I wrote this about ten years ago after closing down the offices of the two companies I’d been running (one for ten years, the other five). People have asked me about it since, so it seems an appropriate thing to make available again via this blog. I’ve had some relevant new experience as well, and although this could use some updating, correction, and reconsideration, I don’t like revisionism and feel it should stand as written, as a snapshot of its time. The next chapter will come (Hint: The “great new product” I was working on, and alluded to at the end of this piece, was GreenServer).
The Middle Digital guide to small-cap technology investment in Calgary.
(Twenty things you need to know about looking for the money you need.)
Version 1.14
September 29th, 2006
Table of Contents (These aren’t hyperlinks. Don’t be so damn lazy.):
Table of Contents
Preface
Introduction
- Your business plan stinks.
- Until you’ve cashed their cheque, it’s just another meeting.
- A better deal will not come along.
- Calgary blows. Too bad.
- Your efficiency and frugality will not be rewarded.
- Legitimate people will not charge you to talk to investors.
- Having a great story is not enough.
- You need acceptable management *before* you need money.
- Business people are capable of being just as stupid as you.
- The organizations that you think are here to help you don’t have all the answers. In fact, some of them only exist to help themselves.
- Rich, successful people don’t have all the answers either.
- Despite what you may be told, you shouldn’t be doing their thing any more than they should be doing your thing.
- Be prepared to hear excuses you absolutely will not believe.
- You don’t have to handle money people with kid gloves.
- The more trivial your product and the less it betters society, the greater your chance of getting funded.
- Lottery tickets may not be as bad a risk as you thought they were.
- If all else fails, start a cult.
- About that “friends and family” thing I mentioned earlier.
- If you think people are being straight with you, you’re delusional.
- I don’t care how tough you think you are. Ignore your mental health at your peril.
- Special Bonus Point for those who made it this far.
Afterword
Preface:
The title of this piece is self-explanatory, and the “in Calgary” part indicates that there is information contained that is indeed specific to this locale. If you’re not from around here, don’t despair: I think the rules generally apply to attempts to do tech business in non-tech environments, or indeed any form of business “out of its element”. I suspect any Calgary oil big-shot would be humbled by being repeatedly shown the door on Sand Hill Road. The difference, of course, is that nobody in Silicon Valley is pretending to support resource companies.
You’re going to find this essay unusual in one main respect: I’m not going to provide you with any guidance as to where you can find financing. There are lots of other people claiming to do that. Instead, I’m going to enumerate the obstacles that are going to prevent you from getting it. Since those barricades, traps, and diversions are likely to comprise the majority of your experience, this will help you spot – and perhaps even avoid – them.
One more thing you should keep in mind: This is not about Venture Capital. I have no significant experience in that space, and others have written about it both extensively and authoritatively. For an excellent collection of those pieces, see:
http://ycombinator.com/lib.htm
This distinction is not trivial. The VC rules are well-understood, while those of the seed, angel, and small cap space are not. In the case of the former, you’re dealing with institutional investors; the latter are generally individuals. And for that reason, VCs do not exhibit the geographic specificity that frames this discussion. If you’re after $5M or $10M you can plausibly approach anyone in the world and be taken seriously. If you’re after $500K the odds are that it’s going to come from someone within a couple of hours drive of you. Individual investors want to be able to keep a reasonably close eye on you; VCs don’t mind burning expense dollars on travel. And although it may seem intuitively simple to think that “less money” equals “less difficulty”, I assure you that your intuition would be wrong. “Less money” means not only “different difficulties”, but, in my view, “worse difficulties”. The small-cap people are next-to-impossible to find (see #14 below) and tend to exhibit less of the predictability, transparency, and discipline that defines VCs.
Introduction:
Congratulations! If you’re reading this, you’ve probably gotten over the first – and perhaps most common – misconception about financing a small tech startup: That you can grow organically and won’t need any outside cash. Spend an hour with an accountant (or anyone else you know who really knows how to drive a spreadsheet) and it’ll quickly become apparent that very few people can do it on their own. This isn’t a universal rule, of course. If you’re in the business of software or web-deployed services, your unit-COGS can be small-to-negligible, allowing you to make the best use of a wide margin. We were in the hardware business, and although we had decent margins, our production costs were still significant, putting us $50K-$100K in debt every time we built a batch of boards. When you’re faced with that reality, it can be quite impossible to grow without outside money.
The best – and maybe the most famous – expression of this in our industry comes from Alan Shugart. If you don’t know who that is, ask your dad.
“Cash is more important than your mother. That’s Al’s Law.”
This document offers a handful of rules assembled in no particular order. It’s not definitive, but it is illustrative of what you’re likely to find yourself up against as you search for investment. A basic assumption is that you don’t have any access whatsoever to “friends and family” capital. If you do have access to that sort of money, ferchrissake get over whatever hangups have prevented you up until now and go try to tap it, because it beats the hell out of flogging your sorry carcass around town for the next two or three years learning the hard way that I’m not blowing smoke up your ass.
The details of the context in which I learned these lessons aren’t terribly important. It’s enough to say that our product was a very elegant hack; a cool little gadget that solved a rather specific problem experienced by only the hardest-core of server and network system administrators, and that if you’re not one of those it wouldn’t help for me to explain it any further. Folks who did have that problem loved (and still love) us. If you’re really curious, Google “PC Weasel” – the board, not the spyware.
Although there’s a significant element of catharsis in writing an essay like this (I like a good rant as much as the next guy – especially when it’s mine!), the greater motivation in putting fingers to keys is to combat the damaging propaganda emanating from some of the organizations here claiming to assist tech startups (see #10 below). What they’re telling the public in order to justify their own existence is that they’re doing everything necessary to support companies like yours and mine. As long as this myth is the only story in circulation, nobody (meaning: the general public, potential investors, government, etc.) will think there’s anything wrong, and nobody will try to effect change. Well, there’s a helluva lot wrong, and change begins with someone pointing out that the emperor is indeed naked.
