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Wednesday, December 6, 2006

Venture Capital - What's the rush?

from Frank Addante





I sit on a number of boards and advisory boards for early-stage companies. I also have a wide network of entrepreneurs that I advise on a regular basis.

Recently, I have noticed a developing trend of people starting companies and rushing to raise venture capital. I've had more people come to me in the past 6 months seeking advice on raising venture capital than I have had in the past 6 years.

I have some theories on why there is this sudden infatuation with venture capital:

1. People simply think it's "cool" or want to build their resume
2. They think that the right venture capitalist will "make their business"
3. They are afraid

Venture capitalists don't validate business models, they don't "build" businesses and they don't make it "easier". If they did, they would do it on themselves and own 100% of the business, rather than only a fraction of it. Venture capitalists provide capital for growth. Customers validate businesses.

Of my 5 startup companies, the one that did the worst was the one that raised outside capital too early. It gave us a false sense of validation and security and ultimately, we never developed the "hunger" required to build a wildly successful business.

Venture Capital is a resource, not a business plan. It should be used for "roll out" not "find out".

I've talked to a lot of companies that have spent a lot of time (months upon months) chasing venture capital. Often times, that time investment could have been better spent talking to customers or acquiring users. If they spent that time proving the business model, raising the capital would be much easier. Without solid traction, you'll get a lot of questions about whether the market opportunity really exists. Rather than spending time trying to persuade a VC, wouldn't it be easier to simply say "just ask our customers"? It's better for them and it's better for you.

Momentum sells. Period.

Frank Addante is a successful Los Angeles entrepreneur, having started 5 companies, resulting in one IPO and two acquisitions. Mr. Addante most recently incubated and served as the Founding CEO of StrongMail Systems, the leading email and digital messaging infrastructure provider for thousands of companies worldwide. Addante was formerly Chief Technology Officer and technology Founder of L90, Inc. As an early pioneer of the Internet, he developed Starting Point, a search engine that grew to be the 7th most popular site on the Internet before it was acquired. Frank's blog on entrepreneurship is at www.founderblog.com.

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