Securing Funding in an Upbeat Market

Venture capitalists are loosening the purse strings, but priorities and perspectives have changed since the anything-goes days of the dot-com boom

By Donna Mullen Good

You're walking into a VC meeting, but this time it's familiar. You've been here before, and you've been here before successfully. It's going to be a lot easier this time right? Then again, maybe not. If you raised money two years ago, you will most likely find that times are very different. The players have changed, risk tolerance has diminished, and the pitch needs to be adjusted.

The good news, especially if you are based in New England, is that the local venture-capital market is recovering faster than the national market, according to recent PricewaterhouseCoopers/Thomson Venture Economics/National Venture Capital Assn./MoneyTree Survey data. By yearend 2003, New England had seen a halt to negative growth and experienced its first annual increase (3%) in dollars invested since 2000. Meanwhile, the nation continued its downward trend by 13% in the same period. New England has continued to outpace the national market in the first two quarters of 2004. Dollars invested increased 16% in New England, while the national rate increased only 11%.

"The state of venture capital today is very different than it was even 10 or 12 months ago. Life-sciences investing has continued at a steady pace since the beginning of the year, and technology investing is currently on an up-tick," said Heather Stone, of Testa Hurwitz & Thibeault. "This more promising environment does not mean that venture money is easy to get, however. The venture community is not looking for innovative technologies alone. Entrepreneurs in this market must also deliver strong business plans and demonstrable market need or product acceptance."

THE FIT SURVIVED.

  As in any down market, only the strong survive. It could perhaps be said that there were venture-capital investors in 1999 and 2000 who shouldn't have been in the market. The enormous "capital overhang" left over from the fund-raising frenzy that followed the rise of the dot-com era only exacerbated this problem. Quite simply, there were too many venture-capital firms with $1 billion-plus funds.

With too few investment opportunities in the market in the past few years, many of these firms reduced their funds significantly. All the same, many less-than-qualified outfits received venture-capital money. Some of the newer and less experienced funds have shut their doors. And with the number of deals contracting more than 30% in both 2001 and 2002, it makes me more confident that the surviving investors deserve to be here.

Now that the venture market has returned, thankfully at a more controlled pace, innovation and entrepreneurs are reemerging as well. This is witnessed in the number of applications we received for our annual Springboard: New England Venture Capital Forum. Now in its fifth year, Springboard: New England showcases viable, emerging, women-led businesses. We received more than 115 applications for approximately 20 slots at our upcoming forum on Nov. 12, 2004. Of the applications, 30% were from serial, or later-stage entrepreneurs. These veteran entrepreneurs, perhaps more than first-timers, recognize the importance of leveraging strategic networks and fine-tuning the pitch for this recovering, yet more sober, investment climate.

FAILURE'S REWARDS.

  With a better venture market comes benefits for serial entrepreneurs. As Stone notes: "The encouraging news for serial entrepreneurs is that competition for the stronger companies has returned to the VC market. Having been through the process before, serial entrepreneurs with a good track record have more bargaining chips when it comes to the terms of the deal and the quality of the VC firms that ultimately provide the funding."

Many investors consider serial entrepreneurs a safer bet. Axel Bichara is a senior partner with Atlas Venture, which invests in information technology, communications, and life-sciences outfits. "Serial entrepreneurs can be highly attractive for venture capitalists because they have already experienced many of the challenges associated with building a company," says Bichara. "At Atlas Venture, we don't exclusively focus on successful serial entrepreneurs. Often, people learn more from failure and there are real risks associated with those who have been successful."

Serial entrepreneurs sometimes cause additional worries for potential investors as well. When Bichara considers investing in companies run by previously successful entrepreneurs, he "has concerns about them trying to apply the same 'recipe' that worked the last time and looks closely at their willingness to accept outside guidance." He bases part of his decision on entrepreneurs' motivations. "You have to look at their ambitions. Are they looking to make money, prove something? An ego-driven entrepreneur is a dangerous thing. We look for entrepreneurs whose personal motivations fit with the business opportunity -- are they passionate about what they're trying to build?"

PLUSES AND PITFALLS.

  There are still many truths that apply to all entrepreneurs, in any investment climate. During our Springboard Venture Capital Forums, we try to provide resources and tools that reinforce the fundamentals of meeting and working with investors, strategic partners and future customers. I encourage even the most seasoned serial entrepreneur to seek out similar assistance prior to raising venture money. While some of the basics remain unchanged, the climate for venture funding is ever changing and requires fresh strategies each time.

I tell entrepreneurs to remember the following principles when raising venture capital financing:

• Even if you are Bill Gates, you only have the first three minutes to nail the business problem upfront.

• Investors mentally leave the room when you exaggerate the size of the market.

• Even though cash is king, ability to execute demonstrates your value as prime minister.

• If the investors have not asked any questions, it's the kiss of death. If they tear the idea to shreds, you will probably be asked back – the goal of the first meeting is to get another meeting!

• Sell the team and the business problem together.

• Back up your business plan with evidence.

• Have a plan for a successful exit strategy.

Once you get to the final meeting, what's the best strategy for getting to a term sheet?

• Start early -- the process generally lasts about nine months.

• Look for VCs that will help build syndicates to create stability.

• Look for investors who will sit on your board.

• Understand what type of financing you need (do you need $3 million or $30 million?).

I will leave you with one final nugget about the world of venture capital. As one VC said at last year's Springboard Forum, "VCs are mostly right, sometimes very very wrong, but never in doubt."

Donna Mullen Good is the CEO of the Center for Women & Enterprise, which has offices in Boston, Worcester, Mass., and Providence, R.I., and is dedicated to helping women become self-sufficient through entrepreneurship. Prior to joining CWE, Donna was the manager of the Denver Dept. of Human Services. An entrepreneur herself, Donna has started two businesses -- Colorado Women's Bank, a credit union for women, and Budget Printing in Denver, Colo.