Yes, this blog post is going to piss off somebody. Specifically, the guy who wrote me this email.
But, it will provide a good lesson for everyone else’s. So it’s worth posting.
So, here’s the story.
I received an email last week from an entrepreneur (let’s call him Mike)
Now to begin, I was pretty impressed with Mike since he used a nice technique to get his email in my inbox (due to the volume of emails I receive, they are screened by others before they get to me).
So, Mike tells me he wants to raise a first round of venture capital based on a $100 million valuation.
Now, anyone who knows anything about venture capital will literally laugh when they read a line like that.
Why? Getting a $100 Million valuation is impossible for a startup. In fact, getting above a $10 Million valuation is also virtually impossible unless you have at least some traction (e.g., you have customers).
I mean it took YEARS and millions of members before Facebook commanded a $100 Million valuation.
So, I told him he really needed to understand how financing works, because I had realized he had never raised significant outside funding for a startup before.
He agreed and was willing to pay my $700/hour fee for a 2-hour consult. However, his law firm had created a non-disclosure agreement (NDA) for me to sign before we could start. So, I reviewed the NDA.
And I found the NDA really couldn’t be signed. Even though I would never tell anyone about his idea, it didn’t have the standard clauses the NDAs need, like a clause specifying the term of the agreement (in his agreement, I was basically to hold his information confidential forever).
So, what really peeved me about this, was his law firm probably charging him hundreds of dollars for this totally useless document. I mean nobody worth talking to would sign it. In particular there is NO WAY any VC would sign it.
(This post by Brad Feld, which references a Guy Kawasaki post, explains why VCs don’t sign NDAs – https://feld.com/archives/2006/02/why-most-vcs-dont-sign-ndas.html Note that Brad and Guy are two of the most widely respected VCs in the world. I’ve been fortunate enough to have interviewed both of them and they are both brilliant.).
Now, I told Mike that I would sign his NDA if he put in some standard NDA clauses (like a time restriction). To this he replied that his attorney advised him that my requests showed that I did not have his best interests in mind.
So at this point, I’m pretty frustrated that I’ve wasted my time with this entrepreneur.
Now, if I had the opportunity to give Mike the 2-hour consult, I would have explained to him how venture capital really works. And how most likely, the chance of him raising venture capital with just an idea was zero. And how, there’s no way he would have received a valuation above $5 million. But…I also would have told him things that he should have been doing. Like raising angel funding (where he might get them to sign an NDA). Like getting customer traction. Like building an advisory board. These are all things that transform ideas (which by themselves have basically no value) into companies that have multi-million dollar valuations.
And that advice would have been worth well more than the $1400 I would have charged.
Since it would have saved him hundreds of hours going down the wrong path (mainly knocking on VCs door, ALL of whom will reject him).
And it would have saved him thousands of dollars in legal fees. I mean, the legal firm he’s working with should be ashamed of themselves. Having a startup entrepreneur paying fees to develop an iron-clad NDA that no one will sign (when there are thousands of standard NDAs which would work fine for non-VCs). And the law firm, I’m sure, charged again to review and reject the NDA suggestions I made.
Note that law firms are absolutely critical to the success of entrepreneurs. But you need the RIGHT law firms. Ones that know what they’re doing and understand the needs of entrepreneurs. And if you’re in the tech space, you use a law firm like Wilson Sonsini. Note that I recently referred an entrepreneur to Wilson Sonsini’s NY office and for modest fees, they have provided tremendous value to him.
So finally, the big lesson I want to give you is this…right now you are at a certain point in your business. Maybe you’re at the idea stage. Maybe you have your first customer. Maybe you have $1 million in revenues. Maybe $5 million. And so on.
Find someone who’s at the next level of success. So if you’re at the idea stage, find someone who has their first customer. And if you’re generating $1 million in revenues, find someone who’s generating $5 million. Etc.
Since that person has successfully overcome the challenges that you are facing now.
They can tell you how the game is played. So find them and ask them to be your mentor or advisor.
Mike doesn’t know how the game is played. And as a result, he has ZERO chance of success. And he’s going to spend (waste) his time and money doing the WRONG things. And if he had a mentor or friend or coach who was a step or two ahead of him, he would be told the RIGHT things to do. And his chances of success would skyrocket.
So that’s the lesson for today — find and get a mentor; it will save you tons of money and allow you to be much more successful!
I thought I’d be less frustrated when I finished writing this. But now I realize that I’m even more worked up. Fortunately we have a treadmill in our office, so I’m going to go for a run now…
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