Worth the price you pay? Raising money: If your search for venture capital feels like it's getting out of hand. Maybe you don't need their money after all

Entrepreneur, Dec, 2001 by David R. Evanson

IF I CAN PREVENT ONE PERSON FROM getting involved with venture capitalists, then I have done a good deed," says Raj Gol. "The fact is, entrepreneurs and VCs don't mix."

If, at the tender age of 30, Raj Gol sounds like he's a scarred veteran of the entrepreneurial battlefield, that's because he is. Gol has been in the IT consulting business since he was i6 years old, and he formally established his current company, New York City-based Brainlink International, in 1994. "We were here long before the dotcoms," he says.

As the IT world morphed during the late 19905, so, too, did Brainlink. It wasn't surprising, then, that in late 1999, when the company was positioning itself as a "broadband provider of DSL services," that Gol, like everyone else with the word "broadband" in their corporate curriculum vitae, started to hunt around for institutional venture capital so he could capture what was certain to be an expanding market.

What makes Gol's tale such an instructive one for capital-hungry entrepreneurs is not that he succeeded or failed--or even how he succeeded or failed--but, more important, why he decided to stop the process before it was completed. Gol's gut told him he wasn't going to succeed in his quest and that even if he did, the time and energy he would have to spend on it before he found success would far exceed the benefits he would ultimately derive from institutional venture capital.

Stop Signs

What did Gol experience that made him put an end to the search, and how can those experiences be used as signposts to warn other entrepreneurs to turn back from the road they're on? Remember, it's not that institutional venture capital is bad per se, but more accurately, the process of acquiring it may not be worth the effort for certain businesses. Watch out for these signs, and be prepared to turn back.

1. Constant requests for changes to your business model. When Gol went calling on venture capitalists, he says, they all had things they wanted him to change in Brainlink's business model. Changes to your company's business model need to be given some careful consideration. Sometimes change can be a good thing. After all, investors' opinions should be viewed as market forces capable of shaping and changing your company into something that can be financed. You may also be attracted to change your business model because it appears to be such an easy thing to do; you simply have to revise certain parts of the business plan. But it's living with the changes in daily operations that can be quite challenging.

Therefore, if investors are giving you constant requests for change, you can take it as a good indication that making further efforts to curry their favor may be a waste of time. The truth is, investors aren't always right about what needs to be changed before a business can take off. As Gol says, if the prevailing thoughts you get from investors are counter to your own, and you're unwilling to give them what they want, it's a sure sign that you've made a turn down the wrong path. Pressing on faster or more furtively doesn't get you back on track any faster.

2. Control issues. Gol says another clue that the jig was up was that investors increasingly came to him seeking more and more control of the company. "One guy offered me $250,000 for 6o percent of the business-the nerve!" he says. So for all Gol's efforts, what was supposed to be a process of shopping around for the best deal--a timehonored tradition in any realm--was delivering deals that were growing more and more unattractive to him.

There's a market mechanism at work behind Gol's experience that entrepreneurs would do well to understand and heed. Specifically, industries or business segments get priced by venture capitalists according to the risks they offer. The higher the risk, the more control the investors want. Accordingly, one way you can interpret increasing demands for control of the company by investors is that your business model or segment is either unproven or generally out of favor, and attempts you make to raise capital against this prevailing mood may prove fruitless. In Gol 's case, there was a lot of excitement surrounding the DSL market, but not a lot of proven success. Given the trouble big telecoms have had with DSL services, it looks like investor skepticism was on target.

Consider in this light a content-driven Web site that depends on advertising for revenue. Could the company raise money in today's investing climate? Perhaps, but investors would want to own almost all the company because of what are now the known risks of such a business.

3. The "huh?" factor. Gol's instincts told him it was time to fold up the tent and go home when he had to reeducate every investor he met about the business. Says Gol, "Each conversation I had was more difficult that the last."

And again, like the control issue, entrepreneurs need to be aware of what's lurking behind the behavior. Specifically, venture capitalists are adventurous only to a degree. They are typically not pioneers, but more accurately financiers of emerging industries where "emerging" means there is clear evidence that something big is afoot. Accordingly, if you are continuously explaining what your business does in the most fundamental, basic terms to glazed eyes, you maybe laboring in a business that has not yet sufficiently emerged to attract funding from institutional venture capitalists.