Archive for the 'Venture Capital' Category

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)

 

 

 

Getting the Attention of a VC

CMM March 5th, 2008

I’ve had a nice long break from writing anything, mostly the results of: 1. Twitter working as my release, 2. traveling, 3. 60+ hour work weeks, and 4. fighting off a cold that doesn’t want to die.

 Since I know a few young business folks in the East TN area occasionally drop by for a read, I thought I would share a blog post from “The Post-Money Value” on getting the attention of venture capital.  I think the post hits the nail on the head and local readers should try to apply those guidelines to their investor of choice.

 Here is a synopsis of the guidelines presented in the post:

  1. Get to know the profile. Every VC fund has a certain profile of criteria (investment size, location, stage of development, technical focus, etc). Finding investors interested in your area is half the battle. Don’t forget, venture equity should be very high value-add to the company. The better you fit the profile of the VC, the more likely they will be able to add value through their experience, network, etc.
  2.  Solve a problem.  Yes, it really is that simple… although I’ll add that the problem must have a large enough market and the solution must have a certain degree of profitability. VCs are obligated to their partners and investors to provide a very high ROI. That means that they sometimes have to pass on profitable and rewarding “solutions” because the numbers just don’t work. And for all of you technologists/scientist/engineers out there, read this one over and over and over…
  3. Play to the VC’s strengths. As a piggy-back to point one, look at the current profile and the VC’s historical investment decisions. Draw some conclusions– What area is the VC interested in? Do you see any technolog trends? Any prefered profile of entrepreneur? Also, this requires getting to know the person. Don’t feel obligated to rush right into the sell. The owner-to-VC relationship is a critical part of the investment decision that takes time to develop/mature. Don’t try to force it.
  4.  Understand the odds. We’ve all heard the numbers. 100s of deals a year and around 2% actually get financed.
  5. Ask for the No. A good VC should understand that your time is valuable (as is theirs). If you feel like things are stalling out and not progressing, don’t be afraid to ask for the no. If it isn’t going to be, its better to know sooner than later. Then you can move on, and there are lots of financing options and opportunities. Remember, if you can’t hear the word “no,” you aren’t fundraising. You’re begging and desperate… and both are major turn-offs. 

Thoughts on MSFT & Yahoo

CMM February 6th, 2008

This morning I had coffee with one of the guys at Abunga.com. It was a great conversation and really refreshing to see some new business leaders developing in the East TN area. Of course, the conversation wandered over to the possible (imminent) Yahoo/Microsoft merger. I love mergers and think they are really fascinating to observe, both from a practical and academic viewpoint. When done right, they are a win-win situation for both sides. They can also be the realization of an entrepreneur’s worse nightmare scenario– turning over your creation to watch it get run into the ground. While I’m not ready to offer any opinions on this situation, I do think Microsofts’ Live Search and MSN platforms are pitiful compared to Yahoo or Google. I also predict that this will breathe some life back into the struggling tech industry.

Here are a couple of points for consideration:

  • $44.6 billion is almost a 70% premium over the closing price of Yahoo the day before (from A VC)
  • No financial buyer in their right mind will compete with a $44.6 billion offer
  • Few strategic buyers have the resources, need or depth of service necessary for acquireing Yahoo
  • This is even more proof that the real legacy of computers and the digital age is not hardware or software… but content.
  • Google is now on the receiving end of a “the enemy of my enemy is my friend” cliche’

Also, I’d expect to see a lot of house cleaning for the portfolios of early technology venture funds. Competition should decrease with two of the three giants combining. That is combined with the overall slowing economy and pessimism on the side of analysts, managers, talking heads, media, most Democrats, and some Republicans.

Lastly (and only if you are interested in finance geek stuff), this provides example of semi-strong market efficiency at work. Nothing happened internally at Yahoo after the close of business on Thursday, January 31. The company didn’t change management, introduce a new product, report abnormal returns, etc. The only thing that happened was someone offered to purchase the stock… which has now bid up to the offer. Interestingly enough, yesterday and today the stock started bidding down slightly as the trade volume leveled off. The point… the market is moving to a new point of balance based on the simple supply and demand concept. And no one had to regulate, adjust, etc. Hmmm… perhaps there is a lesson to be learned here on the federal economic level?

Chart for Yahoo! Inc. (YHOO)

Here are the thoughts of some much smarter folks:

The Gabe & Max Internet Thing

CMM January 29th, 2008

I grabbed this excellent video from Marc Andreeson’s blog (which I highly recommend). This reminds me of some of the presentations I witnessed/suffered during my MBA.

Remember folks, you can have the dream life of your dreams!

Season’s Greetings from Gary the Snowman

CMM December 18th, 2007

E-card video from Blueprint Ventures featuring Gary the Snowman Entrepreneur turned Venture Capitalist.

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