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Ask the Expert - Venture Capitalist
Laura Campbell is an experienced venture capitalist, angel investor and entrepreneur. Today, as president and CEO of Laura Campbell and Associates, she assists business owners with all aspects of planning, growth and strategy, including fundraising. Having approached venture capital both as an investor and as an entrepreneur, she offered to share some of her thoughts and advice for business owners considering equity investment.
What are the advantages to seeking funding from a venture capitalist (as opposed to angel investors or banks)?
The differences between venture capitalists (VCs), angel investors and banks can be quite confusing and complex; there is much overlap between these groups. Venture capital firms are professional investors that generally make equity investments into concepts or rapidly growing businesses. They typically put a million to several million dollars to work in a given company. Within a period of several years, they need to exit or cash out from the investment via an initial public offering, acquisition or recapitalization.
Angel investors are typically high-net-worth individuals that make equity investments into companies. Since they don't have the structure of traditional VC firms, they can be more flexible and opportunistic. Angels might be more patient with the rate of your business growth and not have to exit as quickly.
Commercial banks typically make debt investments into companies, as opposed to equity. So with a bank, an entrepreneur would be borrowing and not giving up ownership. Banks usually require a slightly more mature business with revenues (or imminent revenues) and collateral.
Only a small percentage of businesses meet the standard VC criteria, but there are some definite benefits that go along with VC funding. These include:
What factors should entrepreneurs consider before seeking funding from a VC? Before receiving funding from a VC, you need to be able to answer "Yes" to the following questions:
As a VC, what sort of role do you like to play in the ventures you fund?
Being a VC (and now an angel investor) is a serious passion of mine; there are many fun, fulfilling aspects involved in helping entrepreneurs turn their dreams into realities. I love entrepreneurialism, enjoy meeting different types of entrepreneurs and am an entrepreneur myself. One of my favorite things to do is to help companies increase revenues and position themselves from a strategic, marketing and communications perspective. New ventures need new strategies and new words to describe themselves and determine approach to market.
What factors should entrepreneurs consider before seeking funding from a VC? What sort of materials/reports/presentation should they bring?
Never go to a VC unprepared. If you initially meet or are introduced to the VC outside of their offices in an informal setting, remember that you are being watched like a hawk. Your every move and word is being analyzed. Before a formal meeting with a VC, try to get them to sign a Confidentiality or Non-Disclosure Agreement (NDA). Not all VCs will sign these, but it's worth a shot to protect confidential information related to your business. Be sure to have a very well developed elevator pitch, PowerPoint presentation and business plan for the first formal meeting to pitch your business to the VC. The "elevator pitch" is so named because it should take about the same amount of time as riding up an elevator on, let's say, Wall Street. Start the meeting by delivering an excellent elevator pitch. Next, you should be able to give your presentation in 20 minutes if no questions are asked. Longer presentations lose interest. The presentation content should be similar to those presentations by companies on their "road shows" for an IPO (Initial Public Offering). Your presentation should include information about the business, management, board, market research, approach to market and milestones, customers (or intended customers), financial projections and use of proceeds. Having said this, if the VC is interested in your business, they will interrupt you during your presentation, and the presentation itself will last much longer than 20 minutes. (Important note: The presentation should mirror the content in your business plan. Make sure there is consistency in content and tone across these documents.)
As a VC, what do you want to hear from the entrepreneurs who approach you for capital?What are the questions you find yourself asking most often?
First and foremost, I look for passion in the entrepreneur. I need to believe that she is going to persevere and stay focused in building her business no matter what difficulties or obstacles stand in her way. I want to feel that this business is a dream that she will fulfill regardless of whether I decide to back her or not. Why? One of the entrepreneurs I've worked with, whom I greatly admire, was told hundreds (if not thousands) of times by angels, VCs, bankers, industry gurus and potential customers that his business idea was just plain stupid and that it was not the way things worked. The entrepreneur never once wavered from his dream and has been successful in revolutionizing an industry. Ultimately, I ask the question: Does this entrepreneur have what it takes to build this business and give me a superior return on investment?
Now that you're on the other side of the table - helping businesses obtain funding - what advice do you give your clients about fundraising strategy?
Rule #1: Do serious preparation before even thinking about approaching a VC. After you've made the first contact, the VC expects you to follow through in a rapid manner, just like you'd be expected to implement your business if they make an investment. (More than a few entrepreneurs have contacted me to brainstorm about their businesses - and then didn't follow up in a timely manner with the documents I requested. Needless to say, these entrepreneurs did not gain my confidence or investment.)
Rule #2: Never go to a VC when you're desperate for cash. This desperation is easy to feel and see… for example, by looking at your balance sheet! The more desperate you are, the more your negotiating power decreases. If the VC is interested in investing, you want to be in a position of power by having enough cash to meet your current needs. Don't put all your eggs in one basket. Be sure you are cultivating other investor relationships until the final deal is signed. You want the VC to worry that they'll miss out on investing in your company… not the other way around.
What would you say are the most common mistakes you've seen entrepreneurs make when trying to convince you to invest?
Courting the wrong investors is a huge waste of time and a common mistake. Be sure that your needs and criteria match those of the VC before even thinking of contacting them. Do detailed research on the investors and their investment criteria, including preferred stage of company (e.g., seed, start-up, early, later), size of investment, industry focus and geographic focus. Also important to remember: VCs have different investment cycles, as they typically invest through 10-year limited partnerships. A particular VC firm may only have a 2005 vintage year fund that is fully invested now. The VC may be having difficulty raising their own funds. If they are investing late in their fund's life cycle, be sure they'll have adequate capital for follow-on (additional) investments should the need arise in your business.
Of the business ventures you've funded that have been particularly successful, what are the qualities they've had in common that set them apart?
In real estate, you have probably heard the importance of "location, location, location." For VC investments, it's all about "management, management, management." I'd much rather invest in a "C" business idea with "A" management than an "A" business idea with "C" management. Other winning features of businesses I've been involved in have included serving a large addressable market, solving key industry problems, potential for recurring revenues (versus one-time sales) and barriers to entry for your competitors. I also look for early market adoption of the company's services or products. I ask: "Are the dogs (customers) eating the dog food (service/product)?"
In your experience, what challenges do women entrepreneurs in particular face when attempting to fund/launch a business venture?
From a VC perspective, you have probably seen the industry statistics regarding women-owned businesses getting far less funding than their male-owned counterparts. The gap is narrowing, but women-owned businesses still receive only a tiny fragment of funding compared to male-owned ventures. As far as pitching a VC, use skills that women are known for being strong in - such as communication. But remain very businesslike, logical and methodical in your approach. You should be passionate about your business, but whatever you do, don't be emotional. You will be perceived as unstable, and your business plan is sure to land in the trash.
What is your advice to women entrepreneurs?
What we believe is what we create. Dare to believe in your dreams and live your dreams. You don't want to look back with regrets like "I wish I would have done this or that." Find individuals who believe in you and surround yourself with them. Get the education and knowledge you need to be successful. There are inevitably going to be naysayers along the path. Make sure your venture has an overarching value to the world and that your intent is driven by helping others through your business, not greed or other motives. Pray for guidance and the next right step. Just like life, entrepreneurialism is really a leap of faith!