How to get a second date with a venture capitalist

The demise of venture capital funding has been greatly exaggerated.

Throw out the feverish years of 1999-2001, when venture capitalists put a whopping $200 billion on the table. What you’re left with is a market trend line that is at worst flat: slightly more than $20 billion invested in both 1998 and 2002, according to VentureEconomics.

Philipp Harper bCentral

Far from being dead or even sickly, the market for venture capital is merely back to normal after seeing unprecedented levels of investment during the recent technology bubble. A business owner looking for money to expand as the economy picks up would be wise to take advantage of this financing vehicle.

Of course, a return to sanity on the supply side has implications for the demand side, where entrepreneurs line up with hopes up and hands out. For some time now, it’s no longer been possible for a Bill Gates wannabe, armed only with youthful charm, an interesting concept and a good line, to break the venture-funding bank.

A nod and a wink isn’t enough

These days, perhaps more than ever, there needs to be some steak to go with the sizzle. At a minimum, here’s what you need to bring to the table:

* A comprehensive knowledge of your market.
* A detailed plan of "market execution" — in other words, how you’re going to win and hold share.
* Proof that you and your team are capable of executing the plan.

You also must be able to demonstrate convincingly that the product or service you’re peddling has intrinsic value that can be leveraged into a worthwhile return on the venture capitalist’s investment. "There has to be a clear value proposition," says Brenda Gavin, managing partner of Quaker BioVentures, a Philadelphia-based venture fund specializing in the life sciences.

Gavin is not talking about vague assurances. Gavin is talking about a careful presentation of your business’s development that highlights its "auctionable milestones": points at which value is created. In the context of a biotech, such milestones could be a filing with the Food and Drug Administration or a breakthrough in clinical trials.

In other words, Gavin asks, "What will attract somebody to pay more than I paid?"

The less clearly defined the path to these milestones, the more difficulty you’ll have raising capital. And a word to the wise: Don’t expect to overcome the lack of a sound argument with wishful thinking.

"Hope is not a strategy," Gavin says. "The last thing you want to say to me is, ‘I hope . . .’ "

So what should you say at that all-important initial sit-down with a venture capitalist?

John O’Donnell, executive director of TechRanch, a technology incubator in Bozeman, Mont., says a first meeting with a potential investor is not unlike a first date, where the goal isn’t marriage, but rather a second date. In other words, further negotiations toward a deal, not consummation of one, is the objective.

Still, given the level of competition and the tougher scrutiny to which investments are subjected these days, you’ll be making a mistake if you don’t show up for that first date as prepared as you possibly can be.

How to make a good impression

O’Donnell says a complete negotiating arsenal includes the following five elements. He rates the first three as crucial and the final two as icing on the cake.

*

A product or service that is as close to being fully developed as possible. If you can produce a list of customers or letters of intent to purchase from potential customers, so much the better. (You may not have attained this level of development if you operate in the life sciences or tech-devices markets, given the high startup costs, so Gavin’s "auctionable milestones" are especially important.)
*

A management team notable for its experience. "Gray is good," O’Donnell says. "It’s 180 degrees opposite of the Internet ethic."
*

Ownership of the product or process. You don’t necessarily have to hold patents; O’Donnell says, but the more proprietary technology or trade secrets you can muster, the better. Again, this is a departure from the days of the tech boom when the emphasis was on beating the competition to market and gaining the "first-mover advantage." Today, O’Donnell says, "You’d be very hard-pressed to go into a venture capitalist’s office and say, ‘I need $5 million to be the first mover.’ "

And to earn extra credit with the investor:

*

Prepare a financing plan (as opposed to financial projections) that gives a 36-month snapshot of valuations and dilutions. This tells a venture capitalist how his investment today will be affected by solicitations you may undertake in the future. Do this, says O’Donnell, and "you’re putting yourself ahead of 98% of the entrepreneurs out there who are knocking on venture capitalists’ doors."
*

Provide a preview of what the investor would learn during the due diligence process. At this stage of the game, you might want to offer only a glance, because non-disclosure may be an issue. But just making the gesture can win you points. Such a package might include: your contracts with key employees, with non-competing clauses highlighted; copies of purchase orders or letters of understanding from key customers; and, if applicable, a rundown of the enterprise’s patents and licensing agreements.

Make this kind of effort and there’s a better chance you’ll leave venture capitalists wanting to know more about your company. And that, after all, is the name of the game.

http://www.bcentral.com/articles/harper/158.asp