One more thing: If, as you read, you’re tempted to dismiss this article as “sour grapes”, or me as “bitter”, think again. I’m profoundly disappointed and I certainly have found this process demoralizing, but if I were bitter I’d be more likely to say, “The hell with the rest of you – I got screwed and now it’s your turn”, rather than write this and try to shed the harshest daylight on some very unpleasant realities.
Now, on with the show.
1. Your business plan stinks.
Unless you’re very lucky, you’re going to go through a succession of self-proclaimed “business development” people. It is axiomatic that each one, as his (or her) first act, will read your existing business plan and say, “I see what your problem is right here. No wonder you’re having so much trouble – your business plan is a piece of shit! First thing we’re going to do is rewrite this baby, then you’ll be all set!” There is no limit to the number of times you can go through this cycle.
Listen – as long as we’re on the subject of business plans, I’ve got a couple of other points. I’ve always thought it odd that Heller only identified one catch, because (obviously) there are at least 21 others. Here are a couple of paradoxes that are going to trip up your business plan:
Catch-104
This is the catch that says that you must have a thorough, comprehensive, extensively-researched and annotated, and defensible business plan in order to talk to Money, but that they’re not going to read it. The reason for that is, of course, that they know as well as you that it’s all just a big guess pulled out of your ass anyway and has no bearing on future reality. You’ll be lucky to actually get anyone to read the 10-page “executive summary” that you spent another month distilling from the full hundred-page business plan.
Catch-232
This is one of the catches that Money will readily admit to, particularly in these post-dot-com-crash days. In order to attract Money’s attention, you have to show extremely rapid growth to really big numbers – what they call a “hockey stick” curve. However, if you claim that sort of growth, you will be dismissed as unrealistic. That’s some catch, that Catch-232.
You can probably see that you stand to make an enormous investment of time and energy in a document that in the typical case won’t be read, and in the best case won’t be taken seriously. So the next time you tell Money about your idea, and they ask to see your business plan, consider experimenting with this approach: Tell them that you’re going with the same business plan that Bob Noyce and Gordon Moore took to Arthur Rock. (Hint: Intel’s founders didn’t have one.)
2. Until you’ve cashed their cheque, it’s just another meeting.
The worst thing you can do is attempt to make this search a sequential operation. It may seem reasonable to exhaust one possibility before moving on to the next, but it isn’t. Think of it as exhaustive search: Trying every possibility serially will take more time than you have remaining in your life. You must parallelize this task. Talk to as many people as you can, and extract as many leads out of every one of them that you can. The number of leads you are chasing at any given time should be growing geometrically. If you aren’t meeting with someone new every day, you’re not serious. With each meeting, you have to assume that this is not your guy, and that the best you can hope for from him is to get a referral to the next one who might be. Keep in mind that, despite the guy across the table from you saying that he’s “going to look over your plan and get back to you in a few days”, the odds are greater than 90% that you’ll never hear from him again, so you’d better get the names and numbers ofa couple more possibilities now.
You’d be astonished at how quickly a year can fly by if every time you meet with someone and give your pitch you leave thinking that, finally, this guy really “got it”, and he’s the one, because if you think that, you’re going to sit on your hands for a couple of weeks while he musters the effort necessary to shake off his indifference long enough blow you off.
3. A better deal will not come along.
Once upon a time, a guy who turned out to be otherwise useless expressed his five rules of investment-seeking:
- Take the money.
- Take the money.
- Take the money.
- Take the money.
- Take the money.
He didn’t do us any good, but it’s good advice. Don’t like the terms the money comes with? Suck it up. You may not ever get another offer.
Heartbreaking anecdote:
We first started work on our product as a side project in mid-1998. About a year later, while we were working like mad to finish and ship our beta run – the first couple of hundred boards – we got Slashdotted. The resulting phone calls and email swamped us for more than a week, and in the middle of that craziness I took a few calls from people who, among other questions, asked whether we were looking for investment. At the time, nothing could have been further from our minds – we were just trying to get our first product out. And, quite uncharacteristically, I didn’t even write down their names and numbers.
Oops.
In January of 2000, we got serious, incorporated, and a Bay Area friend seeded us with a reasonable bit of starting cash. Things went pretty well, but we were searching for growth capital by the summer of 2001. Now, by that time the dot-com market was imploding and we may not have had any luck with those people who’d called after reading the Slashdot post, but we’ll never know. Maybe I wouldn’t have had to write this article.
I shouldn’t have to articulate the moral of this story.
4. Calgary blows. Too bad.
Be aware of where you live. We’re in Calgary, which is an oil town. If you don’t live here, think “Dallas” or “Houston” (whichever is the big oil one – I can’t remember) and you’ve pretty much got it. During the 80s we used to see bumper stickers around here that said:
Please, lord, let there be another oil boom.
I promise not to piss it all away this time.
That kind of suggests that they’ll learn from past mistakes and use their next round of riches to diversify their portfolios a little, doesn’t it? Don’t be fooled. The closest they’ve ever gotten to that was to turn into dot-com idiots like everyone else, and then scurry home – tails between legs, more afraid of tech plays than ever – when the bubble burst. In this town, people are in the oil business because they’re too comfortable and complacent and lack the imagination to do anything else – anything new. (Wow – that was really harsh. But stay with me – I’m on a roll.) Right now oil is $70 per barrel, and the oil people are in such an oil frenzy that they can’t even see something if it isn’t basted in oil, and if you think they’re now exercising the wisdom they proclaimed on those old bumper stickers, you haven’t been paying attention. August 2005 recorded the all-time record for sales of houses of value greater than $900K in the Calgary area (110). Sales of Italian sports cars and five- and six-figure Rolexes are at all-time highs, and nobody, I repeat, nobody is diversifying shit (except into real estate – livin’ on the edge, dude!). Apparently you can be enough of an expert in the oil biz to make millions and still not be enough of an expert to understand that it’s cyclic. Or maybe you understand it, but you’re so drugged by the millions you’re banking that you just couldn’t give a toss.
