A VC in Vacationland

Anyone seeking to understand the role of venture capital in creating and nurturing new companies should read Bill Janeway’s seminal piece in Sandhill.com.

Bill is one of the nicest and most brilliant people I have ever met.  He has a great sense about what types of people and ideas will produce great companies.  He taught me a lot of what I know about investing in supply chain companies. And he is very good at calling turns in the venture capital market.

To oversimplify his major point, VC’s today are betting on the "front end" of start-ups–looking for the right idea, right platform(perhaps replatforming an existing company), right team and fast market acceptance to allow an early exit via acquisition, generally after a Series B round. Hanging around to wait for $100 million in revenue and a possible IPO just takes too long to accomplish (as well as too much capital).

What does this mean for today’s start-up entrepreneur?  Unless you have an absolutely killer idea and the team to make it happen, the VC community will likely put you far down the funding priority list. You are left with the options of raising money from friends and family, the fast-growing angel community(which are increasingly acting like VC’s), or find a way to quickly go cash flow positive with an innovative revenue model.

Does the prognosis sound grim for funding?  Based on my limited observations of a variety of start up business plans, today’s entrepreneur will have to engage in more self funding and perhaps look at very different growth paths, including acquisition by a larger player in their space.  Usually, this behavior is not on the entrepreneur’s radar screen.  The typical entrepreneur wants to hold onto their idea and ownership share much longer than they should in today’s capital environment.

My recent feedback to entrepreneurs has been to focus on developing a revenue model that will enable more self funding via innovative revenue models and spend more time getting to know larger players in their space to preview possible exit partners.  That was the strategy we used in selling Vtrenz to Silverpop.  The permission-based marketing space was growing so fast that we knew that scale mattered more than preserving founder’s equity.  Vtrenz ran the risk of being marginalized because they could not grow as fast as the marketplace demanded. Our on-demand model was generating good cash flow, but we needed more indirect channels and sales power to really capture the B2B space.  Acquisition was the best route.

So spend a little time reevaluating your idea about how you company will be most successful. You may be able to make the traditional angel/VC funding model work, or you may need a different approach. The important point is that you know what your funding and exit strategies are up front so that your business model supports your capital requirements.