What the VCs are saying:

Mike Frank, a general partner at Advanced Technology Ventures, provides a candid primer for inexperienced entrepreneurs, and a helpful recap for seasoned entrepreneurs who want to go over the basics of the VC game, in
"The Ten Commandments of Fundraising." (The guest column appeared on Red Herring.com on February 28, 2001.)

Venture Capitalists are attracted to companies that expect to reach the benchmark of $100 million, expect to be publicly traded and financially rewarding for all concerned.

The plan should tie together the objectives and the means, to maximize the attractiveness of the company to prospective financiers.”

– Alan Salzman, Managing Partner, Vantage Point Venture partners, San Bruno, CA

You should be able to write what your business is about on the back of your business card.

– Don Valentine, General Partner, Sequoia Capital, Menlo Park, CA

The prescription for a winning deal, according to Lawrence Mohr, founding partner, Mohr Davidow ventures in Silicon Valley, is “management, market and money.” The key, says Mohr, is the management team and its configuration today and fives years from now.

It’s critical to communicate just who the customer is today, and who he or she will be five years from today. “It’s appalling to see so many with good ideas who can’t answer the question about marketplace demographics.”

- Lawrence Mohr, founding partner, Mohr Davidaw ventures in Silicon Valley

The Executive Summary provides and overview that distills the essence of the plan’s key parts and—most important—hooks the prospective investor. “The importance of the summary should not be underestimated. Unless it captures the interest of the venture investors and appeaars convincing, they will not bother to read further.”

- Alan Salzman & John Doerr, The Corporate Securities Series’ Start-up & Emerging Companies: Planning, Financing & Operating the Successful Business

The dirty secrets of venture capital

By Robert von Goeben - October 23, 2001; parts excerpted:

http://news.cnet.com/news/0-1276-210-7628227-1.html?tag=dd.ne.dtx.nl-pro.0

These days, the one thing there is no shortage of is questions. As a seed-stage venture capitalist, I'm used to helping people navigate the many uncertainties of getting technology companies started and funded. In response to my recent Perspectives columns for CNET, I have received a tremendous amount of e-mail full of questions about getting a company financed, finding the right investor, and even questions about being a VC.

QUESTION: "I am an entrepreneur with a great idea, (a great) team and an awesome product. I have heard that raising money right now is close to impossible (especially with decent terms). How can I maximize the chances for success in my fund-raising endeavors?"

ANSWER: You are right; raising money right now is incredibly tough. But funding does still happen, and there are concrete steps you can take to increase your fundability. If I had to pick the one thing that would increase your odds of getting funded, it would be building the right team. In the eyes of a venture capitalist, nothing is more important than the people they back. I suggest you spend most of your time upfront getting the right people in the company.

And I mean the right people. Look at everyone on the team with an incredibly harsh eye--even yourself. If anyone in senior management doesn't have deep domain expertise in your field, consider replacing them. The good news is that there are tons of qualified people out there looking for projects. The bad news is that there are a lot of sub-par people kicking around as well. Go for quality, be harsh and scrutinize candidates. Build a rock-star team, because in this market, nothing less will get VC funding.

QUESTION: Sending a business plan to a VC is fine, but I communicate my ideas better in person. What is the best way to talk to a VC personally about these ideas?

ANSWER: Don't even bother. Unless you know a VC personally, the chance of getting them on the phone and pitching them, before they have had a chance to look over some kind of summary, is zero. Despite the fact that most VCs have this pseudo "open-door policy," realize the levels of defense around investors are quite deep. This makes sense when you think about how many people are going after them for money, especially in this market. Pushing for "just a few minutes on the phone" sends a bad sign to an investor that you're not willing to play the game. In the end, don't count on the personal connection until you've gotten an investor's interest by other means.

Your best bet is still hitting the VC with a well-honed executive summary. An entrepreneur should network hard to find someone "on the inside" who can personally introduce the company to investors. You have probably read a million times about what should go into such a summary, but it bears repeating. Here are the big four that I look for: team, what you do and what space you are in (put yourself in a bucket), how you make money, your unfair advantage and your funding plans.

QUESTION: How do we find funds that might want to invest in a company at our stage of development and in our space?

ANSWER: On the surface, you would think that the right investor would be easy to find. All venture capitalists (and some angel investors) have Web sites that spell out investment criteria. That said, one of the biggest mistakes entrepreneurs make is not doing their homework. I get a ton of e-mail from people pitching me on a company that clearly does not fit the criteria spelled out on our Web site. Rule No. 1: Read the VC's Web site.

But for all the information that's available, entrepreneurs are still often stopped at the gate by a VC response like "We don't invest in your sector," or "Your company is too early for us." How does an entrepreneur know what a VC wants these days? The dirty secret is that VC requirements change more often than their Web site (for example, many VCs are investing in later stages these days due to greater risk aversion). So the nuances of VC criteria are tricky to determine.

The best way to find out about a firm is to get some "underground" intelligence on them from people who know them. My seed-stage companies always go out for more funding, so, more than anyone, I have to find the right investors to send them to. Before I ever send a deal to a VC, I try to find someone who has done business with them. In the end, when you do find a fund that looks like a fit, you will still need a personal introduction to get in the door. These personal connections are all VCs care about; without them you'll get nowhere.

2001 Survey of Venture Capital Companies

By Dee Power and Brian E. Hill

Copyright 2001 all rights reserved by Profit Dynamics Inc.,

Dee Power and Brian E. Hill



Permission is given to quote from this survey or to reproduce
the survey in its entirety or in part, if the following credit
is included: Dee Power and Brian E. Hill, are authors of the book
"Inside Secrets To Venture Capital", published by John Wiley &
Sons, May 2001 and founders of Profit Dynamics Inc.,
www.capital-connection.com.

