I’ve been to a number of “how to secure financing” events lately. The last one was the Northwest Entrepreneur Network breakfast that featured both The Alliance of Angels and The Puget Sound Venture Club. I’ve also done the rounds pitching a business to a number of VC’s. I have during the years found it to be difficult to understand just what a VC is looking for. Quite frankly they won’t tell you or more likely they really don’t know how to put it into words. So let me tell you.
The number one thing a VC is looking for is pedigree. They want a complete or nearly complete team that has demonstrable experience and preferably success in starting a business and bringing it to exit. Don’t have that? The next best thing is to have members on the team that have extreme credibility and business success that can be demonstrated from a top tier company. Perhaps you ran a team that launched Proctor and Gamble into organic dog treats and it is now a $200 million business, for example.
Second thing is to get the business to the point where market success is proven and you are looking for money to scale the business and grow it rapidly. This changes depending on market conditions, but most VC’s want to lower their risk as much as possible and funding an unproven business model is high risk for anyone.
This second item increases in importance depending on the strength of number 1 above. If the team is stellar, then the VC’s know that if the business model is off the team will tweak, adjust and even sometimes throw out the business model until they have something that clicks in the market. With enough credibility the VC knows the team is capable of doing that successfully.
The third thing is to have defensible strategies. This is usually much less important. But if you are dead on 1 and 2 then you better have this one. Let’s say you’ve been doing research on nano bots and you have found a way to deliver medicine directly to infectious bacteria and you have the patent behind it. Be aware that before you are done with the VC’s you will not be running this company. Ok, how much money do you want? Understand that the VC’s are going to want to replace you with a proven team at some point. You will become “Founder and Chief Technologist” and if the management team runs the company into the ground you will only be able to watch (I’ve seen this happen, personally.) If your business is not so defensible the see 1 and 2.
The fourth and last thing is to be in the hot space. VC’s have hundreds of deals floated past them. They have to find ways to rapidly screen the deals and see what should be investigated deeper. One way they do that is by tracking what are the “hot markets” and what are the over-subscribed markets. The worst scenario is to be firmly planted in an over subscribed market. For example, today, I would say social networking plays are way over subscribed and it would be difficult to get a VC to even look at a business plan in this space, no matter how unique your idea is. This last point accounts for a lot of entrepreneur’s frustrations. It leads to the comments VC’s are lemmings, or VC’s move in flocks, or I can’t believe how stupid the VC’s are. Remember that VC’s have lots of investment opportunities and they are not really concerned about missing a chance to invest in the next Amazon.
The last thing and most important thing. Avoid VC’s as much as possible. Venture money is incredibly onerous. You WILL lose control of your company and it may head in a direction you think is bad. Only take VC money if it is the only way you can scale your business or if maintaining control is not important to you. There is nothing wrong with becoming a serial entrepreneur where your goal is to start companies, raise investment capital, turn it over to a professional team, and start another one. Just make sure that is what you like doing!
Good luck.
