Over the course of my career I have done the bootstrap venture, the venture with significant VC dollars and the capital efficient venture (sub $5 million). FetchBack is my latest venture and was recently acquired by GSI Corp. My goal in this post is to put forth some lessons learned surrounding capital raising, more specifically the pros and cons of the capital efficient model.
The exception - I’m a big fan of doing things as efficiently as possible. Waste annoys me. There are times when you need to throw resources at something knowing that there will be waste. A great example of this is when a company is perfectly positioned, has a proven model and by “throwing gas on the fire” it can move to dominate a position in a marketplace. These are the stories we read about when the big hit occurs. These deals are the exception, not the rule, but they’re the ones that get the majority of press and attention. I have, unfortunately, witnessed too many times where entrepreneurs are faced with the decision to do a large VC round and fall victim to the fear that they have to pull the trigger in order to be competitive. The thoughts ring through your head, “I have to fill the coffers, if I don’t they’ll pass me by!”
The Promises - I think there’s a very unhealthy environment that surrounds the VC market right now. I’m not the first to state that there will be significant fallout in the VC community. I believe, like others, that a very large portion, 50% or more, of the VC funds out there will fail over the next 5-10 years. Many have not been able to produce a positive return and are ill-equipped to thrive in such a market. Again, this gets clouded by the press surrounding the returns of the top 10-20 VC firms. The rest struggle to produce a return and continue to take management fees. Why does this matter to the entrepreneur? The promise that comes with money about value added is usually non-existent. The reality is there’s a lot of capital out there chasing very few good deals. If an entrepreneur has a solid offering, getting cash is not an issue. Getting the right amount can be.
The Opposite usually happens - Over the course of building FetchBack, I witnessed this first hand. There was a company during the course of our first year of business that I was convinced would be a key competitor and had a chance to cut us out of the market. Not only that, I felt their approach could prove to be a major challenge should they get significant traction. I knew the company was pre-profit, had a hand-full of clients and was beginning to show promise. Then it happened. Their major round of capital came in. I smiled and breathed a sigh of relief. Contradictory to most reactions, but I was confident a story was about to unfold I had seen many times before. Again, it’s important to keep in mind the stage of the company. This wasn’t an entity that had discovered the next big thing, could show how the model would scale and all they needed was to throw gas at it. It was a company that was doing “OK”, had promise and was being approached by VC’s left and right. When you throw this much money at a company in this stage it can cause big issues. It can create a false sense of security, it can make management lazy and unfortunately set up a series of events that take the founders out of the game. In this case, that’s exactly what happened. A mistake I have made in the past as well.
Execute! - Some of the entrepreneurs I’ve admired the most over the years are the ones who flew the other direction. When faced with the pressures of seeing a competitor raise a big round, hearing a Board say “we have to get more cash” and reading the latest brand entrant PR release, have instead ignored the calling, put their head down and executed. They proved-out the model as efficiently as possible. They recognized the problems that can come with too much cash. They understood that if the product offering was solid, provided value for clients and they could sell it, getting cash was not an issue. Too often the prize is the capital raise, not the proof of the model. I was lucky enough to be surrounded by some of these individuals during the growth of FetchBack.
Over the course of building FetchBack, I’ve had the pleasure of working with some amazing people. We raised a limited amount to prove the model with some terrific entrepreneurs and investors who have followed me previously. We were navigating amidst a competitive marketplace for both public awareness and clients, and the pressure of a market collapse where we had no idea if our clients where going to pay their bills. We had many heated discussion about doing that big raise and ultimately we didn’t for all the reasons stated above. I wouldn’t have played it any differently.
Great post, Chad. I miss working with you. You are a true inspiration to me and my entrepreneurial efforts.
- Kevin
Posted by: Kevin Rehberg | February 24, 2011 at 10:19 AM
I miss working with you as well. I must say that at times I didn't see the big picture that you saw, and that may have occasionally created friction during the "day to day". However, reading this post reminds me of the fact that you "get" the big picture and you know where you're heading. It was a pleasure working for/with someone who had conviction of purpose and who treated his employees well. I'd love it if our paths were to cross again someday.
Posted by: Wendy Rosen | February 24, 2011 at 11:03 AM
We can believe we are being self-reliant and independent, and yet there is still clearly an overarching destiny, a Great Maker.
Posted by: Coach Factory Outlet | February 24, 2011 at 07:03 PM
Great post. Very informative. I got a lot of tips that I can use as guidelines for my small business. Thanks for sharing this.
Posted by: Brad Fallon | February 24, 2011 at 09:14 PM