Syntagma Digital
Editor, John Evans

Venture Capital or Creative Partnership?

When your online business reaches the stage where it needs some serious scaling up, what do you do? You could try the VCs (venture capital providers). They are the helpful folk who will take 40 or 50pc of your business in return for funding your expansion. They'll probably insist on bringing in a new (and expensive) chief executive, robbing you of much hands-on control. They will also expect an exit payout of something like 20 times the amount they put in. This could only come from either a sell-off or an IPO (initial public offering). Either way, you're going to lose your business progressively over a few years. Of course, you may get rich in the process, but not before making a lot of others wealthy too. Then there's the question of what you'll do with the money. Spend it, of course. That, as Greg Gianforte points out in his book Bootstrapping Your Business, will just deflect you from selling your product to customers. Human nature is such that when we have lots of cash we spend it on Wants rather than Needs. In business that translates to a fleet of white Rolls Royces emblazoned with the company name, each driven by a salesperson in a white suit. I once knew such a company. It went bust. Podcasting There's a story doing the blogorounds today about a company called Podshow which has received $25M in VC funding. A number of commentators, including canny Jason Calacanis, are questioning the logic of the money stream : "What on earth Podshow is going to do with almost $25M in funding is anyone's guess, but it's not going to end well I can tell you that." Jason points out that to raise the cash they must have had "a $35-60M pre-money valuation", which translates down to the VCs looking for a $300-500M exit at some stage. Revenues would need to be in the region of $30-50M for that to happen. Remember, we're talking about podcasting here, a technology whose business case has yet to be proved. He goes on to say that his own company, Weblogs Inc, raised only $100,000+ from VC Mark Cuban "and we never spent it--we made money". Alternatives So what's the alternative? If you're a content provider like Syntagma Media -- and most blog-type businesses are -- there's an obvious one. Instead of selling half your business to strangers with half the money going back into their coffers (the money has to go back into the business of which they now own half), you could try looking for a complementary creative partner. Content provision needs a lot of skills beyond fiddling with template code and pushing out a few posts a day. Having something worth selling and a means of finding buyers for it, require a step-change in skills from one's first Blogspot days. You might, for example, seek out an industry consultancy firm which could deliver great contacts and new possibilities, while also taking over crucial areas of the business operation. That's what we're doing here. It's a much better way to blast your way out from the initial stages of business construction than jumping into the arms of ravenous money-people -- even if they let you.

9 Responses to “Venture Capital or Creative Partnership?”

  1. Hi Tyler. Drop me an email with your ideas. :-)

  2. Just a few points of thought:

    1. No VC requires a 100x return. 10x is considered a homerun.
    2. VC’s don’t typically replace the CEO

    Either way, I’m a little surprised by the new investment as well, and largely agree with Jason that there’s got to be something else going on, as by and large VC’s aren’t stupid.

  3. Thanks, Jeremy, an extra nought found its way into that number. :-)

    It’s hard to see what else can be going on with a podcasting outfit. Maybe they’ve secured the services of a big star or two.

  4. Ahhh, cool. Still no VC in north america expects or requires a 20x. They don’t even expect or require a 10x. The truth is that if a VC gets 2-3x they’re happy. They’ll do 2-3x deals all day every day and twice on Sundays.

    It doesn’t really matter though. Your point that companies need to focus on the actual business is totally, completely bang on :)

  5. It may be that North America has a tighter, more competitive, VC market, Jeremy, although I note that some of the big Valley VCs are operating in Britain too.

    But even JCal seems to suggest a figure of up to 20x. However, I hear what you say, especially after your recent experiences. Maybe you’ll tell us all about those sometime. ;-)

  6. Yeah, well, Jason’s Jason. Fantastically brilliant, but if you gaurantee a VC a 2-3x they’ll never turn it down :)

  7. I suppose it depends on the time it takes. It used to be said that in British Hong Kong you could double your money every three months. That’s 16x in a year. It’s probably the same in Shanghai right now. The VCs are definitiely missing out, poor things. ;-)

  8. It’s all about perspectives. VC’s are ruled by their IRR (internal rate of return: http://www.fundingpost.com/glossary/IRR.asp?refer=). Basically they’re rated nationally and by sector based on the money they return to their investors.

    The reason the misperception is that all VC’s want 10x or 20x is largely because they do enough deals that DON’T do that, that in order to hit decent IRR’s they need larger exits (IPO, acquisition, buyback, LBO, etc).

    A healthy IRR is in the 30-50% range. So if you had a guaranteed 2-3x, nobody’s going to complain. Sure, on 2-3M$ it won’t affect the fund’s overall IRR that much, but nobody’s going to complain either.

    A 10x return will make any VC happy. Anything higher will have any VC, even the largest, dancing. And anything over 20x will have them bragging.

    Again though, it’s all about perspective. When you just look at Xx returns it’s hard to imagine. The reality is that if they put in 10M$ and the company exits for 100M$, and the VC’s “only” get 40-50M$ they’ll never, ever complain.

    End of the day, no VC will complain about a deal that actually impacts their IRR in a positive way :)

  9. Sounds like you fancy going into the business yourself, Jeremy. It wouldn’t be a bad way of investing all your profits from b5. :-)

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