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Venture capital firms remain on the prowl for new businesses, but it's more of a stroll than a hunt.
Venture capital investing fell to $3.7 billion in the second quarter, down more than 50 percent from $7.6 billion in the year-ago period, according to the latest MoneyTree Report from PricewaterhouseCoopers. Although that second-quarter sum represented a 15 percent jump over the prior quarter, the number of deals remained flat at 603, PwC said.
Many sources--including big pension funds, college endowments, and, in some cases, high-net-worth individuals--have failed to meet commitments to some funds, making this one of the most challenging environments for venture capital since the dot-com bubble burst, says Howie Schwartz, a director at the FundingPost, a networking group for venture capitalists and entrepreneurs. "No one is admitting this, but we're seeing it anecdotally," he says.
To capture funding today, entrepreneurs have to do a lot more than present a lucrative business model and pick the right management team, says Mark Davis, an associate at DFJ Gotham Ventures, a VC firm in New York. Today, VCs are increasingly attuned to a company's ability to manage the rate at which they burn through investment dollars, he says. Since it'll likely take longer for companies to make it big or get bought out, they'll be expected to make do with less for longer, Davis says.
To avoid other potential missteps, here are six "do's" and "don'ts" for capturing venture capital today:
- Do look for fund changes
Although VC firms typically stick to certain investing themes and industries, those criteria may change with market conditions. For instance, RRE Ventures, a VC firm in New York and Silicon Valley, recently moved to widen its investment in financial services firms. Given the regulatory hit the financial services sector may undergo in the next couple years, this move makes sense, says James Robinson, a managing partner at RRE. "We've redoubled our efforts at investing in companies that have new takes and twists on [providing] financial services to consumers and to businesses," he says.
- Do network
To keep abreast of changes within the venture community, start networking with likeminded entrepreneurs--especially those who've successfully landed VC funding, says Konstantine Drakonakis, a director at New Haven, Conn., VC firm Launch Capital. In addition, look at trade journals and scan new business announcements to see who's giving, he says. The National Venture Capital Association, an Arlington, Va.-based trade group, is also a reliable source of industry information.
- Do prepare a business plan
Many VCs won't crack open your business plan. Instead, they'll base their decision to provide funding on what their gut tells them and the contents of your executive summary. "I probably will never read it, even if I back you fully," Robinson says. Still, business plans are vital, he says. "It's a dynamic document--it lives, it breaths, it changes. The discipline that goes into writing one will really help you develop and think through key issues in your business," Robinson says.
- Don't waste VCs' time
VCs are often tasked with trolling through tens of executive summaries each day. Do them a favor; keep it simple, says Brian Hirsch, a managing director at Greenhill SAVP, a VC firm in New York. Answer the following questions in your executive summary: What problem are you trying to solve? Why are you uniquely qualified to solve it? Is it a good business? What's it going to cost? And how long is it going to take? Avoid flowery language and be as succinct as possible, Davis says. "VCs don't want to spend twenty minutes trying to parse through the language in the first couple paragraphs," he says.
- Don't overstate the company
Present your company's addressable market, not just its total market size. Too often, entrepreneurs try to pass off the sum of revenues generated by all of the players in an industry as their addressable market, Davis says. Instead, they should cite the revenue a company could generate if it captured 100 percent of the market, he says.
Additionally, entrepreneurs tend to downplay their company's risks while exaggerating its benefits. That's a mistake, Hirsch says. "The more honest and open you are with potential investors, the more they'll respect your ability to manage the business," he says.
- Don't rely on government stimulus
Landing stimulus funds can be a boon for businesses--and attract the gaze of some investors--but they do not typically represent a permanent revenue stream, Robinson says. "I don't value a dollar of government stimulus spending as equal to a commercial dollar," he says. "You might not get it, and if you get it, it may not last."
--Write to Diana Ransom at email@example.com