Editor’s note: February is “State of Venture” month at WRAL Tech Wire. Watch for special coverage about the state of the VC industry all month capped by the Southeast Venture Conference in Tyson’s Corner, Va. The Skinny blog is written by Rick Smith, editor and co-founder of WRAL Tech Wire and business editor of WRAL.com.
RESEARCH TRIANGLE PARK, N.C. – Sometimes entrepreneurs just need to say no to outside investors, especially if they are hoping to:
1. Keep control of the business
2. When it comes time to “cash out,” ensuring they are making the profit, not the “angel investors” or the venture capitalists.
Rich Lee, the former owner of Hosted Solutions in Raleigh, is an example of an entrepreneur who kept control of his company until the day he sold it to Windstream. His payday was huge.
Now, Lee is an investor, helping launch the new Triangle Angel Partners venture. But he has some very interesting advice to offer to entrepreneurs.
You just may not want his cash.
Entrepreneurs dream of successful “exits:” Building a company to the point that they can cash out by selling or perhaps taking it to Wall Street as a public company. But in getting to that exit they have to make many decisions beyond day-to-day business.
One of the most important is: Do they seek partners as investors?
The Skinny asked Lee to explain what he looks for in making an investment and what strategy to follow in seeking outside dollars.
“I generally look at three things before I personally invest.
“One – I need to be convinced there is a solid opportunity for a return over what I could make in the market. It take more time, effort and risk to make this type of investment, so I should receive a better return.
“Two – I look for strong, experienced management teams that can be effective run effectively. And they need to have skin in the game, meaning willing to put their own money in the business alongside mine.
“Three – I need to see a well thought at business plan with detailed financial projections that I can get comfortable with.”
Asked about his own record as an entrepreneur seeking money to grow Hosted, Lee pointed out that he stayed away from venture capital.
“I didn’t raise VC,” he said. “I personally was the majority investor, and the rest came from a tight knit group of people that have invested in some of my prior ventures.
“The key lessons I learned are it is always best to ‘be in control of your own destiny,’ meaning having a controlling interest in the company.
“An example is that if we did have VC, having raised only $1 million dollars in total at Hosted, a VC surely would have exited their position at an earlier stage, maybe $25 Million and happily pocketed a 25x return.
“I was able to instead run the company with a longer term horizon, and we were able to take chips off the table with [a] private equity [investor] at $144 Million, and then later completely exit at $310 million. Financial firms are focused on Internal Rates of Return (IRR), whereas I was mostly focused on absolute dollars.”
So there you have it from someone who grew a business from next-to-nothing to $310 million, entrepreneurs.
Do you want to control your own destiny?
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