Entrepreneurs are generally frustrated with how difficult it is to raise funds. Much of this frustration is directed toward Venture Capitalists; they seem to fund so few opportunities, their criteria for investment is somewhat mysterious, they have a reputation for tough negotiation and low valuations, etc.The purpose of this note is to give you insight into how a venture capital company works, how its partners are compensated and why they operate the way they do. Continue Reading »

Not too long ago I was a twenty something year old first-time entrepreneur kicking down the doors of any Venture Capitalist that would look my way. I had a great idea, good traction, and even more energy, but little chance of ever raising money. I went to conferences, I got referrals, and I jumped at every opportunity to get my pitch in front of the right people, but for the most part I was fighting a losing battle.

After seeing the VC cycle up close, I have a few suggestions specifically for first-time entrepreneurs that will hopefully save you some of the heart-ache I had to endure.

• · For every great idea, there are 500 others exactly like it

Yes, I had heard this a few hundred times too, but I really didn’t believe it because MY idea was not just another social network. It was a Hispanic based telephone recruiting platform. But now that I see the type of deal flow VC’s see, I am surprised that anything can be considered unique. There are thousands upon thousands of businesses floating around. Having a great idea just isn’t enough.

• · Nothing gets a “no” faster than a bad fit

VC’s have criteria for the investments they make and very rarely will they deviate. The odds for success are pretty low in the start-up game, so if a VC is going to invest they are going to have clear guidelines about their areas of expertise. So save yourself some time and make sure you filter who you send your executive summary to.

• · You absolutely must have traction

Before you start a business, make sure you can get it to a point where you have some form of traction before you need VC funding. There is no way you will get money from institutional investors unless you can show that someone, anyone, likes your product. This is due-diligence step number one. Secondly, without traction there are no numbers to crunch, which is what MBA bearing VC’s love to do.

• · Get solid people excited about your company

At the end of the day, being a startup founder means your number one mission in life will be to persuade others. You will need to find employees who will be willing to work for less. You will need to convince customers to try your product/service. You will need to persuade partners to work with you. And of course, you will need to find investors to fund your company. If you can’t get your friends/family/accountant/lawyer to get excited about what you are doing, then you will have a tough time building a successful company. So show the VC’s how persuasive you are and find a few people who truly love what you are doing and who will introduce you to VC’s or people who know VC’s.

• Think about other sources of funding

At the end of the day, getting VC funding as a young first time entrepreneur is very hard. This is compounded if your father in law isn’t Jim Clark and you don’t know any VC’s personally. So while you might be the next Zuckerburg, it would be a prudent move to hedge your bets and build a company that can survive without institutional money.

• Keep the business plan, send the executive summary

This goes back to the deal-flow issue I mentioned above, so many plans come across a VC’s desk on a given day that he/she has to filter them quickly. It just takes too long to go over a full-business plan and even an executive summary, so make sure you put all of the most important information on a one or two page summary and highlight the very key points in your email.

So if you have an executive summary for a business with some traction in an industry that fits Momentum’s criteria, please send it our way.

On the 22nd I will be talking about business plans and fundraising for the 3rd time with the Tech Coast Venture Network in Orange County. I thought it would probably be appropriate to update the presentation a bit…

Attached is a revised version of the presentation I’ll be giving.

I hope you find it helpful!

Business Plans and Fundraising

I sat on a panel today, “Business Pitches that Hook Investors”. It seems all of the panelists took the position that you should skip the long process of writing a business plan (at least as a fundraising tool). Several people in the audience asked for a copy of my presentation, you can find it in a previous blog post: Why You Shouldn’t Write a Business Plan.

As a side note, I will be giving a longer version of this presentation along with some new material at the Tech Coast Venture Network meeting this Thursday, May 22nd. Details of the event are at www.tcvn.com.

On Friday, I moderated the Idea Validation panel at UCLA’s Anderson School Entrepreneurs conference. Thanks again to the four panelists – Jimmy Henricks and Patrick Dillon, co-founders of www.collarfree.com; Dr. Vladimir Ban, CEO of PD-LD, Inc.; and David Silver, author of Smart Start-Ups and President of Santa Fe Capital Group – all of whom pulled from their own experiences give helpful advice on how to think about validating a startup business idea.

