The smartest person in the room

There is a saying, “if you don’t know who the sucker is at the poker table, then its you.” This should be top of mind when entrepreneurs raise capital. But in a TechCrunch era where capital raised is used to validate both entrepreneurs and their startups, it’s easy to understand why they may be focused on valuation first, contract details last.

I started my career in finance before leaving to start my own businesses. At Deutsche M&A and then private equity, they taught us to believe we were the smartest people in the room and that’s why they hired us. In that room, maybe we were. But in another room, say marketing, project management, engineering, tech, etc… we weren’t. My point is to know your strengths and weaknesses and to be aware when you enter someone else’s area of expertise or “room”.

Why do I bring this up? Startup valuations may be entering a period of correction. This means “down rounds” [lower valuation than previous round] or sale of the startup below its last valuation. This typically means a haircut [less money] to employees and founders first, investors last. I am not an expert on capital raising. But when you raise more money than you sell for [recent example Gilt, sold for $250mm, raised $270mm], then a lot of employees and most founders go home disappointed. Investors are disappointed too, but take their money out first.

There is nothing wrong with this structure. He who holds the cash, writes the rules. But I do believe transparency about contract details should extend to employees. As I am learning from others, it doesn’t always.

As a startup CEO, raising money is often the hardest strategic decision to make. Whether to do it, when, with who… My background in finance led me to actually not want to raise money, which surprises people since it’s an area I probably knew most about when starting. And while I grew slow and missed some validation, it’s been the single smartest decision I’ve made.

See finance doesn’t prepare you to be a startup CEO, experience does. I learned on the job. And luckily I learned and pivoted quickly. Not focusing on raising capital or having to explain pivots to investors sped this up [the lean startup]. I have two profitable businesses (ShirtCycle and ConnectLAX) and while a strategic investment is always on the table, it’s not the first thing I focused on when starting.

A lot of my friends in finance think it is. I left finance to work for myself [and find a beach with no cell service], not someone else. If you raise more money than you’re valued at, then you’re working for someone else, your investors.

Just like at a poker table, you don’t want to put all your chips in on the first hand. See a few hands, get a feel for the game, get to know your competition. I’ve seen competitors put all their chips in before getting market validation. [TheLocker spending their funding on TV ads before proving their business model].

You can succeed as an entrepreneur, just remember your first hand may not be your best so don’t overplay it.