Myth 3: Smart Money Makes You Smart
REALITY CHECK: Smart money doesn't come unless you're already smart
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Then Cliff Young was getting ready to launch his own Internet service provider, he says, "I was looking for capital, like everybody else." He was also looking for the right investors. Smart investors.
Young, a former real estate developer, thought the right venture-capital firm would provide just the expertise he needed. It was 1995, and venture firms pouring money into Internet start-ups were priming their fledgling investments with insider advice and powerful contacts. "It was well known that VCs invested in high-tech start-ups and added a ton of value," he says.
Young drafted a detailed business plan. By the beginning of 1996, it was making the rounds. "I contacted a bunch of places," he recalls. "But venture capitalists receive thousands of business plans a week. It's very difficult to get their attention if you're not already on your way. With just my business plan in hand, it was hard to get even a return phone call."
Elite firms like Benchmark Capital and Accel Partners never responded to Young's persistent queries. Even middleweight firms ignored him. "The only person who ever returned my call was a research associate at Hambrecht & Quist," Young says. "He said it wasn't in their area of interest."
From that point on, Young decided to forgo the extra value VCs could bring, and build his company -- InternetConnect Inc. -- using any cash he could get. If he could grow the Marina del Rey, Calif., business somehow, it would become more palatable to smart VCs and he could approach them again.
Young hooked up with a well-connected vice-president of finance who helped to raise $1.5 million from 65 "completely passive" angel investors. The early, undercapitalized months of the company were difficult for Young, who felt hamstrung by his lack of resources. But low cash had a benefit: it forced him to concentrate on the most underserved segment of the ISP market (selling broadband service to small companies), which turned out to be very profitable. "One of the benefits of going a bit slower in the beginning is that you don't blow all your powder before you know your business," he says. "A lot of companies in my industry got funding and grew quickly and then realized that their margins were too low. They ended up going out of business."
InternetConnect did well, posting revenues of $500,000 in 1998. In April 1999 the smart money finally came a-callin'. Young was contacted by Bob Hoff of Crosspoint Venture Partners, in Irvine, Calif., and Matt Mochary of Spectrum Equity Investors, in Menlo Park, Calif. Young met first with Mochary, and at the end of the meeting he had a term sheet from Spectrum. Crosspoint also invested. The two firms gave Young $20 million, and Hoff helped him recruit an experienced CEO. "This gives us the opportunity to really turn on the gas," Young exults.
"Venture firms in Silicon Valley don't fund ideas; they fund people," says Mochary. "If you aren't a person the firm knows as someone who has already created a whole lot of value for them or somebody they know, then you're unlikely to get funded. If you do have a good idea, then build, it and companies like mine will come to you."
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