Reality Check.

Sometime within the next 26 days one of four Venture Capital groups is going to hand me a check for $4 million to ramp up BrAnswers.com. At that point every thing will change, because as common wisdom has it ,"Money changes every thing." Well I was never much for common wisdom, so I'm figuring the only thing that will change will be the fact that I will be getting less sleep than I am now and I will have less time to waste on arguments of no consequence.

Nobody doubts that Branswers.com represents a cool enough concept. Even in alpha, the idea that you can get better answers to the questions that matter from your friends and global neighbors than from a Search Algorithm is easily demonstratable.

On one page the answer to the question "How to travel for free?"
takes you from a coast to coast stowaway trip in a railway container train to the fact that if you can find 8 to 10 people who all want to go to Paris at the same time, you get to go for free.

And dozens of other answers to the same question are available on the same page. Not 50 pages down in Google. Not by wading through all of the book pitches and report briefs that offer to tell you how to travel for free for just $49.95. that the SEO boys have stacked in the first 25 pages of your 1,333,827 search results. The idea is not the point. The $4 million check is the point.

When Mark Zuckerberg, the 23 year old College dropout that started Facebook turned down ( the rumor) of an offer of one billion bucks from Yahoo, he claimed the money was a "distraction."   Like everybody else in our world, I marveled that anybody could turn down a billion bucks and keep a straight face. That was then.

Now I understand his point of view a whole lot better. In fact, over the past four days of sweating through code glitches on the mailforms and crashes of the Urchin Webstat servers ( owned by Google) I can understand all too well why having four VCs in various states of readiness to hand over the first four of $12 million is not four options but five. There is also the option to say, "thanks, but no thanks."

And why in the world would I want to do that? Well take a look at the landscape around the vast majority of VC funded start-ups. Those rotting, fetid carcasses you see strewn about are the remains of once high and mighty CEO's who failed to understand the strings that came along for the ride with all of those zeroes had nooses on the end.

Having been paid handsomely during my career to sit next to some of these c-level swashbucklers, I can tell you this, first hand. Running a successful start-up comes down to the understanding of two basic skills--opportunity recognition and opportunity exploitation.  

Either you discover new opportunities or you create new opportunities. Then comes the task of building a company or creating a strategy that will allow you to obtain a profit from the opportunity you created or discovered.

Right now Branswers is involved in the opportunity recognition process. It's been going on for months now and at best, it is a solitary series of events and discoveries.   Now that the site is launched and the opportunity exploitation process has begun, the question of building a team and a viable business over the next several years is at hand.

These activities typically require capital, so one of my key activities over the past few months in preparing for this opportunity exploitation phase has been the identification of capital resources to exploit the Branswers opportunity.

According to PriceWaterhouseCoopers, 3,416 companies were funded by venture capitalists in 2006. These companies reflect a combined total investment of $25.5 billion in US businesses. My little $4 million in start-up capital is just a drop in that bucket to everybody accept the investors who are considering dropping it in the Branswers bucket. They will take it very seriously. In fact, the five year exit expectations of any one of the VCs considering funding Branswers are going to demand that my focus be on rapid growth and profitability.

In short, unless I can promise and deliver the results they are expecting in a relatively short period of time I will more than likely lose favor with my board and investors and face the threat of a change in leadership. Meaning my ass will be O.U. T.

There have been a number of studies done on the reasons that venture investors change leadership in companies in which they invest. These studies have identified three key reasons for CEO dismissal: the CEO did not meet the expectations of the investors and board members; the poor financial performance of the firm; and, the CEO had developed an unhealthy sense of power.

As potential investors, I would imagine that the four VCs stalking Branswers right now intend to spend a significant amount of time supporting and tracking their investments once made. However, when there is a strong bond of trust and confidence in the CEO, the VCs are able to spend less time monitoring the organization and are willing to give up more control to the CEO. Because of this dynamic relationship, venture investors place a high value on the capability of management, and in particular the CEO, when making investment decisions. Thus, there is a commonly held and often stated rule that a VC would rather invest in a Grade A entrepreneur with a Grade B idea and are unlikely to invest in a Grade B entrepreneur with a Grade A idea.

In spite of this rule and the focus VCs place on choosing Grade A entrepreneurs, CEOs are frequently dismissed before the investor exit. The question then becomes, what changed from the early stages of the investment to the stage when the CEO no longer provided the leadership necessary for success? Now you see why Mark Zuckerburg chose not to be distracted and I am seriously considering the telling of these four VC firms to take a hike.

My research on CEO leadership in venture-backed firms suggests that I had better be able to work seamlessly with my board of directors; attract, motivate and monitor my employees; successfully allocate resources; and, actively manage growth. All of that along with stewarding the development of brilliant marketing and the continued expansion of a killer consumer product.

Venture backed companies, because of their inherent growth orientation, clearly must be led by enterprising CEOs in order to reach the profitability typically expected from investors. I've been able to identify through experience, four characteristics of enterprising leaders: entrepreneurial versatility; fund-raising ingenuity," entrepreneurial ambition; and entrepreneurial judgment.

Elizabeth Penrose, in her book, "The Theory of the Growth of the Firm" states that capital is usually as necessary for rapid growth as market demand. Yet, most investors seek a high rate of return on their money and conduct extensive market and other due diligence in an attempt to avoid losses in an investment. How then do new, small and unknown companies raise money, often even before they are proven by the market? Penrose refers to the ability to obtain capital under these conditions as fund-raising ingenuity. According to Penrose, citing shortage of capital as a cause for failure to grow is actually indicative of a lack of fund-raising ingenuity among leadership. Which leads me to believe that my time is better spent on building traffic then on building inroads to the VC community.

And that bit of reasoning is the basis for my reality check at the eve of funding my latest venture. Do I want somebody pushing me towards the door? Or do I just want to keep on figuring out what questions people feel are meaningful and then give them the damn answers. Page, by page, by page, by page.

Stay strong.

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