Here's the scenario: You get a great idea for a Web site, get it up and running, then go looking for venture backing. Investors like it and decide to opt in. They plunk down a cool $20 million and you ride off into the sunset temporarily flush.
Sounds like a script any self-respecting dotcom would follow, right? Not if you're Cofix Inc., a Web site that matches small and midsized firms with technical-service providers and helps entrepreneurs keep track of their service needs via the Internet.
It would have been easy and not at all out of step with the rest of the Internet economy for Cofix to seek $20 million in the first round of venture financing. But it wouldn't have been very smart, says Cofix's 39-year-old CEO Max Seybold. "If you get $20 million, you try a lot of different approaches," he says. "You start with mass deployment before you know whether the concept is going to fly. We've stayed patient, and are going through test marketing to come up with a proof of concept before spending all those millions of dollars on deployment."
The decision of this young Los Gatos, California, firm to take only $2 million from venture capitalists didn't exactly endear them to financiers. In fact, some decided to pass on the deal.
But the defections didn't scare them because they were following a strategy that would yield a critical upside. Instead of giving up 30, 40 or even 50 percent of company ownership because the idea is not tested, Seybold says their method means they may ultimately "avoid giving away an extra 10 percent of ownership to investors."