Hey, what about the ROI?
If you’re about to meet a VC firm there’s one thing you should remember: take your timeline and measure the time between the meeting begins and someone from the Venture Capital firm asks for the Return on Investment (ROI) of your startup company. Write down the exact times you get in all the meetings you’d have (of course, you won’t get the money in the first meeting…)
Despite of the fact that all companies -and all VCs, of course- should get some revenues in a medium-time period, an excesive pressure over the team to make them earn money asap would result in a serious damage to the company.
The recent social media history can give us some clues:
-What would be (The) Facebook today if all the VC companies that helped Zuckerberg to build his social empire would have asked for revenues since the first days? It’s very possible that Facebook wouldn’t be earning 4 billion dollars each year now (7 years later) and the company wouldn’t be valued in 100 billion. There wouldn’t be any Skype joint-venture, no “social-boom” and, of course, no 750 million people sharing their lives inside a website.
-What about Foursquare, Twitter and other similar companies? All of those ventures have changed the way we share our lives through digital channels. We’ve moved from the classic “Hi! I’m taking a beer at the corner” SMS to Check-in with the Foursquare App. We instantly share our opinion about a TV show with thousands of people using the same “hashtag” in Twitter.
And, is Foursquare a company offering revenues to their shareholders? Of course not. And it’s been “so long” since they got their first investment. But what can you do when 10 million people -and counting- are using the same app to share their location? Find a way to monetize that. Because when you find the right path, yes, you’re smart: you’ll get all the revenues you’ve been waiting for.
So, does this post means that you’re supposed to look for a VC company offering an “infinite time” to recover their investment? Absolutely not. They put their money to help you and in exchange you’d be commited to do your best to make your company grow as expected and they earn money in a reasonable time.
But never forget this: if you have a good idea and your product is built over strong basis with a good business plan, don’t sell a big piece of it to the first VC company. You need the money but you don’t need anybody destroying your dream (your product).
By the way, I found yesterday an interesting book while reading an article in TechCrunch. “One Book Every Entrepreneur and VC Should Own” is a compilation of advices from Mark Tuster (www.twitter.com/msuster), a man that’s been around since 1999 helping companies…starting by his own enterprise. Reading that book you will get unvaluable information about some concepts that you may know if you’re about to start a negotiation: “Drag along rights”, “Redemption rights”, “2x liquidation preferences”, and so on. I’ve only read a summary, but can’t wait to get it and read the whole thing.