Startup School – The funding mindset – capital and partners
The fundamental mistake that sunk Avicena was the mindset that the only way to succeed and compete in this business was to get venture capital funding and that getting funding would be easy.
This mindset was reinforced by the easy money available circa early 2000. The Eugene Lang Fund at Columbia Business School offered a grant of US$ 10,000 to test product ideas as part of the greenhouse incubator course. This would be followed by as much as an additional US$ 250,000 investment if your venture made the final cut.
Within two months of landing in southern California, on the basis of the business plan, the credentials of the team we had put together, and the support of our earlier referees, we received an indicative offer valued between US$ 2–3 million for 30% of the firm. Aleph and Sarwar had agreed to stand behind a commitment we priced at US$ 250,000 over two years and the market valued at four to five times that amount.
With an MBA and a decent business plan, the only socially acceptable way to do this was to sell the plan, get funding, build the business, aim for exit, and depart with your conventional 8% as the ex-CEO. The first time a venture capital associate suggested this, we had a verbal fist fight, but it didn’t take me long to come around to his point of view.
What did we do? Our first reaction was that we were sitting on something large and substantial and we should only share in this bounty with others if we could get a really great price and retain a majority stake for ourselves. The only way to keep a larger slice and get a better valuation was to delay funding to a stage where we had customers, revenues, maybe profitability, cash in the bank, a few term sheets in our hands, and lots of VC phone calls to return. That was the general idea.
The resulting focus then from day one was on funding. Update the business plan so that we could get funding; write a better executive summary so that we could get funding; build technology so that we could get funding; attract customers so that we could get funding; hire talent so that we could get funding; generate revenues so that we could get funding. “Get funding” took on a life and mind of its own and became the primary driver, motivation, and raison d’être. Once we had achieved this nearly impossible goal, only then would we be able to take a breather and figure out how to build the planned business with our new cash.
How did the “Get funding” model work? The fundamental component in the get funding piece was the business plan and the executive summary. You lived, fought, died, and survived by the plan. In Avicena’s lifetime, we wrote and updated 56 editions of the plan based on commentary and feedback from investors who had read it. Over two years, that amounted to a new edition every two weeks. There came a time when our four-man team would only work on the business plan and nothing else at all prior to submission of a revised edition to a promising funding or strategic investment lead.
Half of the year before the move to California was dedicated to building a better business plan. The first few months in California were spent revising the plan in-line with feedback received from angel investors and board members. The last few months spent in a frantic search for money were allocated almost completely to updating, editing, and modifying executive summaries, strategic investment proposals, and the business plan.
When I look back at the effort now, I wonder if it was nothing more than a great big waste. If the same effort and intensity had gone into business development discussions, pursuing marketing leads, or more productive revenue-generating activities, Avicena may have been looked back on with kinder eyes.
If it was any consolation, most MBAesque plans, startups, and founders were driven by the get-funding model above: Build the set, hire the actors, create the stage, and in the process burn your own, your friends’, and your family’s nest eggs and any other easy money or credit that you can get your hands on. If you put up a good enough show with the right combination of colors and fire, someone may actually underwrite the real money needed to turn the theatrical and make-believe attempt into a real-life production. Hopefully this angel would arrive just before you ran out of cash and just after your post-launch party. Once the plan had been underwritten by one investor, expectation was that a bunch of them would follow through over the next few years since no one would wish to be left behind if your production actually became the hit of the season.
Unfortunately, that is not how you build businesses or sustainable franchises. Businesses are built from the ground up with resolve, commitment, and values to and for the business—not with funding. The biggest downside was that the minute you figured out funding was not likely, the game was over. Your business was to get funding; with no funding there was no business. Sometimes even if you were fortunate enough to receive funding, the quest had consumed so much of you that there was nothing left to give the franchise you had wanted to build.
When Chescore, Himalaya, and Hiteck passed and Pearson indicated that it would be a while before it would get back, there was no reason to carry on. We had failed to get funding and the game was over.
Moral of the story:
Build a business first. If you do a fine job funding will find you. You are better off not looking for it from day one.