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The 3 Secret Agreements You Make When Accepting Venture Capital | Dan Martell

The 3 Secret Agreements You Make When Accepting Venture Capital | Dan Martell


– To raise or not to
raise venture capital, that is the question I’m
going to address today. It’s something that I’ve been talking with thousands and entrepreneurs. You know, I don’t know if
you guys know my story, but I built five companies,
sold the last three and the last two were venture backed. I had raised capital for those companies and I learned a lot. I learned about what
to do, what not to do, how to think about should
raise or should you not and that’s what I want to
share with you guys today. The first time, when I
moved to San Francisco to just kind of discover what was possible and then I started a
company called Flow Town and I realized I want to
raise venture capital. The big reason and motivation
for me at that time was I’d never done it. I’d built another company
prior, grew that, sold it, and I wanted to learn
about venture capital, about taking other people’s
money to help fund your growth. That was honestly the main reason. I remember talking to
my co-founder, Ethan, and I said to him, we
had built the business to 20,000 a month in revenue. We were profitable, kind
of ramen profitable, and we had to make that decision are we going to raise or not. I said, “You know, I
want to play a big game.” I moved to San Francisco. I want to learn how this
whole structure works. Let’s do it. That was the main reason for Flow Town raising venture capital. Now, with Clarity, since
I’ve learned a lot things and that’s what I want to
share with you guys today, the main reason I raised
for Clarity is because I truly, honestly believed
and still believe that we were solving a problem
that was going to require scale and growth and it
was really an opportunity to invest capital to grow faster. What I want to share today is three things that a lot of people don’t think about when they think about venture capital. They think, “Oh, I’ve got this great idea. “I want to raise money,” but what’s the impact of that? How’s that going to affect your business? How’s it going to affect your life? What is the real outcome
of these scenarios because it’s not always as easy
as people make it look like where they raise and money
and they sell their company and everything was grand. Number one I want to share with you guys is really the … I’m going to say it this way, you have to kill yourself in business. I really shouldn’t have said it that way, but the truth is you need to hustle like nothing else matters in the business once you raise venture capital
because here’s the thing. Once you take money from somebody else, especially equity for capital,
that’s VC or angel investing, they require you to do
everything in your physical being impossible to be successful. Some people call them, they
like to invest in killers or hustlers or whatever
it is, but I need you to understand that you
need to, essentially, if you have to put your
head through a brick wall, you are willing to do
that because investors only make money in their portfolio. They invest in 12 companies, every one of those entrepreneur’s got to get up to the bat and
swing for the fences. Not get on base, but swing for the fences for their portfolio to work. I want to share that with you because I don’t think a lot of
people think about the risk or the sacrifices they’re
going to have to take in their business once they
raise money for their company. Sacrificing the travel,
maybe you’ve got to go live in another city for three months to build out this division or new department, or maybe you’ve got to
move your whole family to a better part of the world where it’s going to allow you
to build this business, and those are all things
that you need to do. It’s your obligation, it’s
honestly your moral obligation to your investors because
that’s the agreement. That’s the, maybe
undiscussed, contract between venture capitalists and entrepreneurs that you’re going to build
the biggest business possible with their capital. I don’t think that’s always
discussed and that’s why I wanted to share that with
you, so that’s number one. Number two is that essentially
you need to prepare for a zero based outcome. You need to understand
that if you take money from an investor, you
have to give 100,000%. Over the next five to
seven years, the goal is to build a $100 million company and there’s a high possibility that most of these businesses,
95% of the businesses, will do nothing. They will fail. They will be zero. You will spend five to
seven years of your life. Yes, you will have learned a ton. Trust me. The amount of learning that
you go from beginning, zero, to hyper growth that kind of business, it’s a very small percentage
of the population, the entrepreneurial population, that gets to experience that. Yes, there’s value in the learning. There’s value in the notoriety that maybe you gain for yourself, but in regards to a financial outcome, most of the time it’s
zero and I don’t think that that’s well understood
by a lot of entrepreneurs out there and I wanted to
share that with you guys. Now, the third thing that, to me, is again not understood is that you won’t likely be in control of your business. Sure, there are examples. Mark Zuckerberg brought
his company public, had complete control of the board. What normally happens is by your A round or for sure your B round,
you don’t have control of your business anymore. By the time you raise your
Series A or your Series B, you’ll have enough other
investors with board seats that fundamentally they
control the business. Sure, as a CEO, as you
should, you’ll be accountable and responsible to hit certain KPIs, key performance indicators, and just realize that if you
aren’t able to grow and learn with the pace of your business growth, if you’re successful in the first place, there’s a very high
possibility and what’s happened many times in the past is that the board will find another CEO. Now, that don’t mean that they’re going to kick you out of your business,
although that’s happened to a lot of friends of
mine, it just means that you will not be in
control of your destiny. I feel like that’s something that’s not discussed very often. There’s all these horror stories, but many times they’re not horror stories. They’re just situations
where, as the founder, you were not able to
grow with the business and the board said,
“Look, maybe it’s better “that we bring in another CEO,” or sometimes they’ll call it a COO but really they run the
business and you’re just there. Maybe you don’t even go into work anymore. Every scenario will play out, but those three things
just quickly to recap that you need to understand
is you need to be willing to sacrifice everything in
your life to be successful because that is the
game of venture capital and that’s what you’re agreeing to if you raise venture
capital for your startup. Two, you need to be okay
that at the end of the day, it might be zero. You get nothing out of it,
other than the lessons learned and the notoriety building that business. Three, that you will
likely not be in control, if the company goes public. I want to give you guys a quick stat. Most people don’t realize that a CEO, a founder that’s still
CEO when they go public, owns about 5% of the company. Now, the company goes public
and is worth $1 billion, that’s a lot of money, but a
lot of people don’t know that and that’s why I wanted to share it with you guys in this video. To raise or not to raise,
that is the question. At the end of the day, I
wanted to share with you guys the expectations from the
investors, from yourself, from the community, your employees, what the vision is if you take money because I think that
that’s going to allow you to make the better decision. I want to ask you below to leave a comment and answer this question. What would you do with the money if you could raise the money? Tell me in your business,
what would you invest that money from the VCs in
your business to help it grow. Again, five to seven years,
$100 million a year business, what would you invest in? I want to challenge you guys
all to live a bigger life and a bigger business and
I’ll see you next Monday.