In other words: I’m still waiting to see one of those bumper stickers on one of the many shiny new Ferraris dotting our streets these days.
Attn: Jim Buckee
Word has it that you personally banked $12.5M last year, counting salary and options. You have a history of doing The Right Thing, having pulled your company out of Sudan. Keep it up. Set an example for your equally (ridiculously) wealthy peers by calling Warren Bergen (see #10 below) and investing $500K in his seed/small-cap fund. Nobody’s suggesting you should be tithing the money or just kissing it off. It’ll be higher risk than what you’re used to, but Warren will see to it that it’s put in the most deserving companies with the best prospects for success. You exercised conscience in Africa; now do some good outside of your own business, closer to home.
Alarmingly (or not, depending on how jaded your view is), the tunnel vision I’ve just described is all-encompassing, preventing investors from putting money even into technology specifically designed to benefit the resource industry. This behaviour is encouraged by generations of provincial and federal governments that lavish tax credits on those who poke holes in the ground because it generates billions of dollars in royalty revenues. You see, you can come up with the next Google and nobody in government will give a damn because they don’t stand to get a piece of your action. That’s how miserable, stupid, greedy, and nearsighted they are.
This isn’t a “business environment”. This is a pathology.
What, then, are we to make of the Grand Gestures – high-profile, government-funded “high-tech initiatives” like the Microelectronic Center (which brought semi-competent grad students into competition with independent design contractors in the marketplace) and the new Nanotech Center? Are these really calculated snow jobs offered up to dupe the public into believing that there’s meaningful support being given to technology industry, or have provincial officials so succeeded in the manufacture of this illusion that they actually believe these schemes somehow help the industry at large?
Meanwhile, BC has instituted a venture capital tax credit, suggesting that, at very least, they recognize the existence of a problem.
So if you’ve got a tech deal, be prepared to either go somewhere where tech is done (e.g. the Bay Area, Ottawa) or swim against the West Texas intermediate current.
Or, as one business acquaintence recently put it, ever so succinctly:
FIFO – Fit In or Fuck Off
We call this “The Alberta Disadvantage”.
5. Your efficiency and frugality will not be rewarded.
Asking for a reasonable amount of money can be as sure a kiss of death as asking for an unreasonable amount. We spent three years looking for $350K-$1M, depending on which version of the business plan you read. That’s at the high end of individual-angel money, but it’s a small amount for a VC, right? Right. It’s not only small, but it’s *too* small for a VC. With those people, you won’t get a foot in the door unless you’re after at least a million, often a few. Follow the logic: First of all, they’re not playing with their own money – it’s someone else’s. That makes them managers, not investors. And their view is this: If I have the choice between putting $5M in one deal, or spreading it across ten $500K deals, I’m going for the single deal, because each one of the companies I put money into represents a company I have to babysit, and I’d rather babysit one company than ten. A $500K deal is just as much work as a $5M deal, so doing ten of them turns into ten times the work for the same total investment. Is the idea of inflating your use-of-proceeds to step you up into that tier repellent to you? If so, you oughta consider it anyway.
6. Legitimate people will not charge you to talk to investors.
If someone suggests that you should pay to pitch to a group of investors, tell ’em to get stuffed. It’s morally wrong for someone without money to pay to talk to people with money, and doing so
suggests that someone in the middle is profiting from the people who can least afford it. Now, I have nothing against someone collecting a reasonable commission for brokering a deal and bringing you the cash you need, but that’s not what we’re talking about. Only a scumbag will take money from you to put you in a room with investors without any promise as to the outcome.
There are some exceptions to this rule. For example, Dealgenerator will impose some nominal charges (a few hundred bucks at a time) in the course of evaluating your business plan and helping you get ready for a pitch, but they’re a nonprofit operating on a cost-recovery basis. The key is to find out whether anyone is attempting to profit from your limited reserves at no risk to themselves.
7. Having a great story is not enough.
Don’t get your hopes up if people say nice things about you. We spent three years listening to people tell us how wonderful we are:
What a cool bunch of guys! Look at their cool product! It’s in a tight niche with no competition! They’ve got a patent! They’ve shipped thousands of their product to hundreds of customers, all of whom have paid and love the product. And just look at the great names on their customer list! Their company is private and closely held and they don’t have any debt! And there’s no “burn rate” – they’re already cash-positive! This deal is totally fundable!
Well, that’s all swell if you’ve got a banker who will lend against praise, but ours won’t. Hearing things like this should not lead you to believe that any of the other rules don’t apply.
8. You need acceptable management *before* you need money.
There’s a saying about how people would rather invest in a second-rate idea with first-rate management than the converse. Believe it. We had IP, products, sales, customers, and a nice niche market. We needed money (most for marketing, a little for ongoing R+D) and some management.
Catch-488
Common sense says that once you’ve got some cash in the bank it’ll be easy to attract good management bodies, but nobody will give you that money until the management is there.
The only way out of Catch-488 is to find a credible manager (“fundable CEO” is the phrase they use out there) who is, at very least, willing to lend you his name on spec and come in for real if the investment is secured. Got the CEO? Not good enough. Show us your CFO. Got him? Come back when you’ve got your marketing guy. Herding this ever-growing number of cats becomes exponentially more difficult when you lack as much as a can of tuna.
