The VCs have awakened: What to do about it

On the Money
From the  June 2, 2006 print edition

After a dreary and depressing period of timidity and retreat, venture capitalists seem to be awakening.

They remained on a steady pace in the first quarter of 2006, investing $5.6 billion in 761 deals, according to PricewaterhouseCoopers. The quarter’s dollar value matches the investment level from fourth quarter 2005 and represents a 12 percent increase over the same period last year.

According to Michael V. Copeland at “CNNMoney”: “There’s never been a better time to start your own company. New technologies are creating new business opportunities on the Internet, on mobile phones, in consumer products and in information services.”

According to Copeland, in the late 1990s, a typical VC-funded startup needed roughly $10 million to amass the infrastructure and staff required to carry the company from its first business plan to its first product launch. Today, the cost has been reduced to just $4 million. The barriers to entry never have been lower.

The combination of increased venture funding and a lower cost to market makes it a good time to review the essential elements for obtaining your share of this year’s VC money. Here’s the path.

An obvious first step is the business plan — which often is overlooked or underdeveloped. Remember these key points for superior business plan construction:

• Clearly and immediately show that the plan contains the basic components: company, product or service, customers, market, competition and potential risk.
• The executive summary, no more than two pages, should simply answer these three questions: 1. How much money do you want? 2. What are you going to do with the money? 3. How much will the investor receive in return?
• Make the purpose of your business obvious. Demonstrate that your personal skills and management team’s experience are directly applicable to this opportunity.
• Explain how you will manufacture the product or provide the service — especially the source of your profit.
• Discuss general trends in your market and industry. Then, surgically identify the segment and the unfilled need. Demographics of your potential customers are useful, particularly if they strike a chord with the VC investors.
• Depict your competition in detail and the reasons for your superiority.
• Describe your marketing plan — the “4 P’s” of price, place, promotion and product.
• Prepare complete pro forma financial statements: balance sheet, income statement, cash-flow statement, and sources and uses of funds.

The most important is cash flow.

Once the business plan is completed, the hardest part is gaining entry to the venture capital firm. In about 60 minutes, you must show why your business could be the best thing since peanut butter. Obviously, your presentation should be interesting, informative and well-prepared.

Here are some specific insights for success:

• Conduct your own due diligence on the venture firm prior to the meeting. Know its focus, philosophy, successes and failures.
• Prepare a set of questions you want to ask during your meeting. The best venture firms view their relationships as authentic partnerships — and that’s what an entrepreneur should expect as well.
• Don’t become lost in high-level market statistics. Focus on the essentials of what you are going to accomplish with the capital requested.
• Practice the entire presentation and time each section. Maintain control of the presentation’s flow and don’t wander. However, be prepared to digress if requested. By knowing the timing of each section, you’ll be able to re-engage the presentation and still cover all critical parts.
• Have crucial documents (with enough copies for all) ready for review, such as the detailed pro forma financials, a customer reference list and a current capitalization chart. Don’t hand them out until the end of the presentation.
• Have backup plans in case of audiovisual failures and connectivity troubles for live Internet demonstrations.
• Be prepared for uncomfortable questions. Often, venture partners will ask bold questions about areas of concern. Address those questions immediately and then return to the overall presentation, tailoring the conclusion from those questions.
• Maintain a positive “risk-to-IPO” ratio. That is, the number of times you mention “risks” to the number of times you mention “IPO.” Be forthright about the risks inherent in your business.
• If the presentation goes exceedingly well, have your company’s bank wiring instructions ready. Include this information on the last slide of your presentation.
• If the presentation is heading south in a hurry, don’t worry. Relax and have fun. A sense of humor is always helpful.

Remember the words of J. Paul Getty: “If you can count your money, you don’t have a billion dollars.”

© C. Stephen Guyer for American City Business Journals Inc. All rights reserved.