Looking for venture capital? Be careful what you wish for
Start-up founder Wendy Nguyen on stage at a TechCrunch conference. Nguyen initially had trouble finding venture capital funding for her app, HealthyOut. No longer.
The amount of venture capital money being pumped into start-ups is at its highest level since 2001, but it’s still nowhere near what it was like at the heyday of the tech bubble era. Raising money is hard to begin with, and it’s the lifeblood of a new business. On the other hand, you also have to be careful what you wish for. If you are one of the lucky companies who makes it to the level where big investors want a piece of you, then...you have a whole new problem to think about.
Wendy Nguyen and a couple of friends founded HealthyOut, an online and mobile app to help people find healthy restaurant food. As Nguyen puts it: “We want to get people healthy restaurant food in two clicks, to make that choice really convenient and easy to do every day."
Two years ago, Nguyen went from investor to investor trying to get money to make her dream happen.
“Everyone says ‘maybe’ and ‘comeback later’ ... which is actually a 'no'.”
Eventually, Nguyen and her friends boot strapped, a.k.a. they used their savings and built the app themselves. It did well – very well, in fact – and investors started to notice. HealthyOut ended up raising $1.2 million.
While this was the break Nguyen desperately needed, for many businesses, it’s a moment that is fraught with tough decisions.
“Venture capitalists exist ultimately for one reason – to make money for their limited partners,” explains Josh Lerner, professor at Harvard Business School. “The only way to make money is to exit their investments.”
That translates to selling their stake and/or the company as a whole. So that could mean a startup company goes public one day. It could also mean the company gets packaged up and sold to Google or Yahoo, who may or may not actually do anything with it. It could mean changing a company’s target market or even fundamental things about what the company does. If the startup and the major investor aren’t on the same page with all of this, it’s not good.
“The greatest fear is you pick wrong. And that venture firm, because they now have a large say in your company, directs your company in a direction you don’t think is right,” says Matthew Amsden, who helped start Proof Pilot, an online tool to launch and manage clinical trials and longitudinal research studies.
Amsden is quick to add that any startup should be so lucky as to have the luxury of choice.
All the same, getting money means giving up control, so when Amsden talks with investors, he tells them, “It’s dating, frankly. Getting investment is like dating. You’re looking for compatibility.”
Which means finding an investor with expertise in your field, whom you can trust as a mentor.
“It’s not only about the check,” says Amsden. “What else can that particular investor bring to the table?”
And, just like in romantic dating, matches don't always go well. Helena Plater-Zyberk is the CEO of SimpleTherapy, a company that designs online exercise therapy for people who can’t get to a clinic. She recalls instances where “I’ve been asked within the first two minutes of meeting someone what my endgame is.” In other instances she’s been “very pointedly told that the conversation doesn’t need to continue unless I have an exit strategy up front -- before they even understand what it is we’re trying to achieve and who we’re trying to help.”
Of course, sometimes the company founder really does need to rethink things. Like in relationships, they often have to ask, “am I the crazy one?”
Katie Rae, a veteran entrepreneur and chair of TechStars Boston as well as manager of a small venture seed fund called Project 11, says founders who haven’t gained a certain amount of perspective are likely to end up facing challenges getting the right funder. “Lots of teams hold back what they’re working on for a long time before showing people,” she says. “In my experience, the best founders don’t share with the public, but they do share with knowledgeable people their point of view, how they’re thinking, show them the product, and get active feedback.”
“If you don’t talk to smart people, that’s a very tough mistake – it slows you down, you don’t learn as much, you don’t get as much feedback from smart people who would send you in a slightly different and better direction. They sometimes get funded by the wrong people with a very strong point of view opposite from your point of view.”
In other cases, a startup’s founder may not have the background for approaching investors. That was the case for Helena Plater-Zyberk’s company, Simple Thearapy. She’s serves as the CEO, but she wasn’t the original CEO.
“Our service wasn’t conceived as a money making endeavor,” she says. “Our team of doctors created these therapeutic exercises as a result of patient need.”
In other words, the doctors were thinking about patients, not how to grow the business. Which is why Plater-Zyberk was brought in as the new CEO. “We want to be able to balance that type of value system with the needs of an investor who is looking for a return in a set time frame; It’s a difficult conversation to have," she says.
It’s a conversation that Wendy Nguyen, with the Healthy Out App, had to have as well. Before landing the big the $1.2 million investment, she had to answer big questions for investors with big expectations. “Are you guys going to be a $50 million company in five years? Because that’s the type of return that a venture capitalist is looking for,” says Nguyen. If you’re not prepared to go big, then go home. Or at least to a smaller investor than a venture capitalist.
Nguyen thought about it, and considered the fact that the money would cost her a degree of control over her company. She trusted her funders, “and so we said...let’s do this!”
Nguyen and colleagues in New York with former Mayor Michael Bloomberg.
HealthyOut is expanding its model, branching out to help people design personal detox diets now, and is trying to bring its ordering service beyond New York City.
As with all startups, it’s not just about the idea, and it’s never just about the money – it’s about where you get the money, and what you do with it.