9. Business people are capable of being just as stupid as you.
Remember how you used to think that the world was basically divided into the geeks and the suits and that the suits were pretty much interchangeable? And how you came to understand, after a bad experience or two, that the world of suits was actually quite complex, and that just because you hired a guy who was a CA to be the president of your new company (because that’s the sort of thing you need for a public company) it didn’t mean he had a clue in a carload how to manage an R+D team full of dysfunctional personalities? You learned that the suits came in a lot of flavours, and some of them dug your stuff and were very cool and and quite excellent at marketing and management and the other things you suck at – and others were meat sacks not worth the cost of the gas needed to feed them through a wood chipper. You learned their world contains just as broad a range of people as does yours, because you’ve had to deal with incompetent geeks too. It took time, but you eventually figured all this out because you had to.
The problem is that they’re capable of taking just as shallow, narrow, and monochromatic a view of your world as you once did theirs. People who are making fortunes in the oil business – which, as far as they’re concerned, is the biggest business in the world – don’t understand that electronics (including computers) is bigger (it’s actually the largest industry segment in the world, even bigger than cars), and that it’s so big, complex, and diverse that there’s no one person who can plausibly be called an “expert” in anything but a little tiny piece of it.
Despite this fact, when you take a tech deal to these non-tech business people, they will invariably tell you, “Looks good to us. We just have to have our tech guys vet it.” And before long you’ll discover that their “tech guys” – the experts who are sitting in judgement of your work and may well determine whether you’ll make any further progress in this attempt at getting funding – are the weenies who run the PCs down the hall. (In my world, “MCSE” means “Microsoft Certified Solitaire Expert”.) They won’t really understand anything about your technology, but that won’t stop them from reporting back that there’s no market for it and they have no idea why anyone would want such a thing. Their masters won’t know any better than to believe them, and you won’t be able to convince them otherwise, because they’re the geniuses who keep the PCs running and you’re just some guy.
10. The organizations that you think are here to help you don’t have all the answers. In fact, some of them only exist to help themselves.
And there sure are lots of them, even around here. This is a partial list:
Alberta California Venture Channel (ACVC)
Alberta Research Council (ARC)
Banff Venture Forum
Business Development Bank of Canada (BDC)
Calgary Angel Network (CAN)
Calgary Business Information Center (CBIC)
Calgary Chamber of Commerce (CCC)
Calgary Council on Advanced Technology (CCAT)
Calgary Economic Development Authority (CEDA)
Calgary Enterprise Forum
Calgary Research and Development Authority (CRDA)
Calgary Technologies Inc. (CTI)
Canada Revenue Agency (CRA – I’ll bet you never expected to see them in a list like this)
Dealgenerator
Infoport
Keiretsu Forum
National Research Council (NRC)
Partners in Technology (PIT)
Venture Alberta
Western Economic Diversification (WED)
(I’m sure I’m missing some, but off the top of my head it’s a reasonable start.)
I’m not going to go into every one of these in detail – this isn’t really the place for it. But it should be pretty obvious that the predominant common factor is that there’s a lot of bureaucracy here that is being financed by a lot of public dollars – from all three levels of government – and that, just like any bureaucratic structure, its primary interest is self-preservation. As long as they look like they’re doing something to help you, they’re looking out for their phony-baloney jobs, gentlemen. They don’t actually have to help, and (arguably) the longer they can string you along without really doing you any good, the more it’ll look like there are needy companies out there that require their services. If you followed that logic, you’re starting to get the picture.
A few comments:
The Calgary Keiretsu franchise is strictly for-profit (see #6 above). The guy who runs it also runs ACVC (and Venture Alberta, I think), and there is evidence suggesting he has kept so-called “California investors” (who don’t actually have any money) in circulation here in order to keep his cheques from the provincial government coming.
Dealgenerator (Edmonton) is run by a really excellent guy named Warren Bergen. Warren gives a damn. It’s a nonprofit (see special comment under #6 above). Since CAN fell apart (and my inside sources tell me it was mostly populated by tire-kickers anyway), Warren has been talking to CTI about running a Dealgenerator chapter down here. Stay tuned.
I’ve been in the computer and electronics industry for about 25 years, and I’ve been aware of Infoport since 1992 or so. It’s 2005 now and I still haven’t been able to figure out what it is that they do. Nobody I’ve asked can explain it to me either.
Okay, so I padded the list a bit. The old CRDA morphed into CTI. CTI does a lot of stuff, including running an incubator (if you wanna know, I think the theory behind incubators is great, but in practice they’re completely bogus – little more than grossly overpriced office centers incapable of creating the “synergy” they promise), housing TR Labs, and running the “Concept to Capital” program, but they don’t really seem to have thought it through. Help and guidance in writing business plans, doing projections, pitches, and all that stuff are quite useless if they don’t have any clear idea as to how they might help connect you to actual money, and they don’t. Some of those listed above (eg PIT, CCAT) don’t appear to be good for anything but breakfast networking. I don’t think there’s anything fundamentally wrong with that (except the time of morning you’ve got to haul your ass out of bed to make it to their events), but so far they’ve not done us any measurable good.
News flash: For most of 2005 “Concept to Capital” has been suspended “due to lack of interest”. Now CTI has even *less* reason to exist.
This just in: According to Warren (September 26th, 2005), “I’ve completed the ‘provincialization’ of Deal Generator. Deal Gen is now a joint venture of TEC Edmonton and CTI.” There may be some hope in this city after all.
