Show Me the Money! Venture Capital Funding
Last, but Hardly Least: Show Me the Money!
My suggestion is to begin by learning how the venture capital industry came into being. The driving force was a Frenchman, Georges Doriot (1899 - 1987), a college drop-out in France who immigrated to the U.S. in 1921. In the U.S. he became a professor at Harvard Business School, a General, and the founder of the VC industry. Along the way in 1957 he founded INSEAD, the elite business school in Fontainebleu, France. Spence E. Ante has written a fine biography, Goerges Doriot and the Birth of Venture Capital, 2008.
Then proceed to Raising Venture Capital for the Serious Entrepreneur, by Dermat Berkery, 2007. This well written textbook for a business school course about venture capital (VC) is excellent background reading before seeking funding. It explains how VCs work, what kind of exit strategies they are looking for, and pitfalls to avoid. It covers business plans, presentations, milestones, stock options and more.
In the past, entrepreneurs used to take a shotgun approach to seeking funding. They would photocopy their business plans and send it off to the entire list of Pratt's Guide. As that list has expanded to over 20,000, that is no longer practical. Furthermore the Internet allows one to rifle in on firms and their key decisions makers so that one can better determine "goodness of fit" before making contact. First, one examines the universe of capital providers, including business incubators. Second, one starts to narrow down the candidates to a manageable shortlist. Third, one makes a specific, detailed action plan for the funding search.
Realize that VC firms prefer local investments. Partners at VC firms in Silicon Valley want to be able to drive to the company. That means they tend to invest within a 100, maximimum 150, kilometer radius of their offices. Of course there are exceptions. Two VC firms with quite similar long reaches are Accel and Matrix. Both firms have offices in Silicon Valley, New York, Beijing, Shanghai and in India. Accel also has an office in London, and Matrix one in Boston. However neither one of them has a particularly high rating with TheFunded (cf. 2.2 Secondary Research below).
1.0) The Funding Universe
1.0.1 - The Public Library: See what directories are available, and what relevant databases are subscribed to.
1.0.2 - Vfinance has a free database of 1541 VC firms (July 2011). It also provides information about business angels.
1.0.3 - Pratt's Guide of Thomson Reuters lists 20,000 VC, buyout and mezzanine firms.
1.0.4 - VC Gate provides access to a database of 5,100 angel investors and VC firms for $97 (July 2011).
1.0.5 - Bloomberg, the reknowned financial services firm, provides a list of about 190 VC firms structured with common stock. (If the link does not work, Google "List of Venture Capital Companies, Worldwide - Bloomberg.") Find out if this structure makes for a plus point for your start-up. The VCs range from Adcapital AG in Germany to Xenia VC in Israel, with ones in between from countries as disparate as Bulgaria, Finland, India, Poland, Sri Lanka, Turkey and the United Arab Emirates. The major countries, as one would expect, are the U.S., with 30 such VCs, and Germany (because of its legal structure) with about 60.
1.0.6 - Prequin Alternative Assets is an interesting newcomer with offices in London, New York and Singapore. Mark O'Hare and Nick Arnott founded the firm, which is owned by its staff, in 2002. It offers profies on 3,600 VCs, 5,300 private equity firms and 60 sovereign wealth groups. It also has databases about hedge, infrastructure, and cleantech funds, as well as on secondary markets. Its services are pricy, so do some due diligence before purchasing.
1.0.7 - Keiretsu Forums, founded in 2000, has the largest network of business angels with 850 of them in 21 chapters in three continents. European chapters are in London, Madrid, Barcelona and Paris. Companies have been provided with $260 million of capital in investments ranging from $250,000 to $2 million.
1.0.8 - Business Plan Competitions often have close connections to a network of venture capitalists, private equity firms (some associated with consultancies that support the competition) and business angels. Just one example would be the Münchener Business Plan Wettbewerb. McKinsey & Co. introduced the M.I.T. model to Munich Bayern in 1996, since when the competition has become a major annual event.
1.1) Business Incubators
Many of them have have direct connections with providers of debt and equity capital. U.S. examples include:
1.1.1 - Cambridge Innovation Center is located right next to the M.I.T. Founded in 1999, the original focus was on e-businesses in the seed stage with a valuation before financing of less than $5 million. Since 2001 the 250 firms associated with it have raised over $1 billion in capital. Besides Internet oriented firms, the center also houses venture capitalists and firms providing professional services.
