Get Funded!
Sometimes there is nothing more
powerful than the passion and
vision of an entrepreneur. But
sometimes passion and vision are just
not enough. It helps to understand the
criteria that venture capital firms use
to decide which companies to fund.
Some venture capital firms and corporate
investors have very narrow criteria
— specific technologies at specific
stages in specific regions of the
country.
Others have broader criteria and
invest across many technology sectors
and geographic locations. But all
investors look for certain critical components
in an early-stage company.
Below is a brief summary of these critical
criteria. If you meet these criteria,
you may be able to continue to the
next step in the venture financing
process. If you don't, you are likely to
receive a polite note passing on your
opportunity.
- Compelling Idea
Every entrepreneur believes his or
her idea is compelling. The reality is
that very few business plans present
ideas that are unique. It is very common
for investors to see multiple versions
of the same idea over the course
of a few months, and then again after a
few years. What makes an idea compelling
to an investor is that it reflects
a deep understanding of a big problem
or opportunity, and offers an elegant
solution. This is the starting point for
getting venture investors interested,
but it is not sufficient. The idea alone
does not make you fundable. You have
to possess the rest of the ingredients
below.
- Team
You may have a great idea, but if
you don't have a strong core team,
investors aren't going to be willing to
bet on your company. This doesn't
mean you need to have a complete,
world-class, all-gaps-filled team. But
the founders have to have the credibility
to launch the company and attract
the world-class talent that is needed to
fill the gaps. The lone entrepreneur,
even with all the passion in the world,
is never enough. If you haven't been
able to convince at least one other person
to drink the Kool-Aid, investors
certainly won't.
- Market Opportunity
If you are focused on a product/market
opportunity that is not technologybased,
you probably should not be
pursuing venture capital — there are
different private equity sources for
non-technology businesses. Venture
capital is focused on businesses that
gain a competitive edge and generate
rapid growth through technological
and other advantages. If you are
focused on technology, you should be
targeting a sector that is not already
crowded, where there is a significant
problem that needs to be solved or an
opportunity that has not been exploited,
and where your solution will create
substantial value. Contrary to popular
belief, it's not about how big the
market is; it's about how much value
you can create.
- Technology
What makes your technology so
great? The correct answer is, "There
are plenty of customers with plenty of
money who want to buy it," not,
"There are geeks with no money who
think it's cool." Assuming you have a
technology advantage right now, how
are you going to sustain that advantage
over the next several years? Patents
alone won't do it. You'd better have
the talent or the partners to assure investors that you are going to stay
ahead of the curve.
- Competitive Advantage
Every interesting business has real
competition. Competition is not just
about direct competitors. It includes
alternatives, "good enough" solutions,
and the status quo. You need to convince
investors that you have advantages
that address all these issues, and
that you can sustain these advantages
over several years. A few years ago
entrepreneurs could get away with
saying that "competition validates my
solution," but today that's not good
enough.
- Financial Projections
If the idea of developing credible
financial projections makes you wince
or wail, you are not an entrepreneur
and you shouldn't ask investors for
money. Your projections demonstrate
that you understand the economics of
your business. They should tell your
story in numbers — what drives your
growth, what drives your profit, and
how your company will evolve over
the next several years.
- Validation
Is there any evidence that your solution
will be purchased by your target
customers? Do you have an advisory
board of credible industry experts? Do
you have a co-development partner
within the industry? Do you have beta
customers to whom investors can
speak? Do you already have paying
customers? The more credibility and
customer traction you have, the more
likely investors are going to be interested.
To secure venture funding today,
you need a good grade in all seven
areas, and an A+ in at least a couple.
It's a tough environment out there, so
don't waste your time with a story that
is not compelling and credible.
BILL REICHERT is a Managing Director of Garage Technology Ventures.He has spent most of his career as a serial entrepreneur. To learn more about Bill Reichert, visit www.AdvantEdgeMag.com/Reichert today.
