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Print Edition StoriesFriday, April 17, 2009
How to attract venture capital funding
By Mary Duan, ACBJ Wire Service
MHT's Galen Moore: Charities score with online fundraising
How is the economic crisis affecting tech companies?
Whether companies are touting emerging technology or a brick-and-mortar model, a single set of requirements holds true when seeking out venture capital funding: A demonstration of sound business strategies.
That means a defendable technology or business model, a proven team, a solid business plan and a clear exit strategy to garner interest from venture capitalists.
Jeremy Swan, a director in the private equity services group of the New York office of Protiviti, a global consulting and audit firm, said the profile of firms obtaining venture capital in the current economy fit the same mold as those financed pre-crisis. The difference is that VCs are much more focused and apply a heavier hand when it comes to due diligence.
“What makes a business successful in seeking venture capital? The criteria hasn’t changed,” he said. “The business has to be focused. The management team has to be focused and understand the market, and it has to be viable as a business for the long term.”
George Brown, a Protiviti managing director based in Washington, D.C., said that if a company seeking venture funding has a tech play, VCs want to see more than a proof of technological concept. “They’re looking at an actual business created, a revenue line, a cost line understood in the current economy and where they want to take the business ... an economic proof of concept,” Brown said.
These companies need to show a competitive advantage, a means by which they can create a larger market or take away shares from others in the same business space. That advantage can come from what venture capitalist Roger Walton calls the “special sauce,” the attribute that is unique to a particular company.
Walton, a general partner at Castile Ventures in Waltham, said this attribute must have a long-term uniqueness that cannot be easily replicated. This can include a compelling innovation, access to exclusive content or unparalleled connections to a person or group of people.
In addition to having a strong product plan, company executives have to show that they can operate successfully on a technical and financial level.
“The track record of the team and a demonstrable business model and operating model are very important for the money people to get behind,” Protiviti’s Brown said.
When pitching a product or idea, you’re also marketing your team. Recognize what team members you already have and acknowledge what positions need to be filled. The question the VC wants answered, said Walton, is, “Why is this team the best set of people to create this product?”
Flexibility is also important, according to Ken Herbert, vice president of the business and financial services practice in the Mountain View, Calif., office of global business consultancy Frost & Sullivan.
The management needs to be prepared to change roles once VCs take a stake in the business. The executive team needs to be extremely open-minded, Herbert said. Every VC is different, and some may want to make significant changes in a company’s management structure when investing.
Yet Herbert noted, “It’s rare that a person is just shown the door and told, ‘See you later,’ because they’re often critical to the business.”
These are the individuals who have the client contact or the technical knowledge. It is not uncommon to transition them into another role for a number of years, he added.
Quick Tips
• Make sure that members of the management team have a proven track record, and that they are focused on the business of doing one thing better than anyone else.
• Make sure team members know, and are willing to accept, that their roles may change drastically if the company succeeds in getting venture funding.
• Make sure that the company has an exit strategy other than an IPO.
Lynette Cornell, Mass High Tech Editorial Intern, contributed to this article.
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