In the past year, the venture capital funding pipeline has gone from a gusher to more of a trickle. In the first half of 2009, just over 1,200 venture investment deals were made nationwide, involving about $6.8 billion, according to the quarterly PricewaterhouseCoopers/National Venture Capital Association MoneyTree report. That's compared to more than 2,000 deals in the first half of 2008, worth $15.2 billion.
With less venture money flowing--and fewer entrepreneurs scoring cash--what's it take to make the cut? We asked three venture-capital investors to name the key factors that get them excited about a young company. Alex Ferrara of Bessemer Venture Partners , Maneesh Sagar of CT Innovations and Jon Elton of Inovia Capital identify their gotta-have factors for a successful VC pitch.
One important question to ask before you begin pitching: Are you really ready?
Elton says many entrepreneurs don't understand the implications of taking on venture investors. These investors will have an equity stake in your business, have representatives on your board and influence company direction. VC investment also tends to drive the company toward either a sale or initial public offering within five years or so, in order to give the investors a substantial return on their money.
"Remember that VC dollars are very expensive and come with very high expectations of growth and outcomes," Elton says.
Bearing that in mind, here are the factors these VC investors look for.
- An Experienced Team
In today's tough economic climate, experience counts for a lot. Many VCs consider a successful track record with at least one previous startup essential. If you have a great idea but no entrepreneurial experience, consider recruiting an executive to your team who would lend you some startup credibility.
"I want to fund people who've done startups before," says Sagar flatly. "I met some great guys in their 50s recently from Cisco and Oracle, but they've never done startups before. Maybe they have a great idea, but I don't think they have the wherewithal to deal with startup issues.
"You've got to find office space, do marketing--20 things you've never done. You have to motivate everyone, sell, deliver, raise money and keep investors happy, all at the same time. They haven't developed an entrepreneurial mind-set. Good judgment in business comes from experience. I want to see people who've already made their mistakes and struggled."
Beyond having experience building a business, the team's communication skills are critical, says Elton. "I'm investing in people, and if they can't effectively communicate their message to us, they'll have trouble with investors and potential customers. It's going to hurt the company. I look for someone who can get me excited, who has an infectious enthusiasm for what they're doing."
- A Problem-Solving Product or Service
Be clear about the problem your company solves, Elton says. Do you save customers money? Time? Be specific about why customers will switch from whatever they're using now to your offering. VCs often refer to this as solving a "pain point" or difficulty in the marketplace.
"Often, people fall in love with their technology," he says, "and don't necessarily do a good job extrapolating that into a business-use case, or a real pain point. Technology for technology's sake, in my experience, doesn't necessarily win in a real-world setting."
Sagar offers an example of a problem-solving company CT Innovations funded last December: Retail Optimization, based in New Haven, Connecticut. The company's software helps retailers set their stock levels more accurately, eliminating costly overstocks and lost sales due to out-of-stocks. Using the company's product both reduced losses and increased sales for customers, a double-win on ROI that made the company an attractive investment.
Sure, your company needs money. But what does your company offer an investor? Right now, venture capitalists are looking for companies with tangible assets of some kind. If not an existing product, patent, manufacturing process, piece of software or service with an established customer base, perhaps a proven, high-powered management team.
"We like to invest in companies that have some asset," Ferrara says. "The company knows what their asset is and can properly describe it and create excitement around it. Most VCs don't invest in companies that are just ideas."
With the economy iffy, one of the most concrete signs of success you can offer VCs is a customer list. They'll expect you to have at least a few major customers already signed up.
"We want to hear from happy customers," Ferrara says. "We will call them. We need to know--are the dogs eating the dog food? Will customers renew? The only way to find that out is to understand the product and then call the customers."
If you don't have customers yet, scoring funding right now may be tough. Ferrara notes that technology advances have made it possible to launch many products on the cheap, particularly in tech fields--so you shouldn't need funding just to create a product prototype.
"If someone says to me, 'I want $5 million to build an application and market it and get some customers,'" he says, "I think, 'Why haven't they done it a cheaper way?'"
VCs expect entrepreneurs to know the hard numbers of their business. "I like data versus adjectives," Elton says. "When somebody says, 'We've grown tremendously,' I expect them to follow up with 'Here's our traffic data, here's the customers we've signed up.' You should have some objective metrics to illustrate your point."
One of the most important figures to know: customer acquisition cost. How much does your company spend on marketing, on average, to bring in a new customer? This figure is needed, Ferrara notes, because venture capital funding commonly is used to acquire more customers. So be ready to tell investors how much your company could grow from their cash infusion.
Aside from your own company metrics, venture capitalists are keenly interested in how your product or service improves customers' return on investment. "We're spending a lot of time with companies with demonstrable return on investment for their customers," says Ferrara. "They can show how the customer's purchase creates efficiency."
- A Demo
Often, entrepreneurs blather on about how exciting their product or idea is when it would be more effective to simply demonstrate, Elton says. To extrapolate on an old saying, a demo can be worth a thousand words. And a dynamic demo beats a static PowerPoint slide any day.
"Jump into the demo," he says, "rather than showing me a screen shot of something. I find that not very helpful."
- A Plan
It may seem surprising, but the VCs report many of the startup managers who pitch them can't present a clear plan outlining what they would do with the money they're seeking. It doesn't inspire confidence when execs have only a fuzzy idea of how they would use more money to build their business.
"How many new customers would you get?" Ferrara asks. "You need to paint a really good picture that it might be a small company today, but with $5 million or $10 million put toward customer acquisition, it could be ramped into a substantial business."