Sam has had a passion of making donuts since his early teens. He learned the art from his grand mother who used to come visit every summer. The secret ingredient is love, Sam still says the same remembering the old days and sharing stories of how he invented the “pepper donut” with his grand mother. As years passed by Sam’s donuts became more famous than just being known to a few good friends in his college dorm room.
Now Sam runs a donut shop in downtown Manhattan. And just like almost every entrepreneur learns, Sam too, is now facing a dilemma of whether to take his donut business to a large scale and involve a VC. He goes to various VC forums and has caught up with the concept of LinkedIn quite well. One thing that he doesn’t understand is that why do VCs talk big numbers and big margins when what he really needs is 250K to push him to the next level.
If you are reading this as a budding entrepreneur, there’s no doubt you’d know how Sam is feeling. If you have been round the block a few times you’d know what Sam is not seeing.
So what’s really going on? What do VCs see that most entrepreneurs fail to see?
VC, just like the entrepreneur has a passion and only puts his money on some idea or concept after not only getting convinced that there will be a return but also after realizing that the concept falls in line with his own passion and long term vision. One thing that many entrepreneurs forget is that a company or a person who is funding or willing to fund them to grow them, is not really looking for profits and returns at the end of the day. They are looking at many more things. Being able to be on the side of the table where they can decide where they should put money, VCs definitely are in constant pressure too. They are thinking in terms of how they think the future should of the Industry lead towards. They too have a long term vision and passion about products and technologies they fund. If they can’t code, or they can’t come up with the technology, doesn’t mean that they only think of the inventor as an investment to make more money.
A big misconception that many inventors and entrepreneurs have is that they think they need much less money. Imagine you are going to buy jewelry worth $1000. When you leave home, do you just keep $1000 in your pocket? No! You figure out you’d need money for having lunch, perhaps you might end up watching a movie too. And even more, it’s quite possible that you might end up buying $1200 worth jewelry even though you had a hard stop at $1000. Who hasn’t gone through that?
VCs are doing exactly the same. When they see an idea or a potential investment, they try to pad it with things that you might have forgotten to include. They understand that if they allocate $100K on something that might take $200K in the end and if at that time they wouldn’t have another $100K to shell out, even the first $100K would go down the drain. So when they calculate the costs they see it from the point of view of how much money they need to block, not necessarily spend.
Consider for example booking a conference room. You know that the discussion is going to last 30 minutes, 45 minutes tops. But if there is only one conference room available and only one hour slot during lunch hour and your discussion is really important, you’d might as well book it for a whole hour. You don’t really intend to burn up the whole one hour, but there’s no harm planning for it. And that’s what VCs are doing.
So how does a VC see Sam’s situation. A VC sees that Sam doesn’t only need money to upgrade his kitchen, he needs money to advertise, to spread the word, to hire better workforce, and to hire sales people who can go out and help establish partnerships with more bakeries. Growing a business is much different from running it and has its own set of challenges even if it’s for a donut shop! So next time when you talk with a VC, try to learn more than you share and try to share as much as you learn!
December 29, 2010 at 2:08 pm Comments (0)