April - 1999 - issue > VC Talk

Venture capital offers the highest value-added money for companies in need of more than just money. Being funded by a top-tier VC can make the difference between attaining a high valuation in a successful public offering or acquisition, and never getting to first base. With today’s uncertainty about the health of the global economy, it is even more important for the emerging company’s executive management to choose its investors wisely. Here are some practical ideas to help you identify and attract a top-tier venture partner.

What Makes It “Top-Tier?”

The top-tier venture capital firm is considered top-tier for a reason: it has a track record of successful investments. It achieves its success by knowing what it takes to manufacture quality companies. These VCs usually possess a combination of operating experience and financial acumen.

A superior network of contacts to help its portfolio companies is another characteristic of a tip-tier firm. These contacts include business leaders, potential customers, OEMs and distribution partners, advisors and board members — a Rolodex of names of experts at building value within companies.
Think of all the things VCs do to help make their companies successful as “pixie dust”: A little sprinkle in the form of a few key hires, an OEM deal, a customer introduction, a well-timed article and a little “buzz” about the company can make the difference.

How do you find out which firms make the grade? The best way is to talk to people in the know: entrepreneurs who have been successfully funded in the past, as well as accountants and attorneys experienced in helping startups to organize their business and locate funding.
The list of top-tier firms will vary by market segment. It’s not enough for the firm to specialize in technology. Instead, you should look for expertise broken out by sector, such as telecommunications equipment or service, software, the Internet or communications. You should also look for a venture partner that works with companies at the same stage as your own business — for example, early stage vs. later stage of company development.

The VC Edge

Young companies face challenges in recruiting top talent. A top-tier VC has a strong network that can help fill their critical CEO slots as well as senior positions in engineering, sales, marketing and finance.
Top-tier firms can open many doors for entrepreneurs. They often have other companies in their portfolios that are complementary. Look for firms that can make strategic alliances happen.

A top-tier VC helps create “buzz” around a company, helping it articulate a compelling strategy at a sophisticated level. Also, de facto, the buzz tends to be more positive on a company that is able to attract top VC money — although there are some exceptions.
When time comes to raise additional financing, top-tier VCs will also help you raise the money — and very likely at a higher price than you’d expect from a less highly regarded venture firm. When it’s time for a company to go public, the top-tier VC firm can make introductions to the best investment banks. Because the engagement is part of an ongoing relationship with the firm rather than a one-off situation, the bank often will perform to a higher standard.

What can you do to make your new business as attractive as possible to the venture capital firm of your choice? Take care of some business fundamentals:

Do your homework. Articulate what markets you’re going to go after, products you plan to build, services you will offer and why they are competitive with other products and services. You must show a reasonable understanding of marketing, the competition, and have determined something that is unique in your product or service — in short, your sustainable advantage against the competition. You need to not only have a good story, you need to be able to tell a good story.

Pull together a team. Not everyone has to quit his or her day job just yet, but the stronger the team out of the gate, the more likely a top VC will be interested. It shows the VC that you have the nucleus of a team ready to go, and all you need is the funding to pull it together.
Get some validation from the market. Talk to a few potential customers who can speak to the market need for your product or service. They need not commit to buy the product, but merely state that they would be inclined to buy it and why. Show that you have some relationships with customers, understand customer requirements, and are building an attractive product. Without validation, you simply haven’t done your homework.

Get good advisors on board. Success is contagious; look for advisors who have already been successful. The VC will be looking for a company with an “unfair advantage”: better people, better ideas, a better take on the market.

Know your distribution model. Before you approach the venture firm, it helps if you can show that large companies with established distribution channels are willing to work with you to deliver the product. VCs want to invest in companies that know what they’re doing and can call upon relationships to be successful.

Taking It on the Road

Next comes the dog and pony show. You need to be prepared to tell your story as effectively as possible. Put together a presentation that covers the five points presented above. Make sure you can deliver it in less than an hour, including a Q&A session. Before taking it on the road, practice your pitch on your advisors, employees, family and friends — anyone who can give you constructive feedback.

Pick six or eight firms, do the dog and pony show, and take it from there. Take care: If your business misses out on funding the first time around, it’s tough to get back in the door.

Sometimes, however, the VC contact will indicate that he or she likes your story, but recommends that you bring on a stronger management leader and get more industry validation. Once you have a dialogue established, you can easily go back to them when you’ve made these changes. Persistence pays off. One industry trick is to practice on a firm that you aren’t anxious to attract before pitching to your real targets.
With so many venture firms looking to invest, most viable emerging businesses will be able to find capital. However, the right VC firm will do far more than invest money — it will help you develop your emerging business into a long-term player. The bottom-line for success? Pick an “A” market, bring on an “A” team, and look for “A” investors.