Wednesday, November 19, 2008

Start with the right management team.

Some Venture Capitalists (VCs) get involved in very early stage ventures, providing funding with only a concept. But in general, they’re reluctant to be the first investors in a deal. VCs are like penguins standing around the edge of the ice. If you get one to jump in, the others will be prepared to come in too. As someone told me recently, "They never say yes. They never say no. They just take a lot of notes." They’re not very interested in helping you build your business for the long term because they want a quick return on their money. With a VC on your board, you’re going to get help whether you want it or not. Founders often get fired if VCs decide they need a more experienced manager to move the business along faster.

VCs want validation that the company’s technology is OK before they invest, so strategic partnerships with established name companies can be helpful in this regard. Any validation you can get from a third party will speed up VC financing (based, for example, on the belief that a company like GE wouldn’t be involved in something unless it made good business sense). Young Angel-backed companies should explore the many options available under the strategic alliance umbrella, either in addition to or instead of next-stage VC funding, as many larger companies are seeking new ventures to fund. Microsoft invested hundreds of millions of dollars in new ventures in the past several years. Cisco has stimulated demand for state-of-the art network technologies by funding new ventures whose software and content create additional usage of network capacity. Investments in smaller companies can also provide an inside track to big businesses in new industries.

VCs are typically prepared to do more deals that Angels. Angels don’t have to invest their money with you. They can usually invest it in the public market and get a good return with considerably less risk. VCs, on the other hand, are under pressure to invest the money they raise. VC investors focus on different things when evaluating a business opportunity. In recent conversations, one VC pointed out that he wants to see a "control" manager in place, not a salesperson - but to start a business you need a salesperson! Another said the first page she looks at in a business plan is the management page. A third said his firm comes prepared to offer significant assistance with management having years of experience to help them so the management experience at startup isn’t that important. A fourth said he first evaluates the core risk of a business when looking at a business plan. Yet another reports he looks at the market opportunity first and then the management team.

However, in general, good management is a key to attracting VC investors. With technology investments, where time-to-market is crucial, VCs look for teams with proven track records - there just isn't time for long due diligence checks. Jim Breyer, a managing general partner of Accel Partners, has been an investor in over thirty consumer internet, media and technology companies that have completed public offerings or successful mergers. Breyer talks about the importance of the “entrepreneurial pitch” in getting to know the people involved in a business venture. Typically, everything starts with a business plan - more than 5,000 are submitted to Accel every year. Of these, Accel meets with about 250 teams and invests in 10 or 15.

Accel’s success depends less on its ability to read business plans than on being able to read the people who submit them. "The quality of the people is the single most important element in making an investment decision," says Breyer. “It's impossible to divorce business discussion from personal history.“ Breyer favors informal meetings where the business presentation is very interactive. Someone who is very structured (for example, someone who has to go through each slide when giving a presentation) will have trouble in this kind of meeting. Breyer believes they’ll probably have trouble as an entrepreneur as well. “Successful entrepreneurs may be short on experience but they’re tremendously flexible and want to make things happen quickly. If they can't get their message across in 60 minutes, then there’s something wrong.” Breyer says, “We come away from every meeting with a strong feeling about the team.”

I've found that people will put up money for a bad concept and a bad plan if the management team is right. But even good concepts and good plans won’t get funded if the management team is wrong.

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