1.1.2 - Ecompanies is located in Santa Monica, California. Sky Daton and Jake Winebaum founded it in 1999 to help web based start-ups. It has one of the strangest websites I have ever encountered. A business card provides more information.
1.1.3 - HOTVentures is located in Arizona and focuses on early stage technology companies. It has advised prominent media companies.
1.1.4 - Idealab is one of the earliest Internet Incubators. Bill Gross founded it in 1996 in Pasadena, California. It has since expanded with offices in Boston, New York and Silicon Valley. Although it has part of the creation of 75 portfolio companies, as of this writing (December, 2010), it was not accepting new companies. However an affiliated company might, which is "Idealab! Capital Partners."
1.1.5 - I-Hatch focuses on early stage Internet companies located in the Northeast of the U.S. Chip Austin, Brad Farkas and Derek Resifield founded the company in 1999 to provide seed financing. Their emphasis is on new media content, web-enabling technology and network infrasstructure. A proposal (e.g. an executive summar of the business plan) can be submitted through its website.
1.1.6 NextSpace, with its main offices in San Franciso, is not strictly speaking an incubator. Jeremy Neumer, Harvard MBA, Ryan Coonerty, London School of Economics and University of Virginia Law School, and Caleb Baskin, University of Pennsylvania and UCLA Law School, founded it in 2007/2008. It also has offices in Santa Cruz, Los Ang
1.1.7. Plug and Play Tech Center is a start-up accelerator that provides both office space and incubator services, including VC and financing connections. Jojo Flores, University of the Philippines, and Saeed Amidi, Stanford, founded it in 2006. It serves a community of 300 start-ups from all over the world, which have received over $700 million of financing.
2) Your Shortlist
You develop your short list by doing secondary research, then primary.
2.1 - Secondary research: You screen the above VCs by location and investment preferences. Then you go to TheFunded.com for further information. This site has a wealth of information about VCs, including their dark side! For instance, it has a section "Banned VCs." There the following statistics appear (July, 2011):
a) Suspicious reviews - 4 firms
b) Legal action has been taken against a portfolio CEO, or legal threats made against TheFunded.com - 31 firms. Five culprits in Europe are listed including Baytech Venture Capital Beratung in Munich. There is really no excuse for such action. Contracts should entail binding arbitration clauses. (The link is to comments about them at VII. Negotiation Strategy.)
c) No new investments - 374 firms.
The next step is to start researching the targeted VC firms, looking for articles about them and their senior managers in the financial press. You also use Linked In and other web sources. (Further comments, including a reference to an excellent book about on-line research are at Market Research at V. Marketing Strategy.)
2.2 - Primary research: Armed with this information, you now start interviewing people.
a) Journalists who have written an article useful for you. E-Mail and telephone that person; suggest having lunch.
b) People from companies the VC has funded, ideally its CEO (or CEOs of firms in a targeted business incubator).
c) People who used to work at that VC and have since moved on to another firm or retired. Do not overlook the executive secretary who has switched jobs.
d) Faculty members who are familiar with that VC (or business incubator).
If the above sounds like a lot of work, it is. Consider this point: From whom do you think your odds are better to get a 100.000 €, a million, or ten million:
- from someone who is a complete stranger to you, or
- from someone you know almost as much about as you do your own brother?
3) The Action Plan for Funding
Obtaining funding is a business in of itself. One needs to prepare an action plan for it with budgets (e.g. for travel), milestones, a timeline and deadlines. Tasks need to be assigned and people held accountable for them. This project, critical to taking the company to the next level, has to be performed parallel to developing the technology and the markets. Sometimes to assign this task to one member of the team full time, with regular progress reports to the rest of the team, makes sense.
4) Mini-Bonus!
As a reward for having read this far, here are four further funding suggestions, one U.S., one German, one U.K. and one off of this planet entirely. This bonus is correctly labeled "mini" because all are long shots. The first is a new program funded by the (flirting with bankruptcy) U.S. Still, recall the sayings about General Motors: "On a clear day, you can see a General Motors factory from whereever you happen to be" and "What's good for GM is good for the USA." General Motors seems to be recovering from its own flirtation with bankruptcy, so perhaps the U.S. will also.