The Banff Venture Forum is one of the few organized events around here that gives you an opportunity to pitch in a formal setting. It takes place annually, and you first have to attend their “boot camp”, after which they cull out about 50% of the companies that apply to present. Important: Don’t assume, just because someone there wears an “Investor” badge, that they actually have any money to invest. Assume that everyone there is simply a tire-kicker who has come along (probably on someone else’s tab) for a couple of nice days in the mountains.
BDC is a crown corporation formerly known as the Federal Business Development Bank (FBDB). They used to be called “the bank of last resort”, but from one year to the next we can’t seem to tell what, if anything, our government thinks it can do for us through this arm. As a small business with limited resources we then make the safest assumption we can: That anything involving federal bureaucracy is a procedural and paperwork sinkhole that we don’t have the necessary (read: excess) resources to dedicate to, like the NRC and their IRAP program, so we really just have to stay clear of it. The very first page of their current web site claims that:
BDC supports the needs of entrepreneurs at every stage of growth.
I may be out of date on this, but I think that claim is bullshit. When we approached BDC, they told us that we were too far along to qualify for their “startup group”, but not yet big enough for their “VC/equity group”, and they had nothing to offer to companies that fell into that crack.
You may already know about the NRC’s “IRAP” (Industrial Research Asistance Program) grants. The program has been around for decades, and they do give away money, but in recent years all the stories I’ve heard speak to how it’s become too top-heavy in terms of bureaucracy. Also, the NRC only designates a fixed allocation of funds each year for IRAP grants, and if you apply (or more accurately, if you receive your approval) after that money’s gone, tough noogies. This year’s (I’m writing this in July 2006) allocation is already gone – not because the program is popular and got sucked up faster than expected, but because the new Harper government cut back the NRC’s total budget by 10%, and the NRC in response ditched IRAPs for the remainder of the year so they could return the grant allocation to their general budget. If you’re still interested, note that you have to get approval for your project before you start working on it. Expenses incurred prior to IRAP approval won’t qualify.
However, if you’re looking for some free money – providing you’ve already done qualifying R+D – you’d be foolish not to apply for the federal Scientific Research and Experimental Development (SR&ED) tax credit. You apply for it as part of your tax return, it returns cash money to you, and in terms of paperwork:bucks it can’t be beat. Ask your accountant about it. If he/she doesn’t know about it, get a new accountant.
11. Rich, successful people don’t have all the answers either.
It is a mistake to assume that just because someone has a lot of money, he can tell you where to find some. First, a lot of those people got rich through good old-fashioned hard work, bootstrapping their businesses, struggling with cash flow, outliving their competitors, and, if fate favoured them after years of effort, selling the company for big dough. You can learn many things from people like that (and they’re often willing to help you and share their experience), but how or where to raise money is not among them, because they never had to do it. Second, odds are they don’t like hanging out around people with whom all they have in common is that they’re rich. Think about it. Would
you?
What’s interesting is that some of these successful people accept positions such as “Entrepreneur in Residence” with Universities and other organizations (see #10 above) that ostensibly exist to help you. It’s not clear why this is the case. Certainly, there’s a lot of ego gratification in it for them. And as mentioned above, there may be things you can learn from them. I think, though, that there’s a basic flaw with this model: Most of them did really well on one deal, and do not have a track record of repeated successes. There is, then, little data to support the notion that they’re “experts” in business, as it’s not uncommon for guys like this to be people who just happened to be in the right place at the right time, ran the table, and got out. In a word: lucky.
What is almost certain is that they haven’t suffered major failures, so there’s much of the greater business experience (i.e. what you’re suffering through) that they have no understanding of.
So, should you be presented with one of these guys, don’t consider it unreasonable that your first question should be, “Would you invest in this?” If you fail to ask this crucial question, you run the risk of spending a lot of time (think: a year) working on market research and business plans and pitches, believing that the fact that they’re giving you their time is somehow indicative of their belief in your idea, validates your business concept, and suggests that you stand a chance of raising money. Believing this would be a mistake, because they may well consider it a worthless idea, and they’re helping you because encouraging new entrepreneurs – regardless of their own belief in your idea’s merits – is their mandate.
Personally, I’d be way more impressed if CTI (and others who engage in this practice) made a point of bringing on Entrepreneurs in Residence who had strings of failures behind them.
12. Despite what you may be told, you shouldn’t be doing their thing any more than they should be doing your thing.
In the time I’ve been doing this, there’s been a recurring theme: The idea that, since I’m the entrepreneur and the guy who started the company, it’s my reponsibility to get out there and make deals and line up distributors and secure strategic alliances and bring in investment and do all the other stuff you have to do when you’re in business. Ignore the fact that I hate it, suck at it, and don’t want to do it. Deal with it, they say. It’s your company and what you signed up for. Forget your ivory technical tower, you’re the one who has to make it happen; nobody else is going to do it.
To that, I have but one answer: Fuck you.
I consider it to be an appallingly offensive and irresponsible suggestion, and one that only trivializes the skills and talents of all of the management, sales, and marketing people who are good at – and like doing – those things. There’s a very long list of things I’d rather do, and it includes such earthly delights as coprophagia and leng tch’e (look those up only if you really must). If I loathe a job that much, I’m not likely to be anything but mediocre at it, and we can ill afford to have someone who’s incompetent and hates the work running around blowing one deal after another, right? In other words, better to do nothing than to do it so badly that there’s little or no hope that someone who comes in later can rescue it.
Here’s another way of looking at it: For many years I did freelance design work, contracting to entrepreneurs – business guys who had an idea and needed it turned into a product. Would it be responsible of me to, when approached to build a Thing, respond by telling them that it’s their company and they signed on to do whatever is necessary to make it succeed, so I’ll show them how to design digital electronics, program the microprocessors, lay out the boards and push the products into production, but I won’t do it for them, because it’s their responsibility to do whatever is necessary make the company succeed? Of course not. That’d be stupid. I don’t think there’s a difference, so if you can see one, please explain it to me.
