Don’t make a mountain of a Sand Hill (Road)

So, you want to start a business. Fantastic! There’s no nobler pursuit.

Except maybe becoming a monk, or a nun, or starting an environmental non-profit organization, or being a teacher.

But we’ll put all that aside. Great! Let’s do this!

No matter what you read, or who you talk to, or how hard you might try to avoid it, you will eventually succumb to at least one passing thought that maybe, just maybe, you should raise money.

It happens to everyone. Heck, some guys you meet will actually start a business simply because they want to fundraise. You’ll try to avoid this breed of entrepreneur, but you won’t. It’s impossible.

There’s nothing wrong with venture capitalists and angel investors. Just know it’s not the only way, nor is it necessarily the best way. It’s just one flavor in a smorgasbord of entrees and appetizers that together make up the entrepreneurial feast.

So why do we Silicon Valley folks revere investors? Why do we assume that a successful fundraise is the bedrock of our businesses?

There’s no good reason. We just do. I did too until I learned better. Here are three points to consider along your enterprising path.

1. Venture capital is overvalued

If you succeed, your investors will make more money than you will.

But hey, you’ll still get rich. Here’s a recent case study and I happen to know one of the founders.

I graduated in the Class of 2009 at MIT Sloan with Frederic Kerrest, the co-founder and COO of Okta, a cloud security company that had a very successful IPO in April 2017.

He launched it shortly after we graduated and is the first of my classmates to hit the big time, that rarified pinnacle of taking a company all the way to the public markets.

Those of us who know Freddy saw it coming. First of all, he raised $230M from the best firms in town. And secondly, Freddy can execute and people love him, a very rare combination.

We saw it in business school when he ran the MIT 100K business plan competition, and he remained generous and approachable even as his star shined brighter and brighter after launching Okta.

But here’s the rub. Freddy and his co-founder (CEO) Todd McKinnon worked for a decade, putting everything on the line, to reach this level of success.

One of their investors, Ben Horowitz, the named partner at Andreessen Horowitz, came in years after the company began and today he alone owns 50% more equity in Okta than Todd and Freddy combined. Sequoia, their other major VC holder, does too.

Yes, everyone involved at Okta came out a winner, but I think it speaks to how disproportionately capital is valued over entrepreneurship when this happens. It’s not just Okta, of course — it’s every venture-backed IPO except maybe Facebook, but Zuckerberg is an exception in so many ways.

If I could design an outcome that makes sense, I’d have that ratio flipped. The founders should have 50% more equity than any single investor, but that’s not how the valley works right now. It’s not how successful companies are supposed to become successful.

I’m showing, in hard numbers, that the system is rigged so that venture capital is valued more than human capital. Right or wrong, that’s what’s happening here. If you go down the VC path, then you’d better get used to it.

2. Board members should be respected, not revered

During my years at Scripted, I think we tried too hard to please our board. Instead of doing what we thought was right for the long-term viability of our business, we’d do what we thought the board wanted to see at the next meeting.

This meant we couldn’t take risks. We were still a private company but we acted like every half-quarter was life and death and the WSJ would skewer us if we missed our earnings.

That couldn’t have been further from the truth. In retrospect we should have followed our instincts, even (or especially!) when they ran contrary to what the board wanted to see.

It’s our job as operators to see the chess game five moves ahead, to sacrifice a knight in order to open a strategic position that will pay off in the end game.

It’s the job of the CEO to manage that dynamic.

In speaking to other founders and CEOs about this topic, I can see that the CEOs who make it are the ones who respect but do not revere their board members. Respect is important.

These guys entrusted us with millions of dollars and should know how it’s spent and should speak up when burn gets too high. Managing cash and helping the CEO are the board’s two most critical functions.

In fact, the greatest sign of respect is honesty. CEOs should tell the board the honest truth. When something’s not working, bring it up at the board meeting along with a solution.

Talk it through, hear the objections, and make the decision even if it’s opposite of what the board suggested. The board didn’t hire the CEO so she can follow their direction. They hired her so she can make the tough decisions.

The board doesn’t have final say in product decisions or market strategies. That is the CEO’s responsibility based on her view of the market, customer relationships, and development opportunities.

Showing too much reverence to the board means only playing it safe. Only playing it safe, ironically, means increasing the likelihood of failure.

I don’t know for sure but I bet Todd and Freddy made more than a few moves against the advice of Horowitz and the rest of the Okta board. I would bet my money that’s why they won.

3. Customers are the best investors

Most startups shouldn’t have an IPO. So why should every startup take venture capital?

What if I told you about a financing vehicle where the investors will try out your product, give you really useful product feedback, take no equity in return, and make their investment online, via credit card, with no legal mumbo jumbo?

You probably wouldn’t believe me, right? Wrong. There’s a special word for these investors. They’re called customers.

They invest in smaller sums, so you’ll have to be more careful about how you spend your funding, but that’s a small cost for something so beneficial in the long run.

If you think yourself into a chicken and egg, don’t.

Don’t even go down this road — can’t get customers before I have a product and can’t afford the product unless I have customers paying for it problem. Again, I challenge you to think again.

There’s always a way to start small, offer discounts, and hustle your product into the hands of paying customers. It’s just a matter of taking the first step and then figuring it out as you go.

You may not make Horowitz money at the end of the journey but you’ll at least make something and completely control your own destiny. That benefit is priceless.

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