  • Your audio is a bit low man, very contrasting to the Periscope I came from.
    On a Mac Pro with headphones on a Mac pro volume at peak.

  • Awesome video Dan and it's great to hear the "hidden" agreements before, then realizing after it's "too late". 

    It seems to be similar to going from the small league to the big league; the step is huge and even if your give it your best, you can still fail…

    Not to say that all the VC would be used for this specific reason only, but hiring the best people in the world would be a top priority. Some people can build in a day what it takes a month for others to achieve. Some people can create the extraordinary out of thin air, while others will have all the excuses in the world to explain why it can't be done.

    I know that by surrounding myself with the best, I significantly increase my chances of success.

    Thanks again Dan, I did have the perspective that VC was not fun and games, but you've really clarified a lot.

  • Just in time Dan 😊 thank you for the great video. Am in the middle of raise or not raise, haven't decided yet but your video definitely give me another perspective I need to look at

  • Good insights; especially the reality of ceding control in return for funding. As an occasional investor in early stage tech start ups it is a real, emotional sticking point that many founders find hard to get past.

  • Great tips Dan! My startup hasn't been backed by a VC yet, but working towards to it this first quarter. Greetings from Brazil.

  • Hi Dan, thanks for sharing your experience with us.

    I've been seriously thinking about raising capital for my product through VCs but after watching the movie "Something Ventured" http://bit.ly/2mngEtV and listening to you, I'll definitely take a step back and try plan B.

    Thanks a bunch

  • Hi Dan,

    Thanks for the Video.
    Understanding the importance of a Long Term Vision, Board Room will play the utter importance to secure the Vision and Values.

    Can you suggest a read on it?

    Regards.

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