13. Be prepared to hear excuses you absolutely will not believe.
In the course of dealing with people – and this is going to happen more with VCs and people who deal with business plans and such on a regular professional basis – you’re going to get a lot of criticism over your business plan (see #1 above), market research, projections, and the like. Most of it is likely to be legitimate (“We don’t understand your market” or “We don’t think your market research is strong enough. Survey your customers” or “We think your IP is weak”), but sooner or later you’re going to hear something that’s going to rock you back on your heels. In our case, it came in a telephone conversation with a Montreal VC who from all other available evidence is clueful. Here’s what she said:
We don’t like that you have a patent. We don’t believe in litigating our way to profitability.
I swear to god. I couldn’t make this up. If you don’t believe me, I’ll give you the names of the three other people who were in the room with me on speakerphone when she said that.
There are also, of course, lots of excuses that have nothing to do with you, your business, or your plan. This is somewhat of a continuation of #4 (above), but around here we’ve found there’s always an excuse that absolves the person you’re speaking to of any responsibility for seriously considering your investment opportunity:
In the 80s, after oil crashed, it was: “Sorry, but since that son of a bitch Trudeau did us in with the NEP, we haven’t had two spare nickels to rub together.”
In the 90s, during the dot-com boom, it was: “Looks good, but it’s just not a big enough deal for us. You’re great guys, so when you’ve got the next Hotmail, get back to us, ’cause we’re up for the big play, buddy!”
Then around the turn of the century it was: “Tech? Man, we lost our shirts when the bubble popped, so we’re gonna stay away from that stuff for a while. But stay in touch!”
And now that oil’s at $60+, it’s: “Are you kidding? With a market this hot we can’t even look at anything else.”
On a personal note, there are some who claim that our failure was ultimately due to the word getting around that I told a guy (via email)who had really jerked us around (see #14 below) that he had a helluva lot of nerve inviting us out to one of his “angel events” about a year after we broke with him. Apparently this attached such an indelible stain to us that nobody in the investment community wanted to have anything to do with us. File under:
We don’t want to so much as meet you, to say nothing of discussing investing in you, because someone once told us that someone said that someone else said that you once said something mean to someone who we knew was a twit anyway.
There’s always an excuse.
Look, before you get the impression that I’m arguing that peopleshould somehow be compelled to invest, let me clarify. People with money are entitled to do whatever the hell they want with it – nobody can force them to put it where they don’t want to (well, except for the tax department). My point is just that if you’re not serious about evaluating the proposals being brought to you, don’t hang out your shingle as an investor, and particularly as an angel.
Got it? If you’re not serious, don’t waste everyone’s time.
14. You don’t have to handle money people with kid gloves.
Once upon a time (see #3 above) a guy presented himself to us as an “angel”. Now, if you’re not yet up on the lingo, that’s a term referring to people who have money – usually a few hundred thousand, maybe as much as half a million – to invest in deals that are seen as too small for VCs (see #5 above). They’re people who have done well, have probably exited their previous gigs by selling out big (see #11 above) and want to keep their hand in with a new company, usually a higher-risk startup. They’re “angelic” because they finance on favourable terms in the difficult range between “friends and family” and VCs, and they bring their expertise in to help manage the company. In theory, they’re the best people you could hope to get involved with.
Catch-1149
Angels are angels because they want to help you. That’s why they keep themselves perfectly hidden, and you will never find one, no matter how hard you look. The closest you will ever come is meeting someone who once met one, and who was sworn to secrecy regarding the angel’s identity.
Seen a lot of pixies, elves, and faeries in your time? Bet not, and that’s exactly how many angels you’re likely to see, too. But the guy I was telling you about, well, he calls himself an angel. He approached us after seeing one of our pitches (at the Banff Venture Forum, actually. See #10 above) and said he thought we were great (see #7 above) and had us fly down to Silicon Valley to do some more pitches to some of his “angel gatherings” (see #6 above). He then said that he and his partner would put in $100K, allowing us to get back to work on our new product, start a little advertising, and find the bodies we needed: A CEO (who would then be charged with bringing in the remainder of the money we needed) and a marketing guy. Well, that trip turned into a bunch of trips over a bunch of months, during which we weren’t talking to anyone else because we took this guy at face value (see #2 above), and an awful lot of valuable time had been wasted when he eventually revealed he didn’t have any money after all and kissed us off.
That was shocking, but not half as shocking as learning that everyone in the investment community from here to the Bay Area knew about him and thought he was a flake – in the words of one, “he’s a nuisance, but we put up with him”. Well, for us he was more than a nuisance. The
time we wasted on him contributed significantly to the death of our company. And it continues to baffle me why all the people who “know” feign ignorance, act too polite to ask “who farted?”, and allow a menace like this to remain in circulation.
If you’ve been paying attention so far, you may have guessed that there are actually people around in whose interests it would be to keep such a phony in play (see #10 above). You would be right.
What this tells you is that you can really hurt yourself by being too respectful and assuming that everyone is what they say they are. If any potential business partner – investor or otherwise – is legit, he’s not going to be offended if you ask lots of questions, including references. You’re interviewing them for a position in your company, and there’s no reason you shouldn’t be asking them the hard questions, just as you would with, say, a programmer. Ask for the details, including contact information for the people they were involved with, of the last five deals they were involved in.
Catch-1164:
On the other hand, unless you spend your waking hours grovelling and prostrating yourself before everyone you come in contact with, ever mindful of committing the slightest offense and deferential even to those you know to be useless, you run the risk of being marked with the scarlet letter “D” – for “difficult”. Unfortunately, those who know better will (rightly) brand you a suck-ass. Either will qualify as an excuse (see #13 above).
