VC secrets: How to get funding
Robert von Goeben, managing director, Starter Fluid
On top of everything else, the venture capital industry does a particularly bad job communicating its investment criteria to entrepreneurs. As a result, there is now a plethora of funds with almost identical market messages--"early stage, value-added information technology funds."
But in reality, there exists a wide disparity in the structures, economics and expertise of venture capital funds. So faced with a confusing, tight-fisted capital market, what's an entrepreneur to do?
The current economics in the venture capital industry mean that many deals are structured to meet the needs of the VC, not the entrepreneur. That's not a good thing.
I sometimes ask companies to plot out their expected customer and product milestones on a timeline and overlay the chart with the projected burn rate. From this, entrepreneurs should be able to determine how much funding they need before they need to raise more financing, reach profitability, or go public.
Unfortunately, most entrepreneurs get this wrong. I see lots of plans where the companies are destined to run out of money. Know your capital needs intimately before going out to raise money.
The current economics in the venture capital industry mean that many deals are structured to meet the needs of the VC, not the entrepreneur.
Carpet-bombing VCs with your plan runs the risk of winding up with a mismatch. Some VC firms are simply better than others at funding different stages of a company's development. Pitching a later-stage VC too early blows valuable political capital and introductions. It also creates the psychological "I've seen that deal" tone. The converse--pitching early-stage players in later rounds--is a waste of time that makes seed VCs wonder, "If this is such a good deal, why am I seeing it?" Remember, VCs gossip about each other.
It may seem silly in this spendthrift environment to suggest that entrepreneurs check up on moneyed venture capital firms. But trust me, this will become more important in coming years as the VC industry shakes out. An entrepreneur's relationship with a VC extends far beyond the initial investment.
Follow-on support (and funding) is also very important. Of course, there will always be a core group of blue-chip firms that need no investigation. As for the rest of the bunch, it never hurts to check out a firm's investors and portfolio companies--and maybe even speak to one or two of them.
It's become common to find entrepreneurs wasting precious time and attention as they spin their wheels trying to raise money.
Entrepreneurs wind up making a big mistake by not knowing when their fund-raising is not working. Capital is very efficient. If you operate a company that deserves to get funded, it will. If you've talked to ten VC firms and no one has invested, the chances are slim that firms 11 through 20 will bite.
The bottom line for entrepreneurs is to take control of the process. Get a lot of advice up front, then light out with a super-solid capital plan and a targeted list of prospective investors. Hit the market hard but don't be afraid to retrench if things bog down. The best way for entrepreneurs to mitigate the gyrations of the VC industry is by controlling their own destiny.
Robert von Goeben is the founder and managing director of Starter Fluid, a venture capital fund in San Francisco that focuses exclusively on seed-stage investments. Before founding Starter Fluid, he was a founding director of Redleaf Group, one of Silicon Valley's first Internet-only venture funds.