Friday, February 18, 2011

Is venture capital better than VISA?

My first company had phenomenal investors--VISA, Mastercard, Bank of America ... Actually 37 credit cards in all, and it was great because you got sweetheart rates for 6 months as you swapped balances ... no really ;-)

Why was that? Well, I had no idea how to raise money, I had never heard of venture capital, and I certainly had no idea what an investor would want to see to fund me. Actually, I also had no idea who would buy my product, but I was certain I had invented something revolutionary ... if I could just figure out who cared?

Now I wasn’t stupid, I had searched for and found a smart partner who understood the laser business and we co-founded the company. He dealt with all the business crap, and I focused on solving the technology and building the product. The problem is, that neither of us really understood what the market was for our product. So as the number of credit cards increased, and the credit card debt scaled up towards $250,000, I realized that the problems weren’t technical per se, but rather financial ;-)

We ended up selling stock to some friends and family, and that helped but also increased the stress and worry around not losing their money in addition to personal bankruptcy. As things were getting worse, we had a visit from Milton Chang, and he gave us an epiphany about our business.

He spent time in my basement in DC surrounded by used lab equipment and even more used furniture, and spent the day talking about what was missing in the business, which included the fact that we didn’t actually have a business. Milton saw several things he liked, and I came to learn that these were his classic tells for a good investment (Milton went on to invest in 27 companies, generating 5 IPOs, 10 great trade sales, and no losses – his stats are off the charts even compared to the best Silicon Valley VCs).

He saw a passionate engineer, focus on putting every available penny into making the product, cheap rent (my basement), no salaries (everyone worked for equity), and a genuinely revolutionary piece of technology in the solid-state green laser, or the "green diode" as we called it (because its beam quality was about as crappy as a diode).

It took Milton about a week to come back to me with an idea to merge our company with one in California called Iris Medical. It took a year, me taking over as CEO, a lot of stress and angst for a lot of people. But when we put great engineers and inventors together with great sales and marketing, we got a great result: Iridex and a NASDAQ IPO.

We literally went from bankruptcy to success (albeit over a couple more years), and the original investors in Light Solutions got their cash back and also kept their stock, so a nice double return. VISA and the other cards got their money back, plus interest, and everyone was happy.

So was VISA better than VC? Well, it certainly attracted Milton. He couldn’t believe we were committed enough (read stupid) to take this level of risk to back our idea but it clearly showed we believed in it passionately. He didn’t like our idea of skin in the game, because it was too distracting and made us make short term tactical decisions rather than strategic ones, but it wasn’t a bad place to start.

VISA gave some good advice: pay your bills on time or we’ll screw you--perhaps some similarities to VCs with respect to milestones ;-) What amazed me most about Milton was despite not really understanding our market specifically, he understood it well enough generally, and 80% of our issues were common to all startups and he understood those better than anyone I have ever met then or since. The power of a committed investor/partner who is aligned with you and willing to give you the time and advice you need is invaluable--it's worth far more than the money, which as you have seen can be gotten almost anywhere.

A lot of us worry about giving up too much equity for investment, but old school entrepreneurs worry about losing the money, and old school investors get their hands dirty standing shoulder to shoulder with the entrepreneurs to help them not only not lose the money, but to use it to make more. If you are worried about dilution, VISA is much better, no dilution, but for God's sake don’t lose the money ;-(