One discussion item really stuck with me after the panel – whether women entrepreneurs face a tougher road when trying to raise venture capital. A panelist made the observation that women have a tougher time raising capital than do men and in a slightly tongue-in-cheek way, advised women to partner with men if they were to hope to raise funds. Several members of the audience disagreed strongly including an ex-associate from a Sand Hill Road VC and a fund-to-fund expert who made the point that “VC’s want to make money and couldn’t care less what you look like if there is a good ROI to be made.” I tend to agree with the audience but would love to hear what others with personal experience have to say on the point. I know several woman entrepreneurs who have successfully navigated the VC process and don’t recall any hearing about any specific bias against them. But I may be blind to the issue.

The panelist also cited data that supported his point. I do know there are fewer female venture funded entrepreneurs than there are male, but I’ve never seen any data that supports the claim that it’s the VC process that creates the disparity. If anyone has data, I’d love to see it.

There’s been a lot of talk lately about investors laying low due to the recent slowdown in the economy. Looking closer at the numbers, it appears that there is a lot still happening.

Ben Kuo at SocalTech points us to the recent National Venture Capital Association (NVCA) study published just a few days ago. Though the amount of venture capital invested in southern California from Q1, 2007 to Q1, 2008 has decreased from $1.1B to $856M, the number of deals has actually risen! 93 companies were financed Q1 this year versus 85 last year.

Though valuations are lower and capital may be more difficult to come by, venture investors are still alive and well. Yes, exit markets are tightening up. Yes, the IPO market for venture baked companies seems to be in a drought.

However, keep in mind that there is a very distinct cycle to venture capital. Companies receiving their first round of institutional capital this year have a 3 to 5 year time horizon before they exit.  Don’t forget that several household names (i.e. Google, Paypal) “grew up” during downturns - just like the one we’re in right now.

Today’s Los Angeles Times carries an article that predicts that 2008 will be even tougher for start-ups seeking cash. There are a few themes in this article that we often talk about:

Venture investors will be very picky and, specifically, they will be looking for “the complete package”:  great technology, a big market, a strong team and, most important, evidence that the company has already started to get traction. This is a bit self-serving, but we think that groups such as Momentum can help bridge the funding gap by providing bridge funds and  management that is willing to go at risk to get traction.

There is also an interesting anecdote on a theme we often talk about: high valuations in early rounds are often a BAD thing. A company featured in the article was unable to raise additional capital during the current economic slowdown because they had been so successful at achieving a high valuation in an earlier round (it is always difficult to do a “flat” or “down” round).  So, the company went out of business.

If there is any news is in this article it is “more of the same”. You should not expect to fund a great idea or a great product but should be working to build a solid company one step at a time.  As you take capital along the way, don’t always focus on valuation but instead focus on getting the right amount of capital from the right partners.

Noam Wasserman, a professor at Harvard Business School, came up with a core concept about startup founder motivations:

Rich versus King?

Academics are long known for coming up with interesting, but relatively impracticable concepts. This is not one of them. Founders need to understand their motivation for starting the company. By taking time out in the early stages to understand why you are building the company, you can avoid a lot of heartache and headache down the road. Continue Reading »

For many years, I’ve been frustrated by the banking community’s reaction to financing SaaS (Software as a Service) opportunities.  In my view, long term contractual commitments from credit worthy customers should be an asset that can be evaluated and funded. HOWEVER, from an GAAP perspective, the contracts aren’t considered a “receivable” as the service hasn’t yet been delivered. So, banks don’t tend to be very creative! I’ve run into SaaS Capital a few times and I think their model has a lot of merit. The linked white paper below, provided by Saas Capital, walks through SaaS financing issues and options.

Understanding the Financial Implications of the SaaS Business Model

One of the first questions that investors will ask you about your company is “what is stopping others from copying your ideas or technology and beating you at your own game?” I’ve found that the “barriers to entry” question is one of the most difficult to answer when raising institutional money. If you answer too boldly the investor might feel that you are naive about the nature of competition. Conversely, if you answer that you simply have a head start, you may not be making a strong enough claim. Neither answer will build a sufficient level of confidence. Following are a few thoughts that may help: Continue Reading »