The and of Raising Venture Capital

1
The and of Raising Venture Capital
Dos
Don'ts
Houston Technology Center March 20, 2003

• Bob Stearns
• Managing Director
• Sternhill Partners

2
You Really Need Venture Capital?
Do

• There are many alternatives for financing a small
  business venture capital is only one (though,
  perhaps the most glamorous).
• VC is meant strictly for high-growth
  businesses entering competitive markets.
• The problem with obtaining venture capital
  is that it comes with a venture capitalist.
• They (yes, some of them are vultures) require
  you to give up a lot of control in exchange for
  the chance that your company will achieve great
  success.
• Some tread a fine line between advising your
  business and running it.
• The question you have to ask yourself Are you
  really interested only in their money, or are you
  also looking for venture partners who can offer
  important skills and contacts?

3
What Kind of Firms Venture Capitalists
Actually Invest in?
Do

• Firms with
• Strong management teams
• Ownership of hard-to-do technology
• Sound business models VCs invest in
  businesses, not products
• Large (and growing) potential markets
• Intellectual property and other barriers to
  competitive entry
• Liquidity opportunities

4
If You Decide to Go the VC Route,
Your Homework
Do

• Look at the VC's track record, particularly in
  your kind of business. Do the partners really
  understand your technology and business concept?
• Look at their backgrounds. Have they ever managed
  a real-world business? Have they ever had to turn
  around a troubled business or faced challenging
  market conditions?
• Do you trust them to look out for your interests
  and those of your employees? Are they as willing
  to listen and learn as they are to teach?
• Is their fund/portfolio so large that you'd be
  lucky to get any attention at all?

5
What You Need to Include in a Business Plan?
Do
Be able to answer these questions

• Who is the competition and how will it react?
• In terms of the team you have and will require,
  what skills and core competencies are needed and
  whom do you need to hire to be successful?
• How much money do you really need, how long will
  it last, and for what will it be used?
• Who else would agree with your analysis and
  answers to these questions? Where can you get
  outside verification?

• What is the product (or service) and what is your
  competitive advantage?
• Who are the customers and why do they need this?
  What problem does it solve?
• Who will sell and support it?
• How big is the market, i.e. how many
  people/companies will buy it?
• How much will it cost to design and build?
• How much can you charge the customer?
• When will you break even?

6
Delegate, or Outsource, Writing the
Business Plan
Don't

• Writing a business plan is not something you have
  to do to impress VCs or anyone else. It's
  something you do for yourself. It's a toolor
  rather a processfor developing, testing, and
  refining your ideas. It will also serve as an
  operating guide as you launch your business.
• One piece of advice do not delegate this process
  to somebody else, especially an outside
  consultant or accountant. If you plan to be the
  CEO, this process (and the plan that results) is
  one you, yourself, must own.

7
What We Absolutely Want
Don't

• We dont want a 50-page tome with five years of
  quarter-by-quarter financials. We don't have the
  time, and for a seed-stage business, you very
  probably don't know enough to accurately fill a
  thick document.
• Don't send your plan wrapped up in a stuffed
  animal, cake, or bouquet of flowers it may get
  our attention, but not the kind you want.
• Don't call us a day or two after you send your
  summary, expecting a response. Well get back to
  you. We promise.
• Don't ask us to sign an NDA we won't.
• If we tell you we are not interested, don't
  demand a lengthy explanation. And don't worry
  about a rejection. The fact that one VC passes
  doesn't destroy your chances with others.

8
Finally, If You Ultimately Get Funding,
Fritter It Away
Don't

• The economy may not get better soon. So take the
  cash that is offered to you! Even if the
  valuation is not what you want, take the cash.
• Remember that the only valuation that counts
  is the one at your liquidity event.
• Venture money is the most expensive capital you
  will ever have. Spend a dollar of venture money
  like it were ten dollars.
• When spending it, remember
  to keep a tight rein on burn.
  Match burn to revenue.
  And beware of big company
  marketing. Vendors will
  eat your lunch!