Part I: Your Company Just Isn’t Right… the Efficient Return
CMM May 22nd, 2008
No entrepreneur enjoys hearing “your company just isn’t right for us,” and contrary to popular opinion, VC’s don’t enjoy saying it. Unfortunately, the economics of limited resources and a high expectation of performance requires the VC to be very cautious with investing decisions. As a result, hundreds of good deals must be turned away because they don’t fit the profile of the VC fund. This series is provided to help entrepreneurs understand the idea of an investment profile and how to best target growth capital fundraising. Understanding the profile is critical piece of selecting who and how raise your capital, and a central concept to growth-stage venture investing is the idea of an “efficient return.”
Anyone with a basic understanding of finance is familiar with the relationship between risk and return– as risk increases, so should return. Those investments that fail to meet the appropriate return (I’ll spare you the math on determining the efficient frontier) are considered inefficient and a bad investment. This concept holds true in venture capital. After all, why should a VC invest in a high risk start-up that provides only a marginal ROI? Using a moderate-to-low risk strategy, that same VC can invest in public companies and attain a healthy ROI. Likewise, in order to justify a high risk investment (and contrary to what anyone says, every early stage company is high risk) the VC must be able to return 6 to 8 times their investment in a reasonable period of time. That scenario is the only scenario that justifies the risk profile of growth-stage venture investing.
In closing, does hearing this phrase mean an idea isn’t promising or that the entrepreneur is flawed? Many times, the answer is no. In fact, if the entrepreneur is confident in their idea, they should probably revisit the fundraising strategy and ask the question “is VC capital for me?” If the idea doesn’t match with the expectations of VC funding, there are plenty of alternatives including grants, private loans, SBA loans, and bootstrapping. If you still can’t find finding for your idea, revisit your model and value proposition. Maybe you’ve got a good idea but haven’t quite hit the target yet.
Remember, business development isn’t about the precision of the sharpshooter (ready, aim, aim, aim, aim, aim, aim… …fire); it’s about the persistence of the infantryman (ready, aim, fire… aim, fire… aim, fire… etc)
