Q: If you go back five to 10 years what advice would you give yourself?
--Alex Nemo Hanse
With the benefit and hindsight of 20 years of experience in the space, I think the single most important advice that I could give an entrepreneur is the simple admonition to be mindful of the fact that venture capitalists deploy cash in ebbs and flows.
Investment levels and valuations are fundamentally driven by broader market conditions and the venture investors’ perception of market dynamics, and frankly, the competitive landscape in finding and pricing deals.
In some ways, venture capitalists aren’t too different from the herd in finance. They, too, have herd mentality and tend to follow broader market dynamics and rarely buck trends and move capital in a contrarian manner. In other words, they pull back when the market pulls back. That said, some venture investors do view downturns as buying opportunities and for those that take such a view, downturns are often the best environments for finding great deals. But the truth is that in a downturn, venture capitalists are slower to commit to a deal, are much more selective in their process and will absolutely exact greater concessions on price.
So what does that mean to you today?
Take advantage of the market window and the free flowing venture capital. Take more money than you think you need and more money than you would ever need in the worst case scenario (or even the unimaginable scenario), to withstand the next ebb. There is an old adage in venture capital amongst those of us that have seen the tides come in and go back out: “Take the money off the table.” What that means is that you shouldn’t get hung up on dilution, meaning owner's equity is reduced every time a new round of financing occurs. Yes, diluton matters but owning a bigger piece of an enterprise that runs out of dough in a tough financing environment isn't going to be worth much.
I have seen too many companies fail, because they failed to raise enough capital to get them to the milestones that would have created a point of validation and driven a next financing event. Things always go wrong. Things will never turn out as you plan today or as you project today. You will make mistakes. You will hit unexpected hurdles. Things will take longer than you think. As an entrepreneur, you have to accept that as gospel.
And so, be prepared for the worst. Take the money off the table.