The two European organizations afterwards are peer to peer loan intermediaries. Their business model is somewhat similar to that for microloans. However both of them begin with loans of, respectively, 1,000€ and 1,000 pounds. They appear to be more oriented towards personal loans and perhaps working capital for a small firn, rather than for a start-up. Still, there is no harm in entering a several different funding proposals (split testing) to see what surfaces.
4.1 - The National Science Foundation (NSF)
This U.S. goverment organization is funded with $6.8 billion dollars to support research in engineering and science (with the exception of medical research). On July 28th, 2011 NSF announced the Innovation Corps (I-Corps). Its goal is help selected research projects at U.S. universities and move out of the university and into the marketplace. It will fund 100 start-up teams a year to turn research into products. The I-Corps teams will receive $50,000 each. The announcement was accompanied with a solicitation for proposals. A webinar is held about I-Corps the first Tuesday of every month at 14:00 EST (Eastern Standard Time, e.g. New York, which is 20:00 in Munich). The link is to the registration information.
An integral part of the program is six months of training for the chosen teams. That training will be based on course developed at the Stanford Technology Ventures Program, which is the entrepreneurship center of Stanford's School of Engineering. This course, "Lean Launch Pad," teaches engineers and scientists an iterative approach to founding a company. One treats it in a similar way to a research project. One forms a hypotheses, tests it against the marketplace, adjusts the hypothesis accordingly, and again tests it . . . The course is discussed further at the introduction to "C. The Intra- and Entrepreneur's Education, The Ivory Trench."
4.2 - smava GmbH
This site is an interesting German loan intermediary, headquartered in Berlin. You put up on the website the amount you need and what terms you offer (interest and principal repayment, collateral, if any). Then lenders respond. There is no direct contact between the two parties to the transaction. Consider that a challenge to your creativity! The loans range from 1,000€ to 50,000€, significantly larger then at the traditional microlenders. Lenders can pool their funds, with a minimum investment of 250€ to a maximum of 100,000€.
Consider pursuing this route in coordination with a submission to a German business plan competition such as the Münchener Business Plan Wettbewerb linked above at 1.0.8 of "The Funding Universe."
4.3 - Zopa
This U.K. site is quite similar to the the German smava. It also provides peer to peer lending. The range of loans is 1,000 pounds to 15,000 pounds. The firm is headquartered in London, with a staff of 23 (July, 2010). In this case one could consider participating in a business plan competition in England as a tie-in.
4.4 - Microloan franchising
The bottom tier of microloans is 5€ (!) to $25, with loans of a few hundred dollars representing the top tier. The link is to a list of some examples of these lending instutions, giving their websites with a couple of sentences by way of introduction to them at "Pro Bono and Charity Work" at About Us. What on earth could you do with such trivial amounts? Well in this world, the developed world, nothing at all.
However there is another world out there, a pretty large one too, viz. the developing world, a good three to four billion people. Consider developing a franchise related model for your product. The actual legal structure would be a licensing agreement to avoid meeting the legal requirements for a franchise. Furthermore the product needs to do some social good. It can not be a new "tastes like chocolate (spiked with nicotine to ensure customer loyalty)" chewing gum aimed at 1st and 2nd graders. You negotiate with a micro-lender having a large base (and some of them do) the offer for your product. It can be purchased with a micro-loan.
A specific example is the sale of mobile phones in India and Uganda, discussed at the microloan link in the paragraph about the Gramean Foundation. One received a micro-loan to purchase a mobile phone. The owner now let other people in her village use it for a fee. The fees repaid the loan and provided the borrower some income besides. Communications improved. A variation of this model is to have the "village phone" connected to someone who is on a computer with an Internet connection in order to ask questions (agricultural, medical, etc.)
The mobile phone company is establishing a powerful brand name for itself for future purchases with zero advertising cost. Thinking long term of prospects 20 years down the road will inevitably lead to mistakes. Some backwaters that appear poised for growth will still be backwaters come the next millenium. But others of those 20 year targets will pleasantly surprise you and turn into revenue centers (for products not even conceived of yet) considerably sooner then anticipated.
* Chauvinism, excessive patriotism -- up to war-mongering -- entered the English language from the French word that was derived from Nicolas Chauvin. He was a lengendary soldier devoted to Napoleon.