Gyaan Sutra On entrepreneurship and technology

Bootstrapping is out of fashion. Every second company these days goes looking for a venture capitalist, and start off the company firing on both ends. But it you are a budding entrepreneur, and are looking for funding, I must tell you that playing with VC’s has more problems than you know about. They can get to act like assholes, and get away with it. No matter how great you idea, no matter how you are planning to execute, no matter how much profits you think you can generate.

For example, I found Filmloop on the Techcrunch Deadpool (the graveyard for Web 2.0 companies) along with the story that got them there. Their story started in January 2005 when they raised $5.5 million from Guy Kawasaki’s Garage Ventures. Then in May 2006, they raised another $7 million from ComVentures. So with all the cash and ideas, the company launched itself in October 2006.

But in the middle of November, comVentures asks the company to sell itself by the end of December. Why? Becuase of pressure from its limited partners to clean up its portfolio. In December, they sold the company to Fabrik (another one from it’s own portfolio) for a petty $3 million.

That’s not all, to sell Filmloop they made the other investors and the founders sell forcibly by using certain ‘drag along’ rights.

So in the end, ComVentures ended up killing Filmloop to strengthen another company from its own portfolio (read made sure more profits came in). And what happened to the founders? They walked away with absolutely nothing. _[1]

Accoring to Alexa_[2] , Filmloop was exactly dying. Given some time, maybe they would have been able to convert the $9 million that they had burnt up during the two years.

So it’s not about how much money the VC can give you, but about how long are they ready to stick with you. The best way to go about it, is to stick with whatever you have. If you don’t, wait a little longer.

Working for a VC is not much different that a job, maybe it isn’t really the thing you wanted when you quit your job to ‘Start Up’. You can get fired from your own company too.

Also, giving a VC a chunk of your equity does not only mean giving up control over a part of your equity, it also means giving up control over what happens if your company dies. (like what happened with filmloop)

Imaging you sign up with a VC for 40% equity for Rs 1,00,00,000. Now suppose you had a brilliant idea, and you execute it beautifully, feature on the list of hottest new entrepreneurs and over the next two years, turn your company into a giant, and then some silicon valley stalwart pays you Rs 10 crore for it, how much would go to the VC? Rs 4 crore. So practically, you give him the ticket to earn a profit of 100% per year.

But not all of us need a crore to start operations, a decent 20 lakhs would be enough, if you’re planning for a web 2.0 stint. Where what you actually need is a bank loan, and ask your grandfather and dad and uncles to pitch in.

So, all in all, think really hard before you choose the VC option, and sign on the deal. That’s it.