SMB beef with VC

My head is spinning from all the amazing conversations I’ve had this week and I wanted to offer a bit of an explanation regarding my animosity towards VC involvement in the SMB space. As I hinted previously I am working on building another business and have had the “pleasure” of spending some time with the attorneys and consultants that specialize in the financial world. On one hand I’m incredibly thankful these folks exist, on the other hand it makes me long for the good ol’ days of $500/hour IT and corporate law attorneys charge. Yes, my butt hurts.

And on the subject of anal rape, why the hate towards the VCs? First of all, I don’t have a problem towards the model itself – venture has a place in the world helping larger companies get even larger, helping fund projects banks would otherwise refuse to undertake, helping finance complex deals and provide the means for all sorts of debt reduction, leveraged buyouts, etc.

Which in short is the exact same reason no small business (let’s say under $100m) should ever deal with one. But don’t take my word for it: Go talk to someone that has taken funding without a clear exit strategy that involved the IPO. What they will inevitably tell you is that even though the VC typically steers away from day to day, they shackle the kind of big picture and strategic moves that help small companies make it big.

But how could this be? Isn’t it common knowledge that VC is the very fuel that helps companies grow in the first place? Yes. Big companies. That you can count on your hands – the rest of them are in essence private money that is putting the money on either red or green and only hoping for the ball not to land on black. They’ll take losses and they’ll take big wins but nothing in between works. You can’t just build a highly profitable business with a long term strategy: You have to blow it out of the park so they can either win big or cut their losses.

Now that you know..

What is the lifecycle of a funded company that doesn’t go public?

Well, they’ll let it ride forcing big moves and expenses. While the illusion of grandeur (most of the time a delusion) makes things look amazing the course is to make even bigger and bolder bets.

But once things slow down a little, things get ugly. The employees that are working below their market worth get antsy because they want to be bought out. Things are always on track, everyone is winning (except the employees) and you’re just one step short of retiring to your own private island. But then your boss starts getting really interested in your expense report. And your hours. And your conversations. And increasingly trivial big projects while the costs are cut left and right. How can a company be blowing up big time and at the same time selling it’s Aeron’s on Craigslist? Because it’s being gutted, books cooked and working towards being served to a scrap buyer that might make more with it than the sum of it’s parts.

While this may sound ugly and heartless, this is the norm and this is the process. These folks aren’t evil, they are after returns. I ain’t mad at them.

But the part I don’t like is when a small company, who let’s face it lives or dies on the passion of it’s founders, is shackled and distracted towards someone else’s agenda. This is not VC’s fault: they aren’t funding you to believe in the magic of your dreams. It’s more of a steroid shot.  

Borrow money from the bank: It’s your name, your credit, your decisions, your call all the way. But get taken over by the VC and well, for the convenience of not having absolutely assessed risk you are trading away your ability to control your own destiny. Yes, even if you own 49% you’re still a minority and now you work for whoever owns you.

That is my beef with the VC world: People do business with people. And when that trust is broken and it’s a matter of customer vs. logo and everything else be damned, the small business and innovation loses it’s spirit and it’s potential. I have seen so many friends and so many great business and ideas get ruined in this process.

And it’s that process of killing a successful long term business that I mind the most: When people take a shortcut that both mathematically and business-wise leads to a fundamental change in the values. Because people aren’t throwing money at you to keep on doing what you’re already doing well, they are doing it to maximize the leverage and get their returns to grow faster than they would than if they gave you a loan.

Money is simple that way: It just wants to make more money.