Voice of Angels
Connect the Dot Coms

Judging by my correspondence, it's the favorite subject of entrepreneurs. To put it bluntly, you're obsessed with it. In this column, we've turned over the topic as many times as a Rubik's cube, but your questions keep coming. On one hand I appreciate your concern: you want to get paid fairly for an idea. But on the other, I can't see how focusing so fiercely on just one aspect of the entrepreneurial process will help anyone succeed.

From my perch, I can only see it hurting you, blinding you from your real mission: to build a great company. I think back to some of the most famous entrepreneurs and wonder what would have happened if they had gotten hung up on the valuations of their companies.

Take Jobs and Wozniak. Can you imagine them busting Arthur Rock's chops about the huge return he made for funding Apple Computer (Nasdaq: AAPL)? It's a ludicrous thought. The valuation was the least of their concerns: they wanted to change the world. And that's just what they did. Getting rich along the way was incidental.

Now think about the first dot-com gazillionaires: Case, Andreessen, Clark, Filo, Yang, Bezos. Do you honestly believe getting obscenely rich was their primary motive? Like Jobs and Woz, they wanted to change the world. If they had set out to get rich, they wouldn't have been nearly as successful.
 

VOICE OF ANGELS

Our pal Ron Conway, general partner and cofounder of Angel Investors, is right on the money with his take on valuations. "If you're going to build a company like a Yahoo [Nasdaq: YHOO], Ask Jeeves [Nasdaq: ASKJ], or eBay [Nasdaq: EBAY], you should not be worried about valuation on the front end. If you're worried, then you must not have confidence that you're going to build a large, significant company. If I see a CEO that's completely stuck on valuation issues, that's a warning sign. That's a CEO who's confused about what his role is. The bottom line is if the idea is great, you're going to end up with a multibillion market cap and everyone is going to make more money than they can ever spend. Rather than focusing on valuation, you should focus on execution."

Yeah, yeah, that's just what you'd expect a venture investor to say -- it's in his best interest. You may be driven to change the world, but they're driven by the desire to make wads of cash.
Do VCs deserve to earn as much as they do for helping to start the Yahoos and eBays of the world? I haven't made up my mind about that one. What I am certain of is that the question is best suited for debate in a classroom -- not the real world. It's pointless to bemoan how rich the VCs are getting from "your" idea. If you can figure out a way to get your company off the ground without VCs -- and move as quickly as you need to succeed in today's hyper-competitive world -- God bless you. You're unique. Just about everyone else needs the help of venture capitalists.

  CONNECT THE DOT-COMS

The middlemen and women with the money and the connections work magic. How could you believe otherwise? In this dynamic free market, you can only thrive you provide value. Look around. The free market is as efficient as a shark. If you get bloated and lazy, chomp! A few venture firms have been pulled under, but they're the exception. Their brethren have prospered and multiplied. They are raising record amounts of money from institutional investors.

Don't get me wrong. I don't think venture capitalists have all the answers. Any good VC will agree that that's not the case. And I'm not suggesting that any entrepreneur blindly take the first term sheet offered. The key here is to put the valuation of your company in perspective. It isn't the critical element that's going to make you succeed. If you're going to be obsessed about something, why not focus on how you're going to beat everyone else to market by at least six months?

The best practical advice I've heard about valuations comes from Rich Shapero, a general partner at Crosspoint Venture Partners. Asked by an entrepreneur how to figure out what his company is worth, Mr. Shapero replied, "Show it to a number of different players and see if you can't stimulate a marketplace. See if you can get competitive offers or at least multiple offers, so you get a good sense of what the marketplace values your business at. The wrong thing to do is to try to determine what you think it's worth and broadcast that."

In other words, shop your company around and see what you can get for it, but don't make that your priority.

I'm sure you have plenty of thoughts on this matter. Let me know what you're thinking.

NEXT TIME: More than likely it will be an interview with a 25-year-old Stanford dropout who's filthy rich. He's offered to share the wisdom of his experience with instant wealth: that is, how to keep all that money from screwing you up.

Source: Lawrence Aragon, Redherring, Dec. 29, 1999