together a little
money from friends, fools, and family and then when you're
ready to go for outside money, there's a one in a thousand
shot that you're going to get name-brand VC even at that
stage."
Mr. Reichert's main point, which I think is dead on, is that
too many startups have unrealistic expectations, setting
them up for discouragement. "Don't limit your vision to
getting your series A funding from a Sand Hill Road venture
capital fund," he says. "There's this assumption that if,
gee, I don't get Sequoia Capital in my first round, then
I'll never make it with the big boys. There's a chance, but
it's really unlikely that you'll get that funding. So, you
need to expand your horizons and understand what you're
looking for. Don't compromise on quality, but be realistic
in terms of who is the right investor for you at this point
in time."
Mr. Reichert speaks from experience. In his last company,
Academic Systems, he didn't seek VC initially. It made more
sense to get corporate cash. Academic raised $400,000 in
smart money from Jostens (NYSE: JOS), which later brought in
brand-name Accel Partners. It wasn't long before Kleiner
Perkins Caufield & Byers was on board, bringing along two
little companies named Microsoft (Nasdaq: MSFT) and TCI.
"There was a very nice food chain effect that happened," he
says.
* Myth No. 8: I've got to perfect my business plan. *
Reality: No one is going to read it. You only have a few
seconds to attract the attention of an investor.
Mr. Reichert cops to the fact that Garage.com is just as
guilty as other VC advice gurus. It has a 12-slide template
that it encourages entrepreneurs to use instead of a
business plan. "But even at that I'm very anti-template and
very anti-cookie cutter," he says. "Every business has a
different story to tell, and in each business the story has
different points of emphasis." In other words, you need to
understand your audience and tell them exactly what they
want to hear.
Mr. Reichert advises entrepreneurs to focus on the four or
five key questions an angel or VC will ask so that they can
"preempt" them. How do you do that? Simple. Find three smart
people at a cocktail party or some other schmoozefest and
give your elevator pitch. "I bet you that each of them will
have three or four questions in common," he says.
One other piece of advice: don't give VCs history lessons.
"Story trumps history," Mr. Reichert says. "Don't spend your
time recounting the history of the Internet or enterprise
software. Tell your audience the two or three compelling
things that are unique about you, and then answer all the
first-tier questions." Be prepared to give concise answers
when asked about your team, technology, size of your market,
competitors, financial milestones, and so forth. Mr.
Reichert isn't telling you to skip the fundamentals. "You
need to do the work, but don't lead with that," he says.
"Don't lead with 50 pages of stuff. Have good crisp answers
as questions get asked." Having heard countless horror
stories from VCs about entrepreneurs who needlessly try to
impress investors with their knowledge of the industry, I
must concur.
* Myth No. 7: VCs back teams. *
The reality: VCs back future returns. As one prominent VC
once said: "I support my management team 1,000 percent until
the day I fire them."
The main point here is to understand that your VC is your
investor, not your friend or the parent you never had. Too
often an entrepreneur hears a VC say he or she is completely
behind the team and "there is a disconnect in an
entrepreneur's head that the VC now feels as though there is
this emotional bond between them," Mr. Reichert says. "And
then they feel betrayed at the first board meeting when the
VC pushes back on what they say."
While you may feel like your VC is betraying you, there is
little doubt that your fundamental interests are aligned:
"The alignment is around building a hugely valuable
company," Mr. Reichert continues. "It's not aligned around
your inner visions about how to craft a company. While the
VCs buy into your economics, they don't necessarily buy into
your philosophy of management. They'll be tolerant to a
certain degree as long as you deliver the economics. But
understand that it's about the economics."
A related pet peeve: entrepreneurs who say that VCs have
given them money. "What you've got to understand is that
they're not giving you anything," he says. "They're buying a
percentage of your company. They're buyers, not givers."
* Myth No. 6: There is more money out there than good ideas. *
The reality: There are more good ideas than money.
Finally, one for the entrepreneurs. Of course, you know this
is right from experience. You hear VCs time and again talk
about how there is plenty of money in the market for great
ideas. What they don't tell you is that you need to know the
right people to get that cash.
The fact is, money isn't a commodity. There are lots and
lots of good entrepreneurs with good ideas who can't get
funded to save their lives. But don't despair. The real
issue is that you need to get backing. That's what matters,
not whose name is on the check. "Don't feel as though you're
a failure just because you don't have Sequoia's money," Mr.
Reichert counsels. "Very, very few successful companies
started out with Sequoia's money. Now, that's not exactly
the way Sequoia pitches it [he laughs], but understand the
way the numbers ultimately work out."
NEXT TIME: Tune in for the second half of Mr. Reichert's top
ten list. You'll never guess what the No. 1 myth is.
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