Raising Venture Capital in Seattle for Judy's Book: an entrepreneurs' perspective on dilution

Date: July 7, 2004
Today I'm sitting in the waiting room of Ignition Venture capital in Bellevue, WA. This is the venture firm that consists of primarily ex-Microsoft guys. I'm waiting to pitch my hot new "local search" start-up idea -- Judy's Book. I arrive 15 minutes early. Venture capitalists don't like tardiness. I'm feeling confident. I know I'm going to get a term sheet as long as I don't blow it. An hour ago, I met with an angel in Seattle who said he'd invest up to 200K -- if and only if I decided to do solely an angel round. He told me that his model is to invest in companies that solely do not take money from those "thieves". His perspective reinforced my own internal debate about the investor syndicate I'm forming. Should I take venture money? I know I can close an all angel round today for 1 million dollars.

The debate about venture money comes down to two things in my opinion. First, Ignition has clear technical and operating expertise that other venture capitalists don't have. Second, venture capitalists in general offer risk reduction. For Judy's Book, risk reduction comes in two forms -- first venture money allows us to raise more money in this round -- instead of raising 1.0 million we could raise 2.0 million dollars. This extra money may provide us with the extra time and roadway to get to a successful exit. Second, the venture money in general provides us with financial coverage in the event the company goes sideways and we need additional funding but don't have the success that we hope or anticipate.

That said, venture capital comes has its costs. There is the financial dilution that occurs -- and with venture capitalists -- it's expensive money. Arguably, more expensive than financing that comes from customers -- i.e. that would be sales and revenue. And, even more importantly, and certainly less discussed in public -- is the potential for "founder passion" dilution. This emotional dilution is impossible to quantify -- and varies widely with the emotional fit between venture capitalist and entrepreneur. In the case of venture capitalists I've worked with before it's easy for me to assess this dilution and have it be a non-issue. In the case of Ignition, a firm that I haven't done a deal with before -- it's harder for me to assess.

Time will tell.