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Venture Capitalist And Small-Business Expert Ruthann Quindlen

Want to get inside the mind of a venture capitalist? Read on to learn from the experiences of Silicon Valley vet Ruthann Quindlen.

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If there's one meeting that can strike fear in the heart of any entrepreneur, it's that first face-to-face with a venture capitalist. Imagine (palms sweating) standing in front of a room of high-powered deal makers (nervously clear throat) who have the funds and the experience to truly help your business get off the ground.

Ruthann Quindlen is one of those folks on the other side of the conference table. Beginning her career in the finance world as an analyst at a Boston-based investment bank in 1982, she had the foresight to join the burgeoning venture industry in the Silicon Valley in 1993. As part of the venerable early-stage venture firm Institutional Venture Partners (IVP), Quindlen has been on the front lines, watching and helping some of the largest names on the Net get started.

In Confessions of a Venture Capitalist: Inside the High-Stakes World of Start-Up Financing (Warner Business, $25.95), Quindlen shares her experiences of watching start-up companies come, go and survive, specifically addressing the mistakes that first-time entrepreneurs often make. We've asked Quindlen, who is currently forming her own venture firm, Ironweed Capital, which is focused on seed and first-round funding for first-time entrepreneurs, to share some of her knowledge of the start-up tech world.

Entrepreneur.com: Why did you want to write this book?

Ruthann Quindlen: The reason I wrote the book was for entrepreneurs. They were doing presentations on their ideas and their companies, and there seemed to be a lot of things they didn't know. Not necessarily about venture capital, but about building a company. And I thought, How were they supposed to know? Maybe they had a friend who [was an entrepreneur], maybe they got a piece of advice, maybe it was wrong. So I thought, I'll write a book with the common mistakes that I've seen.

Entrepreneur.com: What's the layman's definition of venture capital? How does it differ from angel investment and investment banking?

"If you don't have a clear idea, you can't build a great company."

Quindlen: The difference between angel investing and venture capital is, one is an amateur sport and one is a professional sport. [Angels invest] as a hobby. Sometimes they've made lot of money in a prior company and they just want to kind of get involved with a few companies. Venture capital is a professional business-when times are bad, we still do it. If the company's in trouble, we still do it. We don't just do it at the beginning and then let other people take over. We carry it all the way through.

In terms of what it is, we get money from what are called limited partners-those are university endowments and pension funds that need to diversify their risk. They have a little portion dedicated to high-risk equity, which is what venture capital is. We take that money and invest it for them in [developing] companies. And you can be involved in all stages-from a very early stage to a very late stage-and the dynamics are different in all the stages. Then when the company has a liquidation event-either going public or getting acquired-we distribute those shares to the limited and to ourselves in a split that ranges between 70 percent for them and 30 percent for us to 80 percent for them and 20 percent for us.

Entrepreneur.com: In the book, you say there's a divided camp among venture capitalists as to whether good people or good markets are more important for a company. Why the dichotomy? Have you made a decision as to which is more important?

Quindlen: As with most things, the answer is both. You need both to succeed. What I've found in my history is that with good people, a company will find a good market even if they didn't make one on the first try. I tend to lean in the direction of great people. You still need a great market to make the company work [of course.] With the best people in the world, if you have a crummy market, it doesn't fly.

Entrepreneur.com: What is the "elevator speech test?"

Quindlen: I found that when I was describing the [potential] investments to my partners, if it took me longer than a few sentences to describe what the company did and what it's value proposition to its customers was, then I didn't have a very clear idea of what they were doing. I found it was the same with them describing their business to me. If they couldn't describe in a few sentences-in other words, the time it takes to go between floors on an elevator-what their company was and what the value proposition was, then they probably didn't have a very clear idea either. And if you don't have a clear idea, you can't build a great company.

Entrepreneur.com: What are some of the biggest mistakes entrepreneurs make during the early stages of growing their business?

Quindlen: This book is really written for first-time entrepreneurs. It's very basic and assumes you don't really know a lot yet or you haven't been through it yet. And so I write about a lot of common mistakes in the book. [For example,] first-time entrepreneurs aren't paranoid enough. They'll be telling you in a board meeting that their product and strategy are so much better their competitions'. And then the next time you meet with them, they've been severely trounced by the competition. So one of the things I say is it pays to be paranoid.

Another thing I talk about is leadership. You really need a CEO in charge of the company who can get everyone committed to a common goal. When that's missing, the company loses focus, and focus is what causes the company to be successful at the very earliest stages.

Entrepreneur.com: What are some drawbacks of the hype that accompanies many new tech and Net businesses?

Quindlen: The biggest problem is that you draw attention to yourself from very large competitors. Take the example of Go Corp., which was one of the first pen-based operating systems. Because of the hype surrounding the company, Microsoft got very focused on them and basically put them out of business by getting very focused on a market that was very undeveloped. In a way, you could also say that happened with Netscape and Microsoft; part of the reason Microsoft paid any attention to them was because of the hype around Netscape. Another thing that happens when you have hype is it causes your competitors and people in the industry to kind of wish you would fail. They feel you've overhyped the situation, and they're rooting for you to not make it. That's a really bad situation. Competitors are competitors, but you really don't want people wanting you to fail.