First let me say that “yes Virginia” there will be IPOs this year. And yes there will again be overnight millionaires. What do you have to do to get those venture guys in Silicon Valley to give you the money you need to make everyone wealthy?
Just an aside, here are some of the latest numbers. Last year a leading Venture Capital (VC) firm received over 3000 proposals, business plans. They funded 20. Other VC firms funded between 2 and 6. Will the good times roll again? You bet, but let’s get back to the central issue of what you need to get that funding.
First of all you need real credibility, not just your friends saying you have a great idea.
If you have a leading authority in the field saying it is great then you are going in the right direction. IF such a person says it is not wonderful get a second opinion – if 2 out of 3 come up negative you may want to do some rethinking because the VC will be talking with these types of folks should you get that far and have an opportunity to make a presentation.
The other thing you need is a solid management team.
Yes VC will provide a team on rare occasions if you have a doctorate from Stanford and have an idea that can be proven and will revolutionize the world, but do not count on it. Build your own team. Unless you have accomplished some great recognized deed, you will need to recruit people who have. Because VCs fund management teams. They are not risk averse but they are not willing to experiment with the team.
In fact, the team is more important than the product. Why? Because a great team can save a bad product while an inexperienced team recovers from nothing. Didn’t you just live through the dotcom bust, with 22 year old presidents?
Ok so here is the next step on your way to glory, fame and fortune – the business plan.
Some people, especially the inexperienced, feel they can just slam something together and it will fly. Well welcome to reality. The day of the one page business plan are dead and gone. Your business plan has to be viable, tight, proven, and extensive.
It does not have to be 150 pages, but it does have to show an understanding of your markets, products, etc. Why? Because should you be among the chosen few that get to make a presentation, the VC, as part of his due diligence, has his experts drill down deep into the plan’s detail.
It is a brutal process and not for the weak. If you cannot stand scrutiny stop here and save yourself the pain. They expect you to be the expert, so guess what – you will have to be. You are asking them to risk their money, right?
Let’s talk about what you can expect in the way of funding, presuming you have made it through the presentation and due diligence phase of this process.
Among other documents you can expect to see is the term sheet that outlines the specifics of the deal. If you are dealing with an eastern-based VC you will have it in excruciating detail put together by an eastern lawyer that that will over-lawyer the document.
The advice here is do not go it alone. Find an attorney to work with you who is an expert in the field and does this exclusively. Do not go with your friend, family lawyer etc. if you do it will cost you dearly. This is not a game for amateurs.
So now that we have that out of the way, how much do you need?
Your plan tells you that and of course you have planned for contingencies, etc. The valuation process determines the ratios, how much the money going to cost you, who gets what class of stock, who gets what when it goes public or should the company fail etc. The amounts also depends on if you are in an A, B or C round of funding.
Valuations are based on opinion, worth of similar companies, deals, revenue, etc. If you are making money then your valuation increases, if you have orders your value increases, if you have a deliverable product your value increases etc.
So what do the VCs look for besides a great, seasoned, management team?
Well have you proven your concept, does the product exist as a prototype, what is demonstrable, who is your champion? Do you have interested customers? Have they made a commitment? Yes the VC will call them, so your friends do not count. Better yet do you have orders with verifiable companies? The bigger the company and order the more credibility you have and the greater your chances of getting funding.
How do you find the right VC?
No all VCs are not equal. Some can help you a great deal. Others can be of little help in building your business. Also just sending a business plan to every VC is a waste of your time and money. At best find those that are interested in investing in your industry and type of product.
Yes they specialize – they are experts in an industry and will stick with it. So if you have a medical device and the company invests only in communications software then you do not have a match. You will not get any response. So check out the VC firms, past investments, and in what they are currently investing. Go their site and check it out.
Remember we said how much investment do you need for your company? The amount of investment available from any one VC is also known. They will tell you the size of a typical deal, on their website.
Most invest $500K to $2 million on an A round. But go to their site to be sure this is just general rule, some will go higher and others will do smaller deals. Every Round has different parameters, and each VC has different criteria for doing a deal. Just remember the A round will cost you dearly in equity. It is the most expensive round.
Something you need to think about – you may not be the type of person that wants to have someone in your business. The way a VC works is invasive and yes they can be a tremendous help or hindrance depending on your perspective. They can find talent, set up alliances, provide legal assistance, and get resources that would not be otherwise available to a fledgling company.
However, if you are the type that likes to work alone and create something- then have clear understanding of the VC relationship, before you enter into one. It is more like acquiring another relative than an arms-length relationship. And yes from time to time they will tell you what to do.
At this point you may wish you had an angel. Well angel investors are available you just need to find them. One way is to join an organization in Silicon Valley. How about www.SVASE.org. Then go to a breakfast with angels.
Are you a women entrepreneur? Yes there are support and related groups for women CEOs on SVASE and then try www.Sdforum.org for software and hardware developers. Who said the Valley died? New growth is emerging from the trunks of the dead companies.
Do you want to know what the VCs are looking to invest in now?
Here’s what’s hot – technologies that involve “creative destruction” or displacing the old products or companies i.e. Blade servers are an example of this type of technology. Also of great interest are Linux applications, Biomedical, Medical devices, Linux software, anything that will speed up the time to market for anything medical or Biotech.
Other emerging opportunities are in cosmetic medicines, because we are all getting older and want to look good, even at eighty. Botox is now a 4 billion dollar a year winner. If it reduces wrinkles, enhances health, is non-invasive, then you may have a winner.
If you have products that will enhance physical and personal security not just software but hardware, or can enhance or improve ways of gathering and/or analyzing business data? The demand for security is growing and the business of business intelligence is big and getting bigger. Its forerunner, data mining, needs to be upgraded and improved. And yes there is always more.
The VCs are here, the angels are here, the talent is here, so where are you?
If you are not within 50 miles of the VCs your chances of getting funded go down. Sounds unfair doesn’t it? VCs, like other investors, like to watch their investments and they do not want to get on plane to do it. Remember they do offer assistance, can make things happen and the right ones can almost assure a company’s success.
So what are you waiting for?
Mr. Vishney has held several senior level positions as Partner in a Consulting firm, CEO, VP Sales and Marketing, Consultant, and CIO. As the founder, chairman, and CEO of the globally recognized software company, AWARD Software Inc., Mr. Vishney was instrumental in offering the leading edge BIOS software in the PC industry, which runs on over 300 million personal computers today. You can contact him at rvishney@vcgconsult.com, or find out more about him, his company, products and services at http://www.vishney.com.
