Can Startups Get Venture Capital?

VC money for startups is scarce, but here's one group that hopes to change that.

By Cliff Ennico

Opinions expressed by Entrepreneur contributors are their own.

When economic bubbles burst, a lot of people get hurt by the fallout. Startup and early-stage companies are among the most vulnerable. It's no secret that many venture capital firms, burned by the dotcom implosion, have shifted their focus to later-stage companies--because they are considered safer, and because VCs don't have to wait as long to get their money back.

What if you are a VC that specializes in early-stage companies? How can you keep true to your mission--funding tomorrow's technologies--while avoiding the wildly speculative investments that fueled the 1990s tech bubble? One such firm has come up with a novel solution--if you can't find investable companies, build them yourself.

"We call it partnering," says Richard Sloan, co-founder with his brother Jeffrey of Sloan Ventures LLC, a Detroit-based early-stage investment firm. "The founders of many early-stage companies are inventors or engineers. They understand the technology, but they don't know how to build a successful business. While other VC firms tell them to 'come back when they grow up,' we take the founders under our wing and put the business together for them."

For the Sloan brothers, building a company is a four-step process. First comes a reality check. Says Richard, "We have a huge database of people in just about every industry, so we schedule meetings with potential suppliers and customers and bring the company founder along. We ask lots of tough questions. If our contact says 'I wouldn't buy that because it would disrupt my distribution system' or 'I like the idea, but the margins aren't attractive enough for us,' then we're aware of a problem. Maybe we can solve it, or maybe this is just a bad idea."

Step two is brainstorming the business plan. "We have a room in our office that's covered with wallboard from floor to ceiling. We call it The Oven," says Richard. "Everything you write on the walls can be downloaded to a personal computer. We bring the company founders into The Oven, and we don't come out until we've got the right strategy for building the company. We spend the next couple of months gathering supporting data, confirming assumptions and building relationships."

Step three is building the management team. "It's a particular challenge here in the Midwest," says Richard, "because most of the people you want come from large corporations, not small companies. We sometimes have to be aggressive and bring people in from other parts of the country."

Step four is financing for the new company and making sure every penny is spent in the right way. "These last few months we've been reminded that bootstrap psychology and frugality really make a lot of sense," says Richard. "It doesn't mean we want a company to pinch pennies to the point that they can't be aggressive. But there will be no fancy parties, no expensive paintings, no pinball machines, no fluff, no fat. In many cases, we do the bookkeeping ourselves for the first year or two."

So what kind of startup company is a candidate for the Sloan treatment? First, a company must have technology that can be legally protected from competition. "If your stuff can't be patented or trademarked, don't bother," says Richard.

Second, the Sloans look for "platform technology," which they define as an "innovation that has applications across a lot of niches and markets." For example, Richard cites one of the brothers' biggest successes, a software product that enables microphones to pick up just one person's voice in a high-noise environment. "While the inventor was focusing on the recording industry, you can easily see applications in the surgery, automotive and wireless cellular markets as well," says Richard.

Third, the innovator must be a "luminary"--someone who is well-known in his or her field. "This is important because they're an ongoing fountain of creativity and innovation, and because they have credibility with the employees and executives we will need to bring on board," says Jeffrey. "No one will travel halfway across the country to work for a startup with a bunch of no-names running the show."

Finally, the Sloan brothers look for projects that have large and growing markets. "If we are going to expend all this energy, there has to be a huge upside," says Jeffrey.

One last thing. "People starting tech businesses must have a sense of urgency," says Richard. "If entrepreneurs don't have the right spirit, the right culture, we pass, even if the idea's a good one. We have to have total alignment of energy and objectives in order to successfully make a business happen."

is host of the PBS television series MoneyHunt and a leading expert on managing growing companies. His advice for small businesses regularly appears on the "Protecting Your Business" channel on the Small Business Television Network at

Cliff Ennico

Cliff Ennico is a syndicated columnist and author of several books on small business, including Small Business Survival Guide and The eBay Business Answer Book. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state.

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