Thursday evening (May 26) the Tech Coast Venture Network presented a panel session at UC Irvine consisting of three venture financiers from northern California - Maureen Conners representing the Venture Capital-Angel Roundtable, Kimi Iwamura of Omron Advanced Systems, the strategic venture branch of Japanese technology company Omron and Jim Simmons, Entrepreneur in Residence for Silicon Valley's VC scion Draper Richards. As might be expected each had a different take on their firms investing philosophy and the types of investment they are most comfortable pursuing.
Jim Simmons addressed a question in his presentation about what makes a good VC. It is informative for it maps well to the investment criteria that Jim considers in evaluation prospective clients. And the lesson is important for those start-ups that are considering soliciting firms for funding. It is essential that entrepreneurs do their homework, not just on their business, their market and their competitors so they can answer any questions, but on the financiers best suited to providing funding, expertise, connections and guidance.
What makes a good VC?
- 7 - 10 years of experience in the field
- Has been through enough start-ups to know that things can (and invariably will) go wrong during the life of a new venture
- Who resists the urge to discard the management team at the first hint of trouble
- Has had some success with portfolio firms - if 2 out of 10 rate of success for VC firms in general, over 8 or so years a successful VC will have participated in several and perhaps as many as 5 or 6 liquidity events
- Good chemistry
- Critical to establishing a relationship; these people will be the champion within their firm for your enterprise. It pays to deal with them honestly, forthrightly and frequently. It isn't necessary they be your friends, but they better be in your corner.
- When things do hit rough patches they have to be there for you and your team. Relationship built on mutual trust is essential.
- Belief and experience in the market or technology space
- VCs probably won't look far afield but if they consider a project outside the scope of their expertise, you should be concerned. More important than the money to your success is their relationships and experience within the markets that your start-up is addressing.
- Access to resources to establish a fully funded syndicate
- Especially for early stage investments, it is important that follow-on investment is available and that the firm has a track record of pulling together later stage financiers willing to participate. Many of the failures from 2001-02 were caused by start-ups not able to secure follow-on rounds. And those firms that were able to raise money found earlier investor's positions seriously eroded in cram downs, preferential redemptions and other onerous terms and conditions.
Draper Richards concentrates on early stage, Information Technology (Internet, intranet and communications and high value components) start-ups. They are investing for the long term - through the life of the start-up to liquidity event. The criteria they evaluate in potential ventures:
- Large Markets - $500 - $1B
- Recognized pain killer
- Understandable value proposition preferably with products that have high gross margins
- Sustainable competitive advantage
- Dedicated team that will do whatever it take to get to market and grow the business
- IP or other barriers to entry that provide a defensible position
- Customer traction and especially now where VCs are funding businesses on the cusp of growth rather than concepts that may or may not prove marketable
- Length of sales cycles - some big ticket items in the space have very long sales cycles and firm's executives must be realistic in what it will take and how long it will take to turn interest into sales
- Capital required for whole start-up life cycle - not just the amount needed to get to the next round
These are pretty standard evaluation criteria. When combined with preference for IT based start-ups, entrepreneurs should know what the firm will consider and whether Draper Richards might be a suitable VC for their endeavor. Seems straightforward enough, but it comes up so often in these fora that many entrepreneurs are not putting these pieces together. Entrepreneurs who just look at VCs as funding sources are missing a critical aspect of what makes each VC receptive to particular business plans.
Jim recommends that most of the information can be found on the firms web site and Draper Richards does a good job with that. But it can't stop with a cursory once over. In our experience, VCs are just not as receptive to unsolicited proposals as when they are introduced by others with whom they have some relationship. It is usually the service providers - accountants, lawyers, valuation businesses, consultants - and previously funded entrepreneurs who provide a critical link in the process. Reading the web site provides an environmental scan, but it is relationships that matter within the VC ecosystem.
Even with all the proper preparation, bullet proof business presentation, consummate knowledge of the markets, technology, competitors, personal introductions and a first rate team of savvy experienced professionals, start-ups still face daunting odds in getting selected for venture funding. Start-ups should assume that they might be meeting 30 or 40 financing sources over the course of fund raising. The process still takes much more time, effort and energy than most entrepreneurs expect - even those that have been through the process.
Selecting winning candidates from the 1,000s of business plans that get submitted to established VCs is absolutely subjective. Jim indicated that for every 100 B-plans submitted, 2 or 3 might get serious enough consideration to merit an interview. And despite all the planning and practicing and calling in every favor, some deserving businesses still will not get funded. That is just how it is. Best to have alternatives prepared for that eventuality.
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