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Thursday, June 26, 2003
Ng: Understanding venture capitalists
By WILSON NG
WIRED DESKTOP
START SMALL. It was about 10 years ago when I started my own software company. We started the business just like the Asians have always done business. Start small, grow every year, provide for the family, until hopefully one day, you can give the business to your children.
I guess it is not strange to people here that 10 years after founding the business, I am still managing it. And probably, 15 years from now, I may still be managing the business.
Around eight years ago, we started doing business with American companies and got introduced to several venture capitalists. They introduced me to the American way.
The whole game was that all it takes to be successful is a great idea or a great product. And if you had that, venture capitalists would be showing up to fund you.
Later on, we would all be awestruck by the Internet craze and about the wild success of people like Jeff Bezos of Amazon.com, Jerry Yang of Yahoo, or Marc Andressen of Netscape, or Internet businesses like toys.com, garden.com, hotmail.com, webvan.com, etrade.com.
There were stories of techies who had no more than a wild idea to present, wrote the idea on a restaurant napkin during the meeting, and walked away with $2 million in investments.
DREAMING. I guess during the wild late ‘90s, the dream of every techie was to get funded. And a few months after getting listed in the exchange, they would retire in luxury.
Over the last two years, since the Internet collapse, these kinds of things happening is now almost next to impossible. But I guess old habits and dreams die hard. I know of techies who still continue to dream that one day their VC knight in shining armor would come along.
But there is every reason to think that there is very little chance of this happening in the Philippines—mainly because we don’t have the mass or infrastructure or the people with such wild money to make it.
GAMBLERS. You have to understand the mentality and thinking of venture capitalists. VCs are what you would call, for lack of a better word, big-time gamblers. They go for risk, and for taking the risk, they hope to win big time. They are not interested in a sure-fire investment that will give them a 20 percent return every year. You would probably get a yawn if you said you could double their money in five years.
They are interested in investments that will give them a 100, 200 or even a thousand-fold appreciation in just three years, much like ebay or Netscape did. VCs expect that nine out of 10 companies they invest in will fail. But the returns of that one company that might succeed will more than make up for the losses of the others.
So in short, they are not interested in your going the speed of 60. It is either you go the speed of 500 and hope that in one of your trips you get lucky, or you die trying.
So during the Internet bubble, you saw these companies simultaneously hiring programmers, marketing people, advertising, getting office space, and going from two persons to 100 persons in four months trying to speed things up.
But probably for every entrepreneur that we read about that made it, there were dozens of others
who crashed.
One Internet company executive was told that he could have been a great success if he had taken the time to do it right rather than spectacularly failed. But he said he could not slow down, because the investors expected him to move at that speed. He could have made a great company that earned 30 or 50 percent a year, but that was not what they had expected him to do.
Next time you have a great idea that will earn good money, keep it to yourself. But if you have a wild idea that only has a 10 percent chance of success, but can really win big-time money, then see a venture capitalist.
The Internet has changed everything—except the business rules. The best way to succeed is still to get happy customers. Do you know of any other way?
(Wilson welcomes comments at wilson@esprint.com.)
(June 26, 2003 issue)
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