Archive for March, 2009

Maximize the probability that potential investors will find your deal compelling

Tuesday, March 31st, 2009

Raising money for a startup in this economic environment is difficult at best.  Of course, having the prerequisites that create investor excitement for an opportunity are needed now more than ever: an opportunity which addresses a large, unmet need in a large and growing market with a proven management team executing a clear and compelling business model.  In seeking potential investors in this difficult investment climate entrepreneurs should:

1) Qualify the investor: Entrepreneurs now need to perform more extensive due diligence on their potential investors.  There are now many investors that, while they may say there are investing - they really are not.  Many angel investors have moved to the sidelines as their own net worth has decreased.  Many institutional VC funds, unable to count on planned liquidity events for their portfolio companies and unable to raise new funds from their limited partners, are now in a holding pattern – conserving their current funds for the future needs of their existing companies.  Do your due diligence and seek truly qualified investors for your deal.

2) Structure the funding profile of the deal: In this environment, where investors are much more conservative, an entrepreneur should structure a staged funding profile so that investors are able to invest in smaller tranches tied to the achievement of specific milestones. The achievement of these milestones goes a long way in minimizing the risk of the investment.  Once achieved, these milestones provide the entrepreneur a compelling argument for an increasing valuation of the company (although that too may also be problematic in this environment).

3) Optimize the amount of money being raised: It is unlikely that you will have much say over the pre-money value of your company.  In fact, particularly in this environment, the investor will have a pretty firm idea of the pre-money value and will not be motivated to negotiate that value.   Minimize your monthly cash-flow requirements to seek the minimum amount you need to get through at least 18 months if not two years.  This presents a lower funding requirement to the investor and optimizes the amount of equity the company retains in the deal.

While these tips won’t necessarily make your deal the one that gets funded, we believe they will certainly help you maximize the probability that potential investors will find your deal compelling enough to dig deeper.  They will also help you maximize the value of your deal to all of your stakeholders.

Southeast Venture Conference - now is the best time to start a new venture

Sunday, March 15th, 2009

I attended the Southeast Venture Capital Conference last week in Atlanta.  Similar to the Florida Venture Forum held last month, it is a two-day event that brings VC’s, entrepreneurs, and service providers together to network, hear the latest news on the state of the VC industry, and learn about promising new startups.  What impressed me most about this conference was the number and variety of panel presentations and the notable keynote speakers.  The one message conveyed throughout the conference - now is the best time to start a new venture.

Why now?

Tim Draper, managing director at Draper, Fisher, Jurvetson, at the beginning of the conference noted that:  1) Existing companies are going into survival mode and reducing their investment in innovation, 2) new ventures can now find an abundance of less expensive services and talent, and 3) new ventures that are created in this environment will develop a survival mode culture that will serve them well just like the companies founded during previous downturns - including: Microsoft, Apple, FedEx, Oracle and Genentech.   I think that we will see an increase in the number of startups as the perceived risk to potential entrepreneurs lessens, as instability becomes a part of their careers and lives.  Risk is indeed the hallmark of the entrepreneur, as Tim sang in his now famous song, The Riskmaster.

That now is the best time theme was amplified at the end of the conference by Rich Karlgaard, publisher of Forbes.  Rich noted that instability leads to innovation and dislocations.  In this regard, I highly recommend Clayton Christensen’s book, The Innovator’s Dilemma. Disruptive technologies will now have an easier time gaining a foothold in the market.

Now is the best time to start a new venture!