Methodology

400 active venture capital firms across the United States were
surveyed by e-mail in September and October 2001, 80 or 20% of
the firms responded and completed the survey. The firms were
located in 21 different states, 33% located on the East Coast,
21% in California, 14% in the Midwest, 10% in the South, 6% in
Washington State, and 16% in various other states.  The firms
ranged from small, regional firms to firms that were national in
scope.  The size of the VC funds varied as well.  Respondents
were told their specific answers would not be attributed directly
to them nor that their firm had participated.

The survey asked venture capitalists to compare the environment,
quality of company, and investment activity levels currently to
that of 12 months ago.  The questions included:

Has the environment for entrepreneurs looking for investors
improved or become worse? And why?

Have valuations of start-up companies become more or less
realistic?

Has the quality of the companies looking for capital improved
or deteriorated?

Has the number of companies that contact you for funding increased
or decreased?

Questions concerning the future were also asked:

Do you believe the level of venture capital invested in early
stage companies will increase or decrease in the next 12 months?
And why?

What advice would you give an entrepreneur looking for seed or
early stage capital?

The quantitative questions asked the venture capitalists to rate
their response from 1 to 5.  The answers to the qualitative
questions were summarized into categories.  Below those summaries
we have included relevant quotes from the venture capitalists in
quotes.

SURVEY QUESTION:

*****************

Compared to 12 months ago, has the environment for entrepreneurs
looking for investors improved?  Please rate from  1 to 5, 1 being
much worse, 5 being much improved.

The average rating was 1.9.  81% rated the current environment as
worse, or much worse than the previous 12 months, only 11% said it
was about the same and 8% thought it was improved.  Not a single
VC gave a rating of 5.

Rate      Percent VCs responding

1                      44%

2                      37%

3                      11%

4                       8%

5                       0

The Pessimistic Venture Capitalists

************************************

When asked why they thought that the current environment is worse, no one explanation predominates.  As one can see below, the top four reasons are reasonably close together varying only 5 percentage points.  It is interesting to note that if 'no exit strategy', 13%, is combined with 'public market down/low IPO activity', 10%, the resulting combined ranking would be 23% and jump into first place.

The depth of this pessimism is rather surprising, considering that 12 months ago, September - October 2000, the public market had already declined, technology stocks had plummeted, dot.com failures were in full throttle, and IPOs were nearly non-existent.

Prevalent reasons included in order:

1. VCs are focusing on their current portfolio of companies and don't
have the time or resources to investigate new companies --  18%

    "VCs are bolstering their portfolio companies rather than investing in new."

    "VCs are preoccupied with portfolio issues and the recessionary environment makes setting values problematic.  Additionally getting funding for existing portfolio companies is still tough."

    "VCs are still nursing their technology portfolios.  Those of us without these problems are experiencing a good buyers market."

    "Indigestion from prior deals, lack of confidence, more attention to old deals."

2. Economy/recession -- 16%

     "The world economy is looking soft, so folks are less adventurous. That said, good deals with bright realistic prospects will get funded; it's just that for the last two years many prominent VCs thought they could see the future and some had more money than brains."

     "The recession will make investors much more conservative."

3. No exit strategy/poor liquidity markets -- 13%

     "Market conditions have drastically worsened. Financing and exit strategies are all but gone."

     "No exit opportunities for private capital."

3. Uncertainty -- 13%

     "Extreme uncertainty"

     "Given the current market and recent events, investors are much more averse to risky opportunities, and much more diligent when acting at all."

     "Conservatism is rampant.  Venture funds cannot predict time to liquidity, and thus cannot plan for orderly capital formation."

4. Low investment activity by VCs -- 11%

     "Very few folks are investing -- at least not investing in new deals.  Getting a deal done at whatever valuation is a major accomplishment right now"

     "Most VCs are not looking at new deals even when they say they
     are."

5. Public stock market down,  low IPO activity -- 10%

     "General market tanking which is scaring everyone off..."

     "Huge market change: public capital markets tanked."

     "Increased uncertainty about the future of the IPO market, particularly for technology companies."

     "It has become worse because the public markets have continued to underperform which impacts the private markets, particularly from a valuation perspective."

6. More stringent due diligence -- 5%

    "VCs have slowed down their decision making process as a result of returning to more traditional and therefore stringent due diligence practices."

    "More scrutiny around start-up models."

6. Valuations have dropped -- 5%

     "The fundamental methods of determining 'value' that changed significantly in 1999 and 2000 and now  have reverted back to pre 1998 methods, causing a huge pause by the VC community."

6. September 11 event -- 5%

     "It was worse 6 months ago, an all time low, as venture firms either focused on current companies and/or were afraid to invest in new companies. My sense is that it began to improve in Q3 2001 ... but with the 9/11 tragedy VCs are back in their holes."

     "Insecurity in the U.S. and global economies..."

7. Other --  4%

The Optimistic Venture Capitalists

**************************************

Of the 19% who thought that now was a better environment or at least
the same for entrepreneurs looking for investors, the most common
reasons were about evenly divided between:

1. There is VC money available and it has to be invested somewhere.

     "New money has become available."

     "For good entrepreneurs with a clear line to profitability, it has improved because there is still a lot of money looking to be placed."

2. Entrepreneurs are more realistic about their valuations, there exists
an opportunity for investors to invest in better companies and lower
valuations.

     "There are a lot of funds available, primarily the deal flow is now more mature (team and idea) and valuations are more realistic."

     "The shakeout and shutdown of etailing services ventures have cleared many of the amateurs out of the private equity market and reduced market confusion, which has returned clarity and focus to investment programs."

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