15. The more trivial your product and the less it betters society, the greater your chance of getting funded.
Feel free to accuse me of being more cynical than is really warranted, but I think it falls under “fair comment”, particularly from someone who’s stubbornly idealistic. As designers, I think that we occupy a privileged position in our society: That of people who can come up with solutions to problems. And we like doing it – exercising our minds by first identifying, then solving, problems that people are experiencing. It can be awfully gratifying, knowing that people’s lives can be changed, if just a little bit, for the better, by an appropriate application of technology. That’s why it’s disappointing to see the sort of tech companies that get attention around here. Video jukeboxes and computerized sneakers spring to mind.
16. Lottery tickets may not be as bad a risk as you thought they were.
I used to be of the simplistic view that lottery tickets are a tax on people who are bad at math. I’ve revised that view and now believe that it applies only to buying too many lottery tickets. The perfect number, of course, is one – it increases your odds of winning infinitely over buying none, but the incremental increase in odds gained by buying more than one is unacceptably low. Having experimented with this new approach for a little over a year now, I can report the following.
Based on buying one “6-49 quick-pick with no extra” per (semi-weekly) draw, to date my experimental data reveals that I:
Spent less on lottery tickets than on any of my other efforts at securing financing, and
Brought in more than all of those other efforts combined.
Feel free to draw your own conclusions.
17. If all else fails, start a cult.
Of course, if all of this seems like way too much work, you’re probably too honest. (Maybe that should be point #19: Park your honesty and candor at the door, because they are not your friends.) The record shows that the easiest way to raise a lot of dough is to: a) filter it out of the government for enormous projects that have no business being undertaken here (e.g. Novatel), or b) tell outlandish lies that have a lot of zeros attached to them and can’t help but suck in the greedy and gullible – including credentialed people who really should know better – like bugs to a pitcher plant (e.g. VisuaLabs).
Oh… I’m not sure about that last line. Even really good people can get hornswoggled by a sufficiently slick con, if only for a little while.
18. About that “friends and family” thing I mentioned earlier.
You’ve got a good idea. It’s a deal that you know is VC-sized, but knowing how hard it is to get funded, you approach a VC with a conservative opening – that you can reach major milestones with, say a couple of hundred thousand of startup money. You might even pitch them a $2M deal, but suggest that a $200K startup tranche will allow you to demonstrate that you’re not a bozo, you know what the hell you’re doing, and that you can achieve a significant milestone quickly and without much money, thus earning their confidence and the next tranche.
They tell you that they like the idea, the product, the market, and the opportunity – but as a matter of policy they’re not interested until you have sales (“We don’t invest in pre-revenue companies”) and need VC-sized money (“We don’t do deals under $2M”).
You: There aren’t any angels, and my house is already mortgaged to the shingles, making personal debt financing impossible, so if you think this idea has legs, how about a little flexibility with respect to this “policy”, huh?
Them: No, we don’t want to do a startup. Get out there and round up “friends and family” money.
You: Trust me, I read that Middle Digital thing, and I wouldn’t be having this conversation if I had access to any “friends and family” money. I killed my family and I’m too much of a prick to have any friends.
Them: We like what that says about you – maybe there’s a career for you as a VC. But we consider your raising seed capital to be a “qualifying round” that demonstrates to us that you’re the kind of person we want to invest in.
We’re not just talking about “a failure to communicate”. This belongs more under “teeth-grinding futility”.
19. If you think people are being straight with you, you’re delusional.
Years ago I found a wonderful piece that brilliantly distills the reality of being a technical person in what seems to be a non-technical world. If you’ve never heard this, it’s probably time:
Tact Filters
All people have a “tact filter”, which applies tact in one direction to everything that passes through it. Most “normal people” have the tact filter positioned to apply tact in the outgoing direction. Thus whatever normal people say gets the appropriate amount of tact applied to it before they say it. This is because when they were growing up, their parents continually drilled into their heads statements like, “If you can’t say something nice, don’t say anything at all!”
“Nerds,” on the other hand, have their tact filter positioned to apply tact in the incoming direction. Thus, whatever anyone says to them gets the appropriate amount of tact added when they hear it. This is because when nerds were growing up, they continually got picked on, and their parents continually drilled into their heads statements like, “They’re just saying those mean things because they’re jealous. They don’t really mean it.”
When normal people talk to each other, both people usually apply the appropriate amount of tact to everything they say, and no one’s feelings get hurt. When nerds talk to each other, both people usually apply the appropriate amount of tact to everything they hear, and no one’s feelings get hurt. However, when normal people talk to nerds, the nerds often get frustrated because the normal people seem to be dodging the real issues and not saying what they really mean. Worse yet, when nerds talk to normal people, the normal people’s feelings often get hurt because the nerds don’t apply tact, assuming the normal person will take their blunt statements and apply whatever tact is necessary.
So, nerds need to understand that normal people have to apply tact to everything they say; they become really uncomfortable if they can’t do this. Normal people need to understand that despite the fact that nerds are usually tactless, things they say are almost never meant personally and shouldn’t be taken that way. Both types of people need to be extra patient when dealing with someone whose tact filter is backwards relative to their own.
– http://www.mit.edu/~jcb/tact.html
This is the essence of the life of the technically-oriented person trying to communicate with business people, whose stock-in-trade seems to be subterfuge and deception. The strange part is that there’s no obvious need for this behaviour (and Milton Friedman has argued that it’s detrimental to the efficient operation of business); it’s just how they often behave. The only rationale for this that I can muster is that total candor scares people. They’re not accustomed to it, and their fear response tells them to run away.
Let me give you an example.
