"When a milestone is conquered, the subtle erosion called entitlement begins its consuming grind. The team regards its greatness as a trait and a right. Half hearted effort becomes habit and saps a champion." — Pat Riley (MIami Heat/LA Lakers coach)
One thing you learn early on in the venture business (both as a VC and an entrepreneur) is that Darwin says you are not entitled to anything. You have to earn everything you get (and occasionally get lucky). Often, however, entrepreneurs feel they are entitled to a variety of things and take exception when they don’t get them. Two of the more prominent areas are around ownership and market reception. (note: VC entitlement post to come as well…)
Entitlement 1…the "Option Fairy": I believe that an entrepreneur should, at the end of the day, have a healthy chunk of the business. He/she has spent considerable time, blood, sweat and tears building the firm. However, if the entrepreneur decides to take a capital intensive approach to building the business, then he/she should also expect to suffer significant dilution. Most successful entrepreneurs with large ownership stakes (a la Gates & Ellison) get this idea. There is nothing more disruptive to an investor/management relationship than when the CEO burns through considerable amounts of cash, fails to hit his/her goals and then demands refresher option grants to make up for the dilution they are about to take from the new financing. There is no "Option Fairy" who can painlessly sprinkle options onto companies that miss plan or take the easier, capital intensive approach. Cash does not solve most problems, and, I would argue, causes a significant number of major ones.
Entrepreneurs can fail to understand why VC’s are not sympathetic to their "Option Fairy" plea. The company has the VC’s money. The management team missed numbers, let burn get out of control and now the company needs more money. On top of that, management wants to dilute the investors even more by carving out a chunk of equity for options. Entrepreneurs, either keep your burn under control until such point as you are confident you can deliver results, or realize that if you miss, Darwin gets to visit everyone…we all get diluted together. Also, don’t use the financing (bringing in a new sympathetic investor) to gain leverage with your old investors as it will cause serious bad blood at the board level (especially if the old investors have dry powder). You will win the battle but lose that war. I don’t know of many CEO’s who survive more than one or two years after doing this to their original prom date.
Entitlement 2…I’m Right: I think that one of the leading attributes of a great entrepreneur is the ability to listen (same for a VC BTW). I don’t mean the usual "let’s flatter the VC and nod our heads" style of listening, but really taking in differing opinions. If those around you (VC’s, customers, etc) are not getting your value proposition, it might be time to rethink how you are positioning and/or designing your product or service.
I often come across entrepreneurs who are so wed to their views and ideas that they take great offense when others don’t get it. "I have a great idea and these dumb people around me just don’t get it". These dumb people (customers) have very specific needs and it is your job to figure them out. The other dumb people (VC’s), have seen a lot of companies over the years and a lot of mistakes. Take your mouth off the cool-aid straw long enough to really understand if there is merit in the "opposition’s" comments. Of course, we are all wrong (I am on a daily, if not hourly, basis) and an entrepreneur has to maintain conviction during feast and famine. So, this is a delicate balance.
In the end, Darwin has the final say. As Jack Nicholson said in Prizzi’s Honor, "If Charlie is so f*#@#n smart, then why is Charlie so f#@$@n dead."
great post…directly related to this topic, I am often asked by entrepreneurs “how much do I get to keep if I take VC money”. While the anwer is subjective and based a number of factors, I am curious if you have any guidelines or metrics as a basis. Lets say a company is being formed with 4 founders, and they have taken no angel or venture money yet.
Dilution comes down to two factors: how much you are raising and what is the pre-$ valuation. The business will dictate how much capital is needed. The investor market will determine valuation. Depending on how compelling your business is, the pre-$ could be $1M, $4M or be unfundable. The average seed deal valuation is $4-6M for venture deals (these would be the more established or credible plays…assume $2-3M for your overall avg seed deal).
Great post. It is true that entrepreneurs (and VCs) can’t get complacent. It takes a lot of ducking and weaving to get things right and almost no one gets it right the first time. Being open to evolving is key and feeling any sort of entitlement can close ones mind to ideas that could cause a business to survive if not thrive.