Thanks for the excellent advice. I was just out in SF doing some due diligence on the company. (I happened to be out there.) I met with the CEO, who is smart, but young. (Not unusual for Silicon Valley, I guess). He seems to be a big picture/ideas guy, and lets the numbers be handled by others. Even though he has an MBA, I threw around some financial terms, and he seemed not so conversant. That worries me a bit since I'm the amateur and he's supposedly the pro. His value is this, though: he's a great seller. When you sit down with him for a half-hour, you can't help but be excited by the product. It demos really well too. I can see that potential website partners and VCs may be drawn in by him and his energy.
I've run my own bottom line analysis: If the company goes public (i.e., a real IPO with all the Wall Street underwriters and bells-and-whistles), I'm virtually guaranteed a big payday, and I can quit my job. If it never makes it to IPO, then I lose a nice chunk of money.
What's the likelihood of making it to an IPO? On the positive side: (1) they have an action plan that gets them to IPO in 12-18 months; (2) they have a product in beta, with a product launch in this year; (3) they have partnerships inked which will make revenue once the product is launched; (4) they are already talking to VCs; (5) they've already raised a couple of million on their own; (6) their product is unique and has no current direct competitors.
On the negative side: (1) there is no guarantee VCs will show any interest; and if they don't, this company is dead in the water; (2) the business plan is wildly optimistic; I read an article about internet analyst Mary Meeker who was commenting about the arrogance of internet startups and their pie-in-the-sky business plans; this company suffers from that; (3) the management team is just OK; it has a mix of smart young people and experienced middle managers, but no superstar attractions to hook a big-name VC; (4) the business is not capital intensive, so they are not seeking a huge VC investment; that may turn off the big players like Kleiner, Perkins which don't want to invest in small players; (5) there is significant market risk in the internet market; will investors have the appetite for internet IPOs in 12-18 months; (6) In the future Microsoft or Yahoo may attack this particular market; while this is not a short-term concern; it may scare off some VCs.
The positives and negatives are fairly well-balanced. What I run through my mind is the scenario when the CEO walks into the offices of Kleiner Perkins and after making the pitch is told flatly that they are not interested. Is the company prepared for that eventuality? The honest answer is no. They are banking on getting a big investment from a "brand-name" VC. If they can't get in that door, they don't have an immediate way to the IPO. The company really needs to create a "buzz" and an endorsement from someone is right now the only viable option. That being said, in the end, I think I'm going to make this investment, with the understanding what I really am doing is the equivalent of buying a lottery ticket--albeit with significantly better odds. If I have a 1 in 5 chance of getting back 20 times on my investment and a 4 out of 5 chance of losing it all, I'll take my chances. Call me foolish.
Doughboy. |