Notwithstanding the ambivalence I’ve expressed toward “successful, well-intentioned people” (see #11 above), if you’ve been around for any length of time you’re likely to have friends, and friends tend to want to help. If you’re very fortunate you may find yourself in just the right time and place to be able to get one who’s had previous success(es) involved in your thing. If you can pull it off, mazel tov. Me, I was never there at quite the right time, and they got involved in other things that consumed all of their resources (time, energy, and capital). But, being the friends that they are, they’ve done what they could – rack their brains and spin their rolodexes – to try to find us the money and the guy (see #8 above).
So I’ve got this friend. I’ll call him “Bill”, because that’s his name. For a while he was pushing a steady stream of management & money-raising prospects at me, purely out of the goodness of his heart. One of the guys he sends over, I’ll call him “Mike” (yup, because that’s his name). I meet with Mike and he seems like just the guy. His background includes working for some big server manufacturers, so he understands our market segment – a pretty rare attribute in these parts. We have a good talk. I lay out the honest, unvarnished story. He sounds interested, and I feel hopeful.
And he never returns any of my subsequent calls or email.
Eventually, I make one of my periodic visits to Bill’s office, and tell him about my meeting with (and the subsequent evaporation of) Mike. Bill tells me that he spoke to Mike after our meeting, and although Mike was interested in what we were doing, he said that he could never carry a business card that said “Middle Digital Inc.”.
Floored? I sure as hell was.
Let’s take a step back. I design digital hardware, and about twenty years ago a friend of mine (an accountant named “Steve”. Friend of Bill’s, actually) told me I was simply going to have to use that name for a company. It took a long time to get around to, but eventually I did, and we all thought it was pretty funny, as did many of our customers and other people we worked with (please don’t make me explain the joke). But we certainly didn’t take it seriously, and we were always quick to explain that we considered our product branding (“PC Weasel”) to be a significant asset, but didn’t feel we had a material investment in the company’s name and would have no trouble with changing it if necessary. So, one one hand, if Mike was being straight with Bill, but couldn’t bring himself to level with me, that makes him a chickenshit, and someone we probably wouldn’t want to be involved with anyway. On the other hand, if he was only using that as a cover story and had some other, unstated reason for not wanting to get involved with us, well, that makes him a chickenshit too. Obviously, I’ll never know the truth.
Regardless, this is illustrative of the difficulty you’re going to have if you’re a candid, trusting geek in search of adult supervision. You can be just as honest as you like, and the people you’re dealingwith cannot be relied upon to respond in kind.
By the way, I responded to this by immediately incorporating a new company with a “straight” name (and doing a share swap so it owned Middle Digital) just so I’d never have to hear that particular hogwash excuse again, for *any* reason.
20. I don’t care how tough you think you are. Ignore your mental health at your peril.
This is where I thank my family for maintaining my sanity through the miserable – and ultimately failed – process that led to this piece. Without my wife, Susan, and two beautiful little girls, Sarah and Rebecca, born during this fray, I could not have adhered to the most important rule of all:
Illegitimi non carborundum
21. Special Bonus Point for those who made it this far.
Given this litany of gloom, it’s perfectly reasonable for you to ask, “Why fight? Why not go where the pastures haven’t been strafed with Agent Orange, like the Bay Area or Kanata (see #5 above)?” I guess the short answer is, “Because I shouldn’t have to”, but it’s a little more complicated than that. I’ve worked enough in Silicon Valley to know that while it’s a terrific, fertile place, and I’ve got lots of friends there, it’s not where I want to live, and not a race I want to be a rat in. I like living here, and everything we’ve been told about “the new economy” says that in an Internet-connected world it doesn’t matter where the hell you are – you can do business on an equal footing with anyone. Obviously that contains a large element of bullshit, but that’s the claim.
The last reason may be the truest one:
We do what we do – design things – because we like solving problems. It’s what we do; it’s what we’re wired for. Everything we encounter in our lives is a problem to be approached with engineering discipline, reduced, and solved. For better or worse, business problems (including financing) are not exceptions.
So if the initial conditions we’re dealing with are that this is a city that’s steeped in truly obscene amounts of money, that there’s a constant stream of chatter about high-tech and diversification, and people being paid by various levels of government to see that it actually happens, it seems reasonable to believe that creative, skilled, demonstrably capable entrepreneurs can be connected with the investment they need – there’s no evidence to suggest that this is an insoluable problem.
As much, then, as it may be tempting to dismiss us as stupid, stubborn, delusional, or some combination of those factors, the right answer is actually rather more simple: However ridiculous and frustrating this situation might be, it really is just a problem, and solving problems is what we do.
Afterword:
Sounds rough, huh? Then you’ve gotten the picture. If you don’t have a pretty damn formidable constitution (meaning: you’re a big stubborn jerk who can’t stand the idea of working for someone else rather than pursuing your own ideas), this is not something you should attempt. Unless you are one of the very lucky few, you will be beaten down and your soul crushed. But even so, you may, like me, persist precisely because you’re a big stubborn jerk bent on solving these problems * .
Yes, despite everything you’ve just read, I’m working on a great new product with huge potential, and I’m shopping it around for an equity investment.
Seriously. Write me if you happen to know someone who has both a little cash and a little enlightenment, because they’re hard to find in one package. You’ll get points on the deal for hooking us up.
And if you’re the guy with money who likes doing interesting things: What are you waiting for? I’m twice as much fun to work with as I am to read.
Thanks for your time; hope this helps.
Jonathan Levine
jonathan@canuck.com
* This is glib, and no small oversimplification. If you want to understand why we’re genetically wired for this behaviour, I recommend Lionel Tiger’s Optimism: The Biology of Hope (1979, Simon & Schuster).
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Nitpicking Bastard 