Having the Relationship -- Even With the VCs
Jennifer Lawton, Owner, Just Books, Inc.
Whenever I go to a gathering or event that is comprised of entrepreneurs or business owners or CEO wannabes, a predominant part of conversation is "where do you get your funding from?" I have to reply, in my most assertive, happy-to-be-here voice that "we are unfunded ... we grow by revenue ... oh, wait, no, that's not quite right ... after our fourth year in business we got a credit line in case we needed some stretch with cash flow issues as our growth continues with reckless abandon."
It's fun to sometimes use my timid, quiet, not-so-sure-this-is-the-right-answer voice because, either way, the reaction is one of the disbelief and shock.
"Why? Why is this?" The other person asks me in a you've-got-to-be-kidding me voice.
When I encounter this reaction, we typically go on to round two of this discussion, which is of the intellectual nature. It goes something like this: "I'm not sure what we would do if we had more funding. We operate within our budget guidelines, are profitable (and always have been), and are able to provide well for our employees and clients."
The person with whom I am conversing will say things like, "How do you fund your growth? Expansion? Don't you need to invest in infrastructure?"
I continue with, "We are growing at the average rate of 100% a year, based on revenues. We are intending to grow by 2 offices a year, through revenue and perhaps some conservative use of our credit line and banking relationship. We have always invested in infrastructure and it's all in the budget."
By this time, people have either lost interest and assumed a blank "this is not the real world" stare, or are much more intrigued, and a very interesting conversation ensues.
It could go something like this:
Other Person: So, what is your exit strategy?
Me: Well, you should read this article (If You Don't Know the Way, Ask for Directions) I wrote on why I don't like that phrase. The end game is to do an IPO.
Other Person: But you need "Vulture" Capital to do that.
Me: Vultures? They really aren't so bad. Your investor choice is just that-a choice! Know the risks of any type of investor. Venture capitalists are great if you understand, in advance, what you're buying. I don't like the "Vulture" term.
To answer your question, there is an argument for getting Venture Capital before an IPO, and we are considering this option. Some feel it adds validity to your IPO and as a result, boosts your valuation. Right now, it doesn't make sense for us to take in money that we don't need and give up control that we do need.
Other Person: But shouldn't you get funding, from any source, when you don't need it so that you get the best terms?
Me: Yes, that is a good argument for getting funding now. Right now, we are considering some angel level funding rather than venture funding, and part of the rationale is just the argument you made.
Other Person: But you said you are growing by revenue!
Me: And we are! The funding that we may bring in would be to support some potential extraordinary expenses, allow for us to grow more aggressively, and allow for us to bring some interesting investors on board. We could just as easily use debt financing for this level of funding and give up no further control. Our needs are too small to involve VC at this point.
Other Person: So, when you are ready to IPO, how will people know who you are?
Me: We are working on getting our name out through many venues. We have presented at the Mass Software Venture Forum and have attended events with investment bankers and met with people who are either VC or Investment Banking partners to tell them our story and let them know who we are. There is strong interest in our company within this community, and we feel that we have good momentum and potential should we need to go this route.
Other Person: How do you meet people who are angel investors?
Me: I spend a good portion of my life, it seems, networking and meeting people. The more people I meet, the more leads I get. The more events I attend within groups like Young Entrepreneurs Organization (YEO), the more exposure I get to people who know people or people who are the people. We tell a good story and have a high quality group of advisors.
Other Person: It can't be that easy.
Me: Oh, no. It's not easy, at all. Networking is a skill and it's hard work! You can't just meet people - you have to be able to tell a compelling story in a short time period, it has to be believable, you have to be genuine, and you have to know what you want. And it helps to be honest. And it helps even more to be patient. To me, knowing who I'm going to allow to have a piece of my company is priority one. I am much less comfortable in getting direct input and control information from people who I neither know nor have had sufficient time to develop a relationship with. This is the case no matter who the investor is - angel, banker, VC.
Other Person: Why does that matter?
Me: To me, it is a critical part of our success. Through networking, telling our story and meeting and greeting, we've been able to enjoy huge success and rapid growth by our own steam. That makes for a company of proud people and it makes our assets all the more valuable. If we have on-board employees, then they are invested assets. I'm not willing to sacrifice that on purely financial grounds. The value of any investor, I think, comes in their understanding of who I am, why our company is headed in a certain direction, and their possession of the same type of pride in ownership that I have. They need to be able to have the same convictions as mine about where we are going and why.
Other Person: Do you think that's possible?
Me: Anything is possible. And more to the point, yes. I think it is entirely possible with any funding source. In my mind, the key to a successful and happy investment and investor relationship is having the relationship. Keeping your banker in the loop and well-informed without exception will play in your favor. Choosing the right investor, for the right reasons, is critical. If you need funding, it's critical that you evaluate people for the right reasons. Just needing funds is probably the worst reason.
For us, angels are the right fit. We don't need the weight of VC yet. We could work with investment banks or pure debt financing, too. The angel route allows us close control, small investment and close relationships.
There is no formula for which route to take. You should try each option on first, to see what feels right.
Other Person: That doesn't make sense. You are looking for investments so that you get funded? Which comes first?
Me: When you look for funding, you look for an investor - not a money bag. Investment comes in many, many forms. Time, energy, interest, understanding and dedication are critical features in an investor. There is a lot more to an "investment" than pure dollars. You have to be able to communicate and work with the person who will invest in your company. If you don't like the person or the group, you're never going to like them! Chances are that you know, or will have the opportunity to know, an angel investor. VC and investment or traditional bankers are often, though not always, a more institutional relationship.
It's not unlike a marriage - it's the worst kind of marriage when you marry a partner assuming that, over time, you can change their critical flaws. It just won't happen. Similarly, if you want an investment to work for you, it has to be the right fit. Venture funding, debt financing, friends and family rounds, and angel financing should all work this way.
Other Person: Okay. I see that. Huh. Thanks!
Me: So, are you funded?