Five Tips: Entrepreneurs & Early Stage Capital in a Tough Market
How the Venture Capitalists Nationwide Say to Do It
By Brian Hill
Profit Dynamics Inc., a research firm in Fountain Hills, Arizona, founded by Brian Hill and Dee Power, authors of the books, “Attracting Capital From Angels,” and “Inside Secrets To Venture Capital,” recently conducted a survey of 74 venture capital firms from all regions of the United States. They were asked their views about the outlook for the early stage capital market in the upcoming year. On the whole, the VCs responded with at least a moderate degree of optimism, the overall theme being–the worst may be over. They were then asked this question:
What advice would you give to entrepreneurs looking for early stage capital?
Here’s what they told us:
- Be Prepared
In both good times and bad, this is good advice: Be thoroughly prepared for the presentation to VCs and focus on why your business will make money for investors.
- Conserve Capital
In the late 1990??s, capital was much more plentiful and in some cases, management teams looked at the term “burn rate” to literally mean they had investors?? money to burn, and when one round of financing ran out, they could easily go out and get more. From 2000 and up to today, a massive reality check occurred in the market for early stage capital. The emphasis now is on conserving capital and reaching as many milestones as you can on your own without investors?? money.
- Be Committed
In the due diligence process, investors try to determine the level of commitment the management team has to the business. Will the team exhaust themselves trying to make this business succeed? Part of that commitment can be financial, both in terms of willingness to commit personal resources to the venture, and the willingness to forego compensation until the cash flow of the venture becomes positive.
- Have An Outstanding Managment Team
One way investors mitigate risk is to only put money behind the very finest management teams. An ever-viable maxim applies (and you imagine VCs carry this around in their wallets): a great team with a mediocre idea succeeds more often than a great idea with a mediocre team. The strength of the management team is even more critical to them when the new venture will be trying to gain a foothold in tough economic times.
- Be Patient and Persevere
Even in the exhilarating days of the Internet boom, entrepreneurs were sometimes shocked by how long it took them to obtain seed stage or first round capital. For one thing, they did not take into account the incredible number of ventures that were begun in a short period of time, all pounding on investors?? doors at once. Today, the number of entrepreneurs looking for capital has declined, but at the same time, investors have become much more cautious. The bottom line: nothing succeeds like perseverance.
Our survey pointed out a definite lifting of the gloom that has hung over the early stage capital market for more than two years, but not all VCs were in agreement, as quotes from these two VC??s show:
“Good entrepreneurs will get funding! Great companies are often started in a recessionary environment.”
“Keep your day job.”
Perhaps this venture capitalist most clearly stated what entrepreneurs looking for early stage capital in 2003 should keep in mind:
“Conserve capital, get customers, be patient, be persistent.”
Brian Hill is co-author with Dee Power of, "Attracting Capital from Angels: How Their Money and Their Experience Can Help You Build a Successful Company," 2002 and "Inside Secrets To Venture Capital," 2001, both published by John Wiley & Sons. They can be reached through her company’s web site http://www.capital-connection.com