When we were first starting NetApp, back in 1992, we thought
that we could create a product and a company on an unusually small amount of
money. We also thought our low cost would give us an advantage in trying to
raise Venture Capital (VC) money. We were half right.
It took us just over a year from when we incorporated to
ship product, and we had raised only $1.6 million dollars. To put that in
context, some start-ups have raised over $100 million to enter the storage market
and still not gone public. We shipped our first product with just eight full
time employees and only three full time development engineers. The eight were a
CEO, head of sales (the only sales person), head of marketing (the only
marketing person), head of customer support (the only support person), an office
manager, and three engineers including both James
and me. We also had three part-time consultants—one on manufacturing and two
more engineers.
We were right about building a product with surprisingly
little cash, but we were wrong in thinking that VCs would find this attractive.
VCs don’t particularly like small investments. In fact, we had to raise that
first $1.6 million entirely through “angel investors”—rich
individuals who invest their own money. The VCs wouldn’t invest until after
we’d shipped product. It took another $10 million or so for us to go public.
In business, it’s always helpful to understand the other
person’s perspective, so let me describe how the world appears if you are a VC.
A VC fund is a lot like a mutual fund, except that instead of getting money
from regular people, you get it from university endowments, pension funds,
really rich people, and so on. And instead of buying stock in public companies,
you invest in start-ups. Your job, as a VC, is to invest all that money you’ve
raised, and the funds are sometimes very
large. Some funds are a few hundred million dollars, some multi-billion
dollars.
The problem is, it’s just not easy to invest that much
money, and it’s almost impossible to invest that much money in small chunks. I
recently had lunch with the CEO of a small start-up, and he told me that he was
looking to raise $7 million, but one investor said, “Couldn’t you take $13
million?”
It boggles most people’s minds to imagine investing a
hundred million dollars, much less a billion, so let’s imagine that you have
$100 to invest, and you are trying to figure out what stocks to buy. (Me
personally—I recommend index
funds, but let’s just assume that you have your heart set on stocks.) It
wouldn’t make sense to invest $1 each in a hundred different companies. That
would take way too much research and would be a pain to manage. You’d probably
be completely uninterested in a fifty-cent investment, no matter how good it
sounded.
That’s exactly how a VC feels when a start-up comes in and
says, “We’ve got this great idea, and best of all, we’ll only need a million or
two.” VCs typically go on the boards of all the companies they invest in, and
the last thing they want is to be on a hundred boards, or even fifty. After all,
that might distract from the summer in Europe and the winter in the Caribbean.
It’s much, much easier to invest larger chunks of money in a smaller number of
companies.
