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Don't let the money make you a dummy

Technology IPOs are stacking up like groupies at a Motley Crue concert. Dozens of companies, including Palo Alto Networks, ServiceNow, Workday, and the mac daddy of them all, Facebook, are planning public stock offerings this year. And the flood of wealth they create could trigger a wave of startups and angel investing in the coming 24 months, fueled by the newly rich.

As the IPOs roll and the typical six-month lock-up preventing employees from selling stock options expire, new money will flow into innovation. A gaggle of executives, engineers, and product managers from the newly publicly companies will likely leave to spark new startups. This is a natural cycle in Silicon Valley. Early-stage employees cash out and leave to chase their entrepreneurial dreams.

Some of these new, new companies could be very successful. A category king or two may emerge. But many of the newly rich who become entrepreneurs will fail. That’s because sudden success can make smart people dumb. Many would-be entrepreneurs will forget what actually made their last company successful. For every Instagram, there are dozens of’s. I know people who made hundreds of millions in the late 1990’s who since then have had nothing but a long string of losses with their own and other people’s money.

Winning in the high-tech industry depends on the convergence of many things. And although success often seems quick, it often is anything but that. To create a category king, you must be smart, tenacious, and surrounded by the right people. Your timing must be perfect. You’ve got to have compelling technology and a powerful business model, and build a solid customer/user base. And you must be very, very lucky. Everyone who builds big successful tech company gets lucky along the way – yes, even Steve Jobs, Mark Zuckerberg, and Bill Gates got lucky.

Many people tend to forget this as the money, power and accolades build.

The “Emperor’s New Clothes” Syndrome is real. Success can make people think, “I made this happen.” But just because you were on the team that built Apple’s iOS, doesn’t mean you personally made the iPhone a bigger business than all of Microsoft. Just because you were part of building one big success doesn’t necessarily mean you can do it again — especially if you are drunk on IPO champagne.

When exiting a big success to start a new company, smart entrepreneurs stay grounded and clear about what really happened to make them a success. They don’t believe their own PR.

As the 2012 IPO season rolls through, many would-be entrepreneurs will turn to their newly rich friends and present them with a “killer opportunity” to be an angel investor. In Silicon Valley, the only thing that gives you close to the high of building a big winning company is funding one. The success of high-profile entrepreneurs turned venture capitalists — like Marc Andreessen of Andreessen Horowitz, Peter Thiel of The Founders Fund, and Mike Maples, Jr. of Floodgate — incites envy and admiration. If the new batch of millionaires is anything like their ancestors from the late 90s, they will have a hard time resisting the urge to invest. They will play venture capitalist too.

My advice to the newly rich is to tread carefully.

Dabbling in VC is like dabbling in bomb-making. You could blow shit up and hurt yourself. Venture investing is better left to the pros. Top-tier professional VCs actually know what they are doing. Most important, they risk OTHER PEOPLE’s money. The vast majority of the money that flows into venture funds comes from sophisticated investors who place a very small percentage of their funds into high-risk, high-return VC.

If you really fancy venture investing, make the commitment to become a pro. Every successful entrepreneur I know who made the switch to VC hustled and worked very hard to make that transition.

If you want to put your own money into startups, be smart. Invest a very small percentage of your net worth — your real after-tax, cash-in-the-bank net worth, not your “on-paper” net worth. Only play with dollars you can afford to lose. Break this rule, and you’ll break your heart.

The IPOs planned for 2012 could give many people and companies in Silicon Valley cause to celebrate. They could also lead a fresh crop of entrepreneurs to start dreaming about IPO parties of their own. Let’s hope they learn from the mistakes of the past, make smart investments, and build great companies.

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