A investor guide to spotting entrepreneurs on steroids

Ah, baseball. And all those wonderful images of hot dogs, sunny days and (sigh) steroids.

The first pitch usually heralds the beginning of the season for venture capital fund-raising conferences. And attendees should beware, for said conferences are hangouts for entrepreneurs on steroids.They don’t actually involve drugs. They do involve lots of companies blown up bigger than life.

What are entrepreneurs on steroids? Simply, they’re companies packaged to be more attractive-looking investments than their fundamentals make them.

Here are several examples of the most common types of steroids used by companies making presentations to investors:

* Patents. Every company says it has at least one patent. Actually, many companies only have patent applications. Some patent applications are only provisional applications, which many patent lawyers consider to be of dubious value. Beyond that, some patents already granted are of relatively little value. For example, claims may be very narrow, allowing many ways for competitors to offer competing products or services without infringing the patent.

* Revenue. Companies know that having existing revenue makes them more attractive to investors. The primary value of having existing revenue is that it shows people are willing to buy the product. That’s true in some cases. Companies on steroids, however, often have revenue that doesn’t prove the business model works. For example, companies may have consulting fees from services the founders provide to pay the bills. Investors need to know whether the revenue means the company has proven the basic business model.

* Projections. The drugs of choice for many entrepreneurs. Often, entrepreneurs truly (but mistakenly) believe they can achieve rapid revenue growth. This is often a sign the management team is too inexperienced to understand the impediments the company faces.

Jim Verdonik

Full Story: http://www.bizjournals.com/boston/stories/2005/04/18/focus3.html