Although the curriculum doesn't change much, the VC chat was very well-attended at the O'Reilly Emerging Telephony Conference (eTel) in San Francisco. By show of hands, the room was predominantly entrepreneurs. (If there were other VCs in the room, they were shy and didn't raise their hands...cowards.) Here's some of the themes explored by Steve Tomlin of Avalon Ventures and a panel that included a business development director from InfoSpace and Rich Levandov from Masthead Venture Partners:
What makes a hack a product? The road begins when there is a paying customer involved, along with a contractual commitment to support the functionality. This has the potential to become a business once the total price to buy the product exceeds the total cost to develop it. Your hack is really a proof case for the product that you want to develop - something more than just a powerpoint for investors. You evolve from a hack when you let the needs of your customers start to inform how you develop.
One of challenges for an entrepreneur is making sure that your interests are in synch with the goals of your VC. For example: if you haven't raised outside funds, you can more easily sell your product as an asset to a corporate acquirer. With outside investors, your required exit valuation becomes much higher...meaning that you need to take the product much further in order to sell it, as well as need to develop a more substantial customer base.
Someone with a very early stage business needs to get inside the head of a potential strategic acquirer, in order to be successful at selling. Innovation is where startups thrive, so find acquirers where competitive innovation and specific expertise is valued. One utterly rare (yet perfect) example - Josh Schachter at del.icio.us thought it would be neat to develop a folksonomy, and thereby learn about what users thought was interesting. The venture folks put in about $500,000 to figure out the model and finish out the UI. Then, when looking at raising more substantial venture dollars, the liquidation preferences (and other typical VC deal terms) contributed to the attractiveness of selling the business to Yahoo!.
So...what makes a business fundable?
- Be in an area of specific interest to the individual VC, but be aware of any existing portfolio conflicts.
- Have the right timing, don't be too early/too late/undifferentiated
- Be part of a proven team, or have a personal relationship
- Meet the hurdles on basic business metrics
Other good advice, that isn't often said: be plainspoken and down-to-earth. If you're not likable, why would the VC want to spend two years working with you? This isn't too different from a job interview. Besides, if your dialogue is full of obscurity...what are you trying to hide?
Hot Buttons du Jour
- Viral potential - show how you can spread rapidly while holding down customer acquisition costs
- Network effects - show that you have scalability that will make a market yours
- The elevator pitch - have a simple, concise story
Most importantly, make the investor want to buy what you're selling for herself. :)
Food for Thought
- There are plenty of sources for investment, so make sure that VC is what makes the most sense for you before bringing it in. Sometimes the best alternative for a founder is to build a product and then sell it immediately to a strategic acquirer. (If you can finish development with low capitalization, then this is a totally viable direction.)
- Once you bring in VC dollars you have to actually build up a business around your product. This is required for the VC to "put enough money to work." Also, VCs build their own business operations based upon an expected pace - how many new businesses they have to fund each year, how long the growth for those companies will be nurtured, what market their investments will be in, etc.
- Do you want a VC with operating experience, or one with a sophisticated financial background? They're usually not the same person. Decide which one will get what you're talking about.
- If folks are talking a lot about an emerging market, there's a good chance
that VCs have already seen hundreds of companies in the space. Pretend
it's baseball and "hit it where they ain't."
(Cool Reference: The Autodesk File)
Tags: christine herron spacejockeys technology best practices vc venture capital o'reilly etel
