I recently met with a potential new client. The two entrepreneurs have a great business concept, and some real “traction” (a word upon which I have commented before) in the form of actual repeatable sales. This is one of those good ideas that, once described, seems so simple and obvious that it makes you wonder why you didn’t think of it. The margins aren’t software margins, but they are close, and the addressable market is deep into the hundreds of millions. 

Like everyone else, they need money to support execution on the plan. They don’t need much: $1 million initially and perhaps another $3 or $4 million later on. They have many blue chip (read fortune 500 customers), and the business is potentially bankable. But, try to get money out of a bank these days. They are certainly going to try the banks, and I will point them in the direction of a couple of the usual suspects.

As is often the case, the conversation turned to VC money. Just like banks, try to get money out of a VC these days – it is hard and expensive in terms of valuation (equity give up). Having talked about financing and other things for a while, they asked a simple question that clients rarely ask: What would you do?

My knee jerk reaction in another time, or for another business, might be “talk to some VCs,” but valuations for very good companies seem to be mindbendingly low in this environment. The trade off might be find a VC and try to shorten the time to an exit (should there ever be exits again) or bootstrap and run the risk of taking longer to get to an exit. If you have a business where there are significant barriers to entry, the risk of a longer run to an exit seems lower than if competitor can enter readily. Consider what you will have to give up to an investor and what you think your eventual exit value might be. By the way see "Founder Dilution -- How Much is Normal" on Fred Wilson’s blog and the links he has posted there. There is a big difference in having 10% of the company at an hundred million dollar exit in two years and having 50% of the company at an hundred million dollar exit in five,six or seven years. Consider that it is a rare funded company that gets to an exit in two years. So, you could be looking at 10% of an hundred million dollar exit in five years (or more).

Also, once you have professional investors you cede a high level of control to them. That may or may not be important to you, but you should certainly consider it. The flip side, of course, is that a good investor brings a lot of intangible value along with his or her cash.

All things considered, if I thought I had a lock (or as close as one ever gets in business) as this client does and I didn't need a ton of money, I think the slow road looks more profitable. If you need a ton of money, then you may not have any choices.  But, the more money you need the more dilution you will have to suffer.  This means you have to have a huge opportunity to hit the returns this client will get on a smaller deal.  These dynamics could really undermine the VC model because the stronger companies will figure it out and look for alternative routes to develop their businesses.