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How long before you start making money?

Time to money

(This column originally appeared in the 3/22/99 issue of Forbes Magazine.)

It took the telephone more than 50 years to reach 90% penetration of American households; beginning in 1980 it took the VCR only 18.

Time is more than money; time is wealth. Today's Internet market will pass you by if it takes months just to raise money. This is how to speed up the process.

Flow with the go.
In Silicon Valley, a handful of firms handle the lion's share of high-tech startups. They incorporate the new companies, create the venture capital funds, handle the acquisitions and take the hot companies public. They're expensive but worth it: Since they do high-tech work all the time, things go faster and easier. The money you save by using Uncle Joe the divorce lawyer is a pittance compared with the cost in time and money required to undo his mistakes.

Don't outsmart yourself.
Many an investor has walked away from_or spent three months fixing_deals because of crazy capitalization schemes. Complex antidilution rights, warrants, rights of first refusal and the like cause these problems. If you have a messed-up capital structure, you'd better have the world's greatest business idea, because investors have plenty of other opportunities.

Be brief.
One-page executive summaries, 20-page business plans, 20-minute presentations. Got it? Stick to the basics: problem, size of market, product, customer, team and money. I've never heard of a business that didn't get funded because its plan was too short.

Create the illusion of scarcity.
If there's anything an investor hates more than a lousy deal, it's not getting in on a good deal. Get a bellwether investor. This is someone who's famous and brings your deal instant credibility and hotness. Create the illusion that there are more investors willing to put in money than you're willing to take. If you have the luxury of picking investors, pick the ones who can add the most value to your business in terms of connections and credibility.

Float like a butterfly.
When a potential investor offers a suggestion or criticism, either agree, find common ground or postpone a response until you can obtain more information. Many entrepreneurs are so focused and passionate that they debate every suggestion and criticism. They come across as headstrong, unable to budge and unwilling to take advice.

Acknowledge the enemy.
And make up an enemy if there isn't one, because a warning bell goes off in the head of sophisticated investors when they hear, "We have no competition."

Look for value, not valuation.
In 1982 the founders of Wyse were looking for venture capital; they received two bona fide offers. One offer was at a $6 million valuation; the other was significantly higher. The higher valuation would have meant much less dilution of their ownership_which naive entrepreneurs think is the Holy Grail of capital raising. But the wise founders took the money from the firm offering the lower valuation because its money came with incredible connections: Kleiner Perkins Caufield & Byers. Wyse went on to become a $500 million company.

Take the money when it's offered.
Eugene Kleiner, the founder of Kleiner Perkins, puts it this way: "The time to eat appetizers is when they're being passed around." It means take the money that's being offered instead of hoping for a higher valuation and less dilution later.

Keep spending low and cash balances high.
"The leading cause of failure among startups is death." This is Johnson's Corollary to Kleiner's Law of Appetizers. It's named after Craig Johnson, the founder of Venture Law Group. Few companies fail when they still have money in the bank. Live to fight another day or until the world recognizes your market.

Ask for less than you need.
In any business except high technology, you should ask for more money than you need. However, the opposite is true in this market. If you need $3 million but would like $4 million, ask for $2.5 million. When you've raised $2.5 million, you're a hot item, and it's easier to raise the additional $500,000 and even more. By contrast, if you ask for $4 million and raise $2.5 million, the $2.5 million may get nervous and back out.

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