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Despite today’s rough economic climate, venture capital funds have not disappeared. In fact, many high-net worth investors have recently redirected funds into the VC community as a relative safe haven versus the unidirectional rollercoaster ride the stock market has represented of late.
As expected, the biggest difference today is that the investments are under greater scrutiny. Yet, when you read the more recent headlines, it initially appears that the majority of funding is going toward Web 2.0 companies or cloud-centric businesses. However, after careful examination, you’ll see that the types of companies that are getting funding today share four common attributes, regardless of their category.
So, if your company is not Web 2.0, cloud-centric or otherwise deemed hip and cool, there is still funding available, provided you meet the following four criteria:
1. Intellectual property
While great ideas abound, validating the authenticity of your intellectual property and articulating it in business terms is crucial. One of the primary thoughts going through a VC’s mind during a presentation is whether there’s enough there, and if the team can actually make it work.
The one simple question that needs to be answered is, “Am I building a product or service for a market that is currently underserved and undervalued, yet will be in demand within the next three to five years?”
2. Market segmentation
While everybody likes to be seen at a crowded party, when it comes to getting funding, it’s important that your business is in a market that’s not too fragmented, as that leads to higher sales, general and administrative (SG&A) costs and a deflated overall value.
For example, consider the amount of social networks that have sprung up of late, with three dominant players still owning a lion’s share of the market, leaving little room for newer entrants. The key is to offer a differentiated, yet complementary product or service that can easily fit into a larger portfolio, while addressing a critical business need.
3. Strength of the team
The experience of the team is becoming increasingly more important when it comes to funding. While a wunderkind makes for great headlines, a company with the greatest potential has a balanced team that includes seasoned veterans with experience in larger technology companies as well as startups.
4. Strength of the business model
While great ideas, differentiated products and experienced teams can lead to funding, the fourth and final element that can make or break a company is its business model. Essentially, before a company can be funded, VCs want to know if the founders have a well-thought-out, realistic and predictable way to forecast revenue, as well as a way to build and execute a strategy around it.
With this in mind, consider whether revenue will be generated on a subscription or maintenance basis, for example, or if it will require a six to nine-month sales cycle. As any enterprise software sales rep can tell you, it’s far easier to make quota when you have a recurring revenue stream from an existing client base, as opposed to elephant hunting at the end of the quarter.
Additionally, be clear about your exit strategy. Since initial public offerings (IPOs) are fewer and farther between, especially in the tech sector, VCs need to know how and approximately when their investments will pay off in terms of a liquidity event.
Points to Consider when Seeking VC Funding
Points to consider when seeking VC funding
If you have the aforementioned criteria in place, you are well-positioned to seek the help of the investment community. Turning the tables on the criteria for success cited earlier, the following are four points for entrepreneurs to consider when evaluating VCs and asking for funding.
1. You are hiring
When you are seeking funding, you are also in the process of hiring your boss/bosses. Keep in mind that the VCs will be part of your organization whether they take the role of outside advisor or board member.
2. Set realistic expectations
Fully understand the terms of the arrangement, what is expected and what will be rewarded. Realistic expectations should reflect the size of the market segment, the viability of your business to succeed in that segment and the volatility of the economy.
3. Don’t just take any funding
Be sure the funding is coming from a reputable source, with a strong track record in ventures that are similar in nature to your business.
4. Find balanced and experienced VCs
Align with those firms that have expertise in your market segment, as well as with banking and investing. The ideal investor fully understands what it takes to build a technology company from all sides of the business, based on previous experience gained by walking in your shoes. As an ally and investor, the VC needs to fully understand how your market works, and have the patience and knowledge to set realistic milestones and goals that determine successes.
While technology trends will come and go, and economic upswings and downturns will remain cyclical, there will always be demand for innovation and the need for VCs to help spur the next big thing.
Jeff Papows is President and CEO of WebLayers. He has more than 30 years of IT industry experience and has raised tens of millions of dollars from the VC community. Jeff has led private and public companies, most notably in the roles of president or president/CEO at Lotus Development Corporation, Cognos and Maptuit. He can be reached at jeff@weblayers.com.