Looking Beyond VCs
My wife owns two wedding boutiques—one in Charlotte, North Carolina, where we live, and the other in Raleigh. The Charlotte store did fairly well from the start, but the one in Raleigh did virtually no sales in its first six months. My wife felt frustrated, because she was too far away to know what was actually going on. I was able to develop a software program that would let her manage the store remotely. Sales in Raleigh more than quadrupled after we started using it there. When we installed it in Charlotte, annual sales there increased 29 percent. I figured other wedding stores might want to try it and signed up the first three, at $99 a month, in January 2010. Today, we're adding three to five customers a month. I know I need help, and I found a venture capitalist who seemed excited, but I haven't heard from him in three weeks. Now I'm wondering if I have the right VC. How do you know?
— Shannon Johnson, founder, Dresstracker.com
Charlotte, North Carolina
The solution to any problem begins with asking the right question. I suspected Shannon was asking the wrong question. He should have been asking himself whether he needed venture capital at all. "Do you understand the food chain of raising capital?" I asked. "The more speculative your concept, the more you give up. Venture capitalists generally invest in highly speculative concepts and demand a large share of the equity. You have customers, which means you have more options—and can get better terms—than someone who has only an idea."
I suggested he think first about how much money he needed and what he was going to do with it. "The answers will dictate whom to go to and what to ask for," I said. "Forget about whether you get the money from a bank or a VC or a group of investors."
It turned out Shannon already had an answer. He wanted someone to buy Dresstracker. "In that case, you're almost certainly going to the wrong guy," I said. "There are businesses that specialize in partnering with or acquiring companies like yours. You don't need a VC to find them." Shannon said that, in fact, he did have one customer who might be interested. "There you go," I said. "And if he won't do it, he may know someone who will. But whatever you do, don't let yourself be dependent on one guy who may or may not call you back."
Please send all questions to AskNorm@inc.com. Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book, The Knack, is now available in paperback under the title Street Smarts: An All-Purpose Tool Kit for Entrepreneurs.
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