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A peek into the inverted world of venture capital: “Business plans are overrated, and profits perhaps even more so”

Infections Greed:

VCs are professional nit-pickers. Give them something to find fault with, and they’ll do it with abandon. I generally tell people to come to pitch meetings with less information rather than more. Sure, you’ll get pressed for more, but finesse it. Presenting a full and detailed plan is, nine times out of ten, a path to a “No” — or at least more time-consuming than having said less.

Profits are a different issue. Being profitable too soon gives investors, rightly or wrongly, an idea of what the margins are on the business, as opposed to what they could be in some perfect world. As a result, it takes a mighty force for them to not start wading in with discounted present value worksheets, and the like, thus hammering your valuation and generally making funding much more complicated (and equity consuming) than if you were wildly unprofitable.

How could a story like this not have a happy ending?

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  • 1 comment

    1 Comment so far

    1. Michael Cook July 28th, 2007 7:56 am

      While this is an overly simplified version of what VCs really do, I think it is important to note that VCs remember the sting of the Internet bubble.

      On the other hand VCs expect 1 in every 10 deals to be huge, 5 in ever 10 to be ok, and the rest to fail miserably. The Redfin story has some allure to it, but certainly needs some tweaking. I am not as certain as the rest of you that it is doomed to failure, but I dont think I would be jumping on the money train.