A VC in Vacationland

Being in venture capital has more than a few similarities to Diane Keaton’s 1977 classic movie Looking for Mr. Goodbar (when are they going to bring that out on DVD?).  Substitute the lonely VC for the by-day teacher of the deaf Diane played in the movie and her nightly craving for sex via the bar scene for venture conferences and you have a fairly good description of the lifestyle of at least some VC’s. 

Why is it that we attend these conferences and allow ourselves to be besieged by all sorts of inappropriate investments to waste our time and patience? I guess it comes with the territory, but is also part of the craving not to miss the next new, new thing. Perhaps we are just new, new thing junkies.

Of the one hundred or so investments I "considered"(consideration can range from 1 minute to multiple weeks) last year, well over 80% were the result of attending conferences.  The wildest one was one Diane could have used if the evening’s Mr. Goodbar had back problems–HarmonySystems.  Most of the others were forgettable, mostly because many entrepreneurs are very bad about follow up.  If a VC asks a lot of questions or requests a viable business plan (no revenue hockey sticks or third year 80% gross margins, thank you), these entrepreneurs tend to disappear.  Perhaps they are looking for easier money that I provide.

I usually end up investing in two types of companies:

• Personal Experience: start-ups where I have known the senior leadership team for many years. Most have worked for me in the past and I am glad that I spawned a crop of entrepreneurs who have good ideas and a solid plan for executing the idea.  They feel comfortable with me and vice versa.  It makes our lives a bit easier as we know each others strengths and weaknesses.

• Referential Experience: start-ups where someone I have known for many years recommends a leadership team they know very well. In this case, the source is a good friend whom I trust, who has done substantial due diligence, is investing, and thinks that the company would complement my portfolio companies.

For companies on the fund raising trail, here are a few recommendations:

1. You better have a good network before you start serious fund raising. Many entrepreneurs think the time to go after VC money is after they have an inital idea and a modest business plan.  As I said in a previous post, Step Away From The Term Sheet, this is a great way to give up a lot on control for very little money.  It is much better to modestly invest second mortgage and angel money, produce a viable product or service, and get launch customers excited than to shop a concept. This is the time to have initial conversations with a select group of friendly VC’s to make them aware of your business and then provide them with short, quarterly progress reports as you move to a true value creation point.
2. Targeted approaches are better than conference hopping. The dreaded "thirty investors in one month"  road show is still a major feature of fund raising, but hopefully one that is dying out.  The reason is that it is a waste of time for both entrepreneurs and VC’s.  If entrepreneurs spent as much time planning their capital campaigns as they do, say, new product enhancements, then both sides would be spared the inappropriate meetings, often with junior VC staff members instead of decision makers. If you have done the right preselling to the right VC’s, then the process of obtaining the necessary funding should be less painful for both parties.
3. Get the luminaries on board early. If you and your company are relative unknowns with a minimal, prior track record, your probability of receiving funding, even with an excellent idea, is about as good as winning anything substantial on Deal or No Deal. If you have not successfully competed previously in your chosen market segment, please, please get someone on your team who has done it before.  Not having market experience was the number one reason I turned down entrepreneurs last year. I had one very smart person with a successful background in software try and convince me that he was now the world’s best manufacturer of RFID chips. I politely suggested a few people who had done it before, and who may be able to help him get funding, but the person was not interested in sharing ownership.

I would be interested to hear about entrepreneur’s experiences in raising money over the last year, especially what worked and what did not in their campaigns.