by David Berkowitz
The venture capital business is back. After a few of years of declining investments, 2004 saw the industry bounce back and 2005 showed renewed strength in the market with rising deal sizes and surging valuations. VCs' pockets are lined with cash - the first nine months of 2005 saw Canadian funds raise $1.4 billion in new money, a 20-per-cent increase over the same period in 2004.
Despite the enthusiasm, it is not '2000 Redux' for the venture business. Unlike the bubble of the late '90s, a 20-something Internet entrepreneur cannot raise millions today with little more than the proverbial napkin business plan and a deck of PowerPoint slides. Extracting cash from VCs takes hard work, patience, resilience and determination. Doing the dance is a necessary evil for tech entrepreneurs. It's like meeting the parents of your fiancée; it's not fun but it's got to be done. And very few get it right. Here are a few tips to help you strike when the heat is on:
- Do your due diligence: Raising venture capital is not just about finding someone with deep pockets. VCs can be a great resource as a source of business advice and contacts. Get to know the ones that specialize in the specific stage, sector and market you are in. Target only those VCs with whom you are a good match.
- Know the process: Every venture fund is different. Personally, I like to start with an informal meeting, followed by a 90-minute pitch. Then, I will proceed with my due diligence, followed by a presentation to my partners, term sheet (description of the offer), legals and finally the closing. Know how that firm works and who the key decision makers are.
- Sit tight: Raising a first venture round can take anywhere from three to 12 months, far longer than in the past. Plan ahead. Don't show up on Friday expecting a cheque by Monday.
- Solve a problem: We get approached by many companies with wonderful technologies that simply do not solve a problem that anyone cares about. I invest in fuel cell companies but I'm not trying to save the planet (although it would be a nice side benefit). What problem are you solving and how much will your customer pay to solve that problem? Sounds simple, but many entrepreneurs have trouble articulating the answers to these questions. Think about how you'd explain your business to your grandmother and pitch from there.
- Get to the point: When pitching, many entrepreneurs spend the first 15 minutes talking about the billion-dollar market potential or recent analyst reports on the industry. By that point, the VC has tuned out and is looking for his or her BlackBerry. When you only have an hour to prove yourself, make the best of it. Keep your pitch really simple, with 10 or 15 slides that only use up 30 minutes of your time. Less is more. Explain what you do in non-technical language, why it is important and what problem it solves. You can use the balance of the time to field questions from the VCs and find out what they are specifically interested in. Remember, your goal for the first meeting is to get a second meeting.
- Expect cynics: When you present in front of VCs you are going to be presenting to an audience full of cynics. We are definitely going to challenge your assumptions and ask difficult questions about your plan and strategy. Don't get defensive - it doesn't help. We want to see that you can handle the questions and the challenges. Even if you don't have the answers, we want to see that you have given some thought to the issues and that you are straight-forward and honest.
- Accept feedback: Through years of investing, we VCs like to think we know what we are doing. If you present to a number of VCs and get the same negativefeedback from all of them, don't ignore it. I have seen many companies take this feedback to heart, rework their strategy, make some changes and come back to the bargaining table six months later to successfully raise capital.
- Don't burn your bridges: We may say no. But we might say yes later. Or we might fund your next venture. It's a relationship business and you should continue to cultivate your VC contacts, even when you're not out raising money.