Get to Know Venture Capital Firms, Start-Ups Told

Executives of start-up companies should check
out a venture fund’s investors and prior
investments before trying to raise money,
venture capitalists and their backers told
entrepreneurs yesterday in an attempt to shed
more light on how venture capitalists make
investment decisions.

By Nicholas Johnston and Ellen McCarthy
Washington Post Staff Writers

The idea for yesterday’s panel discussion in
Vienna came from the Morino Institute’s
Netpreneur quarterly survey of local
entrepreneurs, in which officials of start-ups
frequently expressed bewilderment at the inner
workings of venture investing.

"A lot of this has to do with how the venture
business really works," said Mary MacPherson,
executive director of the Netpreneur program.

Although building strong and lasting companies
with new technology is a stated goal of every
venture investor, investing still comes down to money. People such as Catharine Burkett, who has
invested about $200 million in early-stage venture funds for the University of Richmond, need to make
money to keep the bosses happy.

"Technology isn’t the only thing," Burkett said. "We’re counting on our venture capitalists to build
companies that will generate returns."

Investors in venture funds have many choices when looking for an investment that will generate strong
returns. That’s money venture capitalists such as Jack Biddle of Novak Biddle Venture Partners have to
compete for each time they raise a fund.

"When you have $25 million, you have a lot of options," he said. "I’ve got to outperform their alternatives."

Those alternatives can include such things as shares in public companies, hedge funds and oil-exploration
investments. Traditionally, however, venture investing has performed consistently better than investment in
the public markets. But as the industry recovers from the excesses of the recent boom, those returns have
suffered.

That puts added pressure on venture capitalists to pick only the strongest start-ups, which makes
fundraising for many companies extraordinarily difficult. Jim Hoover, chief executive of PriceWorks Corp., a
Great Falls pricing-management software firm, said trying to raise venture capital is harder than he ever
imagined.

"I’ve been to six local companies and one in New York," Hoover said. "But it’s always the same. They say,
‘We like what you’re doing, but we’re just not investing in early deals without revenue.’ "

Hoover said he’s learned to tailor each pitch to the interests of each venture capital firm.

"You really should know the partners, know the partners’ portfolio, how they like to invest and what deal
they’ve passed up. It’s really important to ask questions of the people who introduced you to the firm," he
said.

One of the most important questions that all officials of start-ups should ask themselves, however, is
whether they even need venture funding to begin with. Many entrepreneurs have come to see venture
capital as a legitimization of their business, MacPherson said, when there’s no reason they should look for
outside institutional investment.

Knowing the financial goals of the investors in venture funds can help a start-up determine if its plans are
appropriate for the fund’s objectives. Often they won’t be, and there’s nothing wrong with that. Historically,
most technology firms have been successful without any venture investing at all.

"You should be able to grow the business and be profitable without me," Biddle told one software
entrepreneur. "I’m just gravy."

http://www.washingtonpost.com/wp-dyn/articles/A28623-2002Mar27.html