How to Woo Venture Capitalists
Peter Sisson, CEO of Line2 (also known as Toktumi), is an entrepreneur and VoIP pioneer whose last company, Teleo, was acquired by Microsoft in 2005. He has been on the forefront of the Internet industry for 15 years, starting four companies and nurturing many others through advisory roles. He was named one of the top 10 “people to watch” by CNET, and won the Arthur Anderson Best Practices Award for Strategic Leadership with Wineshopper.com. He is a graduate of Dartmouth, Stanford and Cornell Universities.
Question: What mistakes did you make with your first two ventures?
Peter Sisson: I mean, constant. That's how you learn, right? And what's nice about Silicon Valley is that it rewards that. Well, no, let me take that back. It doesn't reward that; it tolerates it more than a large enterprise, where mistakes can be career-ending in a really bad company where they -- you know, where it's a fear. Typically a corporation that's run on fear versus encouragement, and sticks rather than carrots, tends to be an environment where mistakes are not tolerated, and then no innovation happens. And so Silicon Valley is the opposite. It encourages you to take risks. Entrepreneurs are not rational business people. If you look at the risk and reward curves, we're way out here. We're taking a lot of risk in the hopes of a lot of reward, but it's not really rational. Actually, most business people are much closer to the origin there, where there's some risk and some reward, but not the kind of risks that entrepreneurs take.
The mistakes I've made in taking those risks have been numerous. WineShopper, obviously. We were burning $3 million a month before we even had customers. That was the dog food that everybody was eating back then, or the Kool-Aid that everybody was drinking was, you know, build these -- build it; it's a land grab. Everyone believed that the Internet was a land grab, and you had to build this thing. We build a 20,000-order-a-day pick/pack center to automatically fulfill wine and it was a thing of beauty. Built it from green field to full production in six months, had 15 bays for big UPS trucks to back up into. And it never got to ship much wine. Those assets were restarted by Kleiner in a new company called New Vine Logistics, which did ship wine in the back end for winery clubs and what have you. But it was never, never the opportunity that we all believed it would be.
You make hiring mistakes, you make strategic mistakes. I had an opportunity to merge with a company earlier in WineShopper's history that I did not pursue. Hindsight is 20/20. I should have pursued it. But each time you get smarter, and the other thing you learn to do is, you don't fret over your mistakes. You just instantly correct and move on. You make a bad hire, you've got to make the decision to say, listen, this isn't right; it's not working out. And you cut and run and you hire someone else. So as long as you can act decisively, you can undo the effects of bad decisions. But I think we all make bad decisions. The fact is, if you never made any bad decisions, you probably weren't taking any risks.
Question: What’s your advice for startups looking to raise capital?
Peter Sisson: Fund-raising is hard right now. Angels have -- their personal net worths have been depleted. In some cases not depleted, but certainly reduced to where they're less willing to take risks. Some VCs have had trouble closing new funds. The top VCs have money to spend, and there's plenty of money that's being spent and invested. The way I think of it is -- well, in terms of the stages, it almost always is going to be credit card debt and friends and family initially. It's very rare that you're going to go right out of whatever you idea is and pop into Kleiner Perkins and they're going to write you a check. You're going to have to prove something before you can typically raise money from a VC. And the four areas that they look at, there are four areas of risk. And investing is all about risk versus reward. They want as little risk for the most reward, so they're going to try and reduce that risk. There's management risk, market risk, financial risk, and technology risk. Management risk: if you've never run a company before, you'll do much better going in to pitch a VC if you've already got two or three seasoned people who have run the types of functions you need them to run and done it successfully on your team. So that reduces management risk: people in the company who've done it before. You don't have to do all four of these, but you have to, you know, typically hit, depending on the investing climate, two to four.
Market risk is, is there a market for your product? What's the competitive landscape? Is it a billion-dollar option? Because VCs typically want to see at least a billion-dollar adjustable market. That doesn't mean you can't start a company if it doesn't have an adjustable market of a billion dollars. It just means it's probably not a VC play. It's probably a different type of business. And you don't have to attract venture to build a great business, as many people know.
The third one was financial risk, which is, is there a business model? Can you actually make money? Is there a way for this business to sustain itself and be profitable?
And the fourth is technology risk, which, if your company involves some kind of new technology or new thing, have you built one and proven that it can be done? During the bubble days, like in 1998 and '99, when it was really crazy, you could probably only have to tick off one of those boxes to get VC funding. Now you probably need to tick off probably all four, maybe three. And you know, mitigating market risk means having paying customers, right? So that's not always the case. Certainly in the past few years there's been a rush of money sent into social media stuff, but the more that you can sort of address those four issues and do it in a very convincing way through data, through beta customers, through letters of intent -- whatever you can do to sort of increase the likelihood that you're going to be able to execute is going to improve your chances of getting funded.
Recorded on October 1, 2009
Peter Sisson, founder and CEO of Line2, remembers mistakes he’s made in launching companies and offers advice to rookies looking to secure funding in a dry economy. This video is part of a "Profiles in Entrepreneurship" series with Start Out, which promotes entrepreneurship in the LGBT community. (www.startout.org)
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