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What I Learned on the Inside: Part 3

BY JEFF KEARL

Editor's Note: The most difficult hurdle for most new businesses to overcome is financing: you have the idea, but how do you get it off the ground? Should you borrow from friends and family, seek private angel investors, try to attract a professional venture capital investor, or eschew outside investment completely and pursue a slower, self-funded strategy? Jeff Kearl, head of sales and marketing here at Logoworks, came to work with us from the heart of the dark and mysterious world of start-up financing, the venture capital firm. Since his intimate knowledge of this important subject is regularly sought, we have asked him share some of his insights with you in a series of articles. The first installment (July issue) is "Sources of Capital". Last month,(August) Jeff tackled the issue of valuation in "How Much Do I Give Up." This month, he asks the question "To Raise, or not to Raise." We wish you success in growing your business.

To Raise or Not to Raise?

Most venture capital firms receive many more investment proposals than they have the capacity to invest in. Some firms receive as many as 10,000 business plans per year and only invest in ten. Perhaps this is because many entrepreneurs correctly value the contribution that a good venture firm can make to a growing company. This often includes introductions to key customers, top executive talent, and other quality investors as well as access to strategic advice borne of experience. Unfortunately, the reality is that only a small percentage of companies are good candidates for venture capital. A savvy entrepreneur will seek to understand the qualifications, regardless of whether or not she seeks venture capital, because venture qualifications are the underpinnings of great companies.

Venture investors generally focus on three risk areas when evaluating an investment.

1. They seek strong management teams. They don't invest in individuals. They look for teams with relevant domain experience, deep networks (who do they know and who knows them), and passionate commitment.
2. They seek companies operating in emerging markets that have the potential to be very large. They want to validate lots of customer demand and your ability to fulfill it.
3. They seek companies with a differentiated business model and/or unique intellectual property.

If your business doesn't have most of these attributes (and most don't), venture capital is likely not the best source of capital for your business at this point in time. You may also want to consider that fundraising is a time consuming process. Bird-dogging meetings with investors, preparing and making presentations, managing due diligence requests, and negotiating a deal all take time away from operating your business.

Luckily, there are a couple of things every entrepreneur can learn from the venture capital process even if your business is not a good candidate for venture capital. Strong management teams are a common attribute of great companies. Therefore, try to build relationships with the best managers in your industry and seek to hire them as your company grows. You can start building your management team long before you actually make the hires. Hiring "A Players" is not an overnight affair. First you must find out who they are and then you have to develop a relationship with them over time. Venture investors often invite industry experts to sit their boards of directors to give counsel and bring credibility to the business. Since every company can benefit from a strong, independent board of directors, spend some time building yours. Lastly, be a visionary. As divergence accelerates, many new market opportunities are created each day. Often, a nimble company with a visionary leader can see and take advantage of new opportunities faster than even a venture-backed startup.
Below is a checklist of the kinds of attributes a venture capitalist will look for in an investment. You should be able to go through each consideration and rate your company. This way you can start developing your company in the areas that you consider weak.

«  Part 1  |  Part 2

Jeff can be reached at jeff@logoworks.com


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