[Sept 20, 2009 – www.techcentral.co.za] The lack of venture capital (VC) in SA and other poorly served markets often forces local entrepreneurs to seek this type of funding abroad. But before making the long trip to Silicon Valley, start-up entrepreneurs should be prepared to answer some seemingly innocuous questions that have a far deeper meaning in the world of VC.
Tell us about the team. How has the founder assembled the team? What is the depth of his network and his ability to convince his peers to buy into the vision? Have any members of the team taken a product to market before? Do they have the management capacity and intellectual horsepower to build the company and/or change course if the original assumptions are faulty? Where are the weak links and areas of expertise that might need improvement? Could the team progress without the founder if necessary? Can the team be trusted? Can the VC company and this team work together for the next five, or even 10, years?
The VC funder/entrepreneur relationship lasts longer than many marriages.
What does the company do? The VC provider is looking for a short, clear and succinct description of what you do. How well can you articulate and differentiate your vision? Is this unique? What is the distinct problem you are solving? Is this a big problem? Is this a nascent space, how large, what’s the growth potential? Is this a thematic area of interest to the VC company? Does the VC have any conflicting investment in this space? Is the space ready and open for change? Does the VC provider have sufficient expertise to call upon in evaluating the opportunity?
Imagine how the VC provider will describe your company, in one sentence, at his partners meeting.
Who are your customers? Do you have customers? Do you have prospective customers? When will you have customers? Will they pay for it? Is the market large enough? What is the sales cycle? What is the price point? Where is the pain? How will this new solution fit with customers’ existing technology profile? How easy/difficult is it to implement? How many customers do you need to break even?
Solving a big problem with real customers who are prepared to pay is the shortest path to raising VC funding.
Who are your competitors? VC providers are sceptical of claims of there being no competitors and will assume either the team does not understand the market, or the niche is too small, or the value proposition too weak. Listening your competitors is advantageous. It enables the VC company to better understand the size and scope of the market and gives the entrepreneur the opportunity to explain how significantly better his solution is to existing alternatives.
At least 22 search engines preceded Google.
Explain the underlying technology. The VC company is trying to determine barriers to entry? How complex is the technology? Is it scalable? Is it defensible? What does it displace? Does the team have the skills?
Is the secret source in the complexity of the technology, method, or the business model?
What is the business model? The VC provider wants to know how you are going to make money. Will this scale? How fast? What is the distribution strategy? Who are the channel partners? What is the phased geographic distribution? Can the plan handle exponential growth? Have any other companies have similar growth curves? What are the critical success factors and downside contingencies? Is this a big enough opportunity?
Could this opportunity grow from zero to at least R500m in sales in 3-5 years?
How much capital do you need? The VC company is trying to determine if your assumptions are realistic. What are the anticipated uses of proceeds? How much capital is this really going to need? What percentage might the VC provider consider investing — at the outset, later, or over the life of the project. How many VC syndicate members will this involve? What are the likely total capital requirements? Is this a VC type of investment? What’s the anticipated return on investment?
High-risk, early stage investors would like to model 10x returns for each investment, with the expectation that nine out 10 opportunities might fail to perform adequately.
Who else are you talking to? Watch out! This question is a curved ball. The VC company is trying to find out where you are in the fund-raising cycle? Is this a fresh opportunity? Is there any urgency to the deal? Is a syndicate in place?
The courtship ritual needs to be carefully managed to maintain interest, momentum and an ultimate closing with the right syndicate.
Who is on your board of directors? Who is advising you? As with the previous question, if the opportunity sounds interesting and you won’t tell the VC company who you are talking to, the company might try back-channeling through mutual connections for the inside track. Where are the “six degrees of separation”? What other reference checks? What is the real state of play?
VC companies prefer a small board of directors (3-5), and expect you to leverage lots of advisers, meaningfully and frugally.
What is your exit strategy? The VC provider is circling back to the first question. What are the team’s expectations for an exit? Do you understand the market? Who are the likely buyers and why? Is the timeframe reasonable? Are the VC company’s and the entrepreneur’s interests aligned? Will such an exit provide meaningful returns on investment commensurate to risk?
Does the entrepreneur want to be rich or famous? Megalomaniacs are problematic.
In conclusion, there are an almost infinite number of reasons VC companies say “no” to start-ups. But the most common are incompatibility with the team, theme, sector or market. Entrepreneurs by nature are entrepreneurial, so, if at first you don’t succeed, try again. VC firms in the US have invested more than $130bn in the past five years. That’s not chump change.