Keep Your Rich Friends And Their Dumb Money Away From Your Startup

Paul Lee

After a stop at NBC’s venture capital division and a run as head of Playboy digital, Paul Lee became a partner at Lightbank three months ago.

You care about Lightbank because that’s the Chicago firm that spawned hits like Mediabank and mega-hit Groupon.

Lightbank brought in Lee to be a more traditional VC, and to expand its portfolio beyond the midwest. We caught up with him and talked about his favourite airline, the problems with dumb money and Quora, which Lee is not very impressed with.

BI: Let’s start with your refreshing Twitter account. A lot of people in the tech world, they are so careful in how they use this thing. But you’re very candid. Explain why.

LEE: I actually have been fairly unguarded which has caused some headaches both at Peacock and at Playboy. In this day and age, you have to be authentic, even if you don’t say the politically correct thing or you say the thing that most people wouldn’t want to say. If it’s on your mind, you gain legitimacy by being transparent about it. Maybe I’m at times a little less guarded than I should be. I wonder if it’s going to bite me in the arse some day.

BI:  Lightbank companies – from Mediabank to Groupon – are all based in Chicago. But in the press reports surrounding your hire, a point was made that this was no longer a Chicago-only firm and you guys were looking elsewhere. Is that true?

LEE:   In the last three months, we’ve done five deals, and four out of those five deals were based in Silicon Valley. In terms of expansion, we’re at the point where firms are reaching out to us because they feel like we can add value in terms of our skill set and our experience, and we want to take advantage of that. So, to the extent that we meet great entrepreneurs with really interesting businesses, we’re somewhat agnostic as to where they’re located. I travel to San Francisco at least one week of the month, and I’m in New York at least one week of the month, so we’re actively looking for opportunities outside of Chicago.

BI: Oh yeah? Which airline do you recommend?

LEE: I fly American almost exclusively but Virgin is killing me. They just opened a route to SFO gets me really tempted but I have like executive platinum status with American and it really hurts me to think about walking away from it, but I am thinking about it.

BI: The Lightbank guys have had some huge successes already…Groupon, among them. What exactly do you bring to the table?

LEE: A couple things: I’ve been in venture capital seven of the last eight years, so I think that perspective brings a skillet from the other side of the table.  I think the other aspect is operating experience and specifically Playboy. The great thing about Playboy is that it’s a really recognised brand and our target audience of entrepreneurs in their early twenties and late thirties. The third thing, in terms of my street credibility with entrepreneurs and getting to know these guys on a street level, my rolodex is actually really deep.

BI: Let’s put a little of the unguardedness to the test. You recently tweeted: “” Explain the link!

I put up that question in Quora, “Why doesn’t anybody talk about Quora anymore?” but I didn’t receive any comments on it.

At the end of the day, it’s great that there’s a lot of capital available at the seed level in terms of super angels and all these guys participating and willing to provide capital for young entrepreneurs, I think it’s a really healthy thing.

I think the point that I’m cognisant of is that at the end of the day, these things need some semblance of a business model at some point. There’s notion that you can create something and you’ll figure out a business model much later on, after we’ve aggregated all these users with a ton of engagement. It’s valid, and it has happened, but statistically speaking, the odds of hitting that lottery are pretty slim.

To the extent that you’re not limiting yourself by being tied down to a specific business model, all that said, I think that you still have to be mindful that there is a path to creating a real business at some point down the line. The thing that I was joking about with Quora is that I noticed that people aren’t talking about it anymore and nobody’s really talking about the business model there.

BI: Going back to the Twitter account, you say “when was the last company that a company was successful who had high net worth investors?” Unravel that for me. What were you getting at there?

LEE: We see a lot of startups come in that have raised a couple million dollars from friends and family.  The issue with that is, those guys don’t bring a level of sophistication in terms of being professional investors, so a lot of times what happens is that those guys allow the inexperienced entrepreneur to run a little bit ragged and do some things that are a little bit off – something like hiring really aggressively or spending a ton on marketing when the product is awful. Things that set the company back.

Once you raise that sort of money, it’s really difficult for a professional investor to come in and then invest in the company using a valuation that actually makes sense. The early investors have to reset their expectations based on what their equity stake is worth, because you’re essentially re-capitalising the company. And if it’s your friends and family, that’s going to be a difficult discussion to have as an entrepreneur.

So the point I was trying to make there is there’s a certain amount that you should raise from those types of people and prove out a concept to a certain extent, but there is value in bringing aboard professional investors and letting them help guide you in building out real value for the company.

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