To VC or Not VC…That is the Question
// January 11th, 2010 // View Comments // Small business
Another big question that comes up from young entrepreneurs is the viability of VC funding for their business.
Many entrepreneurs will go right from idea to “I-have-to-write-a-business-plan-and-get-vc-funding” mode.
The fact is, that’s not how it works. Here are a simple set of points on VC funding. Read through them and decide if this is indeed the path for you to pursue.
Do some homework on the last 50 deals funded by VCs. If your company is…
1. In the high growth segments that VCs are actively investing in
2. Doing $5 million to $20 million in revenues
3. Poised for high-double to triple-digit growth
4. Staffed with a management team that has minimum MBA level education
5. Led by a CEO who has a proven track record in starting-building-selling a company in this space
6. Armed with strong market protections through patents and/or proprietary technology with significant barriers to entry.
Then you may be perfectly poised to talk to a VC.
If you do not have at least 4 of the 6 qualifications above, you’ll be wasting your time. [Like anything else, there are exceptions to every rule, but the less items you can check off on the list above, the worse your odds and the higher your risk of wasting time]
VC’s make great partners for book-smart entrepreneurs (MBA, PhD level) because VC’s are highly sophisticated and educated individuals themselves.
VC’s don’t do well with street-smart (bachelor’s degree or less) entrepreneurs. The 2 groups speak totally different languages. It ends up being a very frustrating journey for both parties.
If you are seeking startup or working capital and don’t fit the bill as stated above, then take advice from Lori Hoberman Chair, Corporate and Securities Group at Fish & Richardson P.C. [this is an excerpt from an article by Steve Viuker on Amex OPEN Forum. Click here for the full article]
“However, the average start-up is much too early for a venture fund,” explained Hoberman. “I tell my clients, ‘If you can sleep borrowing money from friends and family, do it.’ As for angel investors, you need to find that certain individual who likes the industry you’re in. But again, family and friends is one of the better ways to get started.”
Other tips from Hoberman regarding early-stage funding are:
1. Going to a local bank is an option but it is tough because you need collateral. You’ll never get funding without it. And that, more often than not, is your house.
2. I like to see if he or she has a path — angel investor or friends/family — to get the company though a 12-month period. That means a budget and a sense of where the company is spending the money.
3. If technology is involved, the firm might consider spending money on a patent application. That can cost $10,000 to $12,000.
So there ya go. Lori and I are on the same page.
Questions or comments? Post em below and I’ll respond.
