Photo: Flickr via Kate Ter Haar
Whether you have been to business school or not, if you’re an entrepreneur in the good ole’ U.S. of A, you know one thing for sure. If you want to grow a company, you need financing, preferably venture capital. So when our team decided our business, Peer Software, needed an infusion of cash to keep our growth curve sloping rapidly upward, we decided we would reach out to the venture capital community and I would take the lead.
We thought we’d be a hit with the VC community, and at first blush, we seemed to have impressed them well. They were attracted by Peer Software’s track record as a technology company: 17 years of profitable business and a top-tier client base both domestic and international.
More importantly, our most recent strategic initiatives to expand our product portfolio (from backup products to collaboration solutions), dedicate focused resources for international sales export growth (to take advantage of US dollar weakness), build the company brand as a leader in data management solutions, and continue to service well our existing long-time customers had paid big dividends. Revenues doubled in less than a 3 year period and the company ballooned to over 10,000 corporate customers world-wide.
My hopes quickly soared (initially).
One of the key questions that came up repeatedly in my talks with VCs was whether Peer Software was a “lifestyle business” or a “high potential business”. The VCs made it clear that the latter was more desirable but the more conversations I had, the better I understood the true meaning of “lifestyle” and “high potential”.
A lifestyle business is in fact what most would deem as a real “traditional” business, one that has an eye toward profitability and consistent sustainable growth through long-term relationships with its customers. A high potential business on the other hand cares less about profitability and more for the “limitless potential” of rapid expansion. Moreover, the revenue model is less important for the future of the company than the exit model strategy (i.e. How do you sell the company? And for how much?).
As a traditional businessman, I found this disturbing. In my mind, much of this mentality led to the boom and bust cycles we have all witnessed so much of over the last 20 years. Further, the more I talked to the VCs, the more it became clear how great the discrepancy was between what we wanted and what they wanted. We didn’t see the gap between a lifestyle and high potential business as readily as some in the VC community would define. Why can’t a lifestyle business also be a high potential business?
A VC firm thrives by seeing outsize returns from their invested portfolio companies. This fosters a “go for the fences” mentality among start-ups that is encouraging them to try to build the next Twitter or YouTube instead of starting rock solid companies that offer real services and turns real profits.
I thought about some of the biggest businesses out there: Microsoft, Computer Associates, Dell, HP. These are all companies that didn’t take money in initial growth stages and so they built from a solid place, never in debt. When they did take money, they were in such a solid place that they had the upper hand in negotiations.
So how does the story end? We didn’t take the money. And we’ve continued to grow well without taking any outside investments. A deal simply would not have made sense for us, leaving Peer Software subject to differing business ideologies and faced with an existence (and/or exit) much less comfortable than the one we had pre-VC.
So what’s my advice for entrepreneurs? Don’t overestimate the power of venture capital, and don’t assume the VC firms will provide some strategy or insurgence of power that was not there before. The truth is, if you don’t have the core expertise already, then you probably shouldn’t start the company. Plus if you don’t think you can build a profitable business, you should rethink your business model. Instead of looking for funding, entrepreneurs should remember the basics of building a solid business:
- Start with a dedicated, hard working, and knowledgeable team
- Build and offer a product or service that many customers need and want
- Understand your market and build a reputation as a thought leader
- Foster an ecosystem of customers and partner firms incentivized to make you successful
- And most importantly, SELL SELL SELL (the more you sell, the less you need VC funding!)
The end goal should not be to make money but to build something great that offers real value for people. And if investment is right for you eventually, then you will have the upper hand in negotiations when you take the money since you won’t need it to survive.
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