To Get Venture Capital Funding, Know the Risks and Tell a Good Story
In 22 years of working with venture
capitalists, Steven M. Cohen, co-manager of Morgan Lewis's emerging business
and technology practice, can only remember one time when a venture capitalist
returned feedback to a presenter and ultimately invested. When the odds are
that slim, "how do you get that first meeting and give yourself the best
shot at getting a potential investor?" he asked.
Cohen moderated a panel titled, "VC Confessionals: Why We
Funded, Why We Passed," during Wharton's recent 2012
Entrepreneurship Conference, whose theme
was "Turning Painpoints into Opportunity". In explaining that
tagline, the conference organizers noted that "pain has often been
embedded in entrepreneurship. The pain of a personal frustration inspired a new
venture. The pain, sweat and tears of an idea turned it into a viable business.
The growing pains of the startup helped it morph from being in a league of its
own, to one in which it became an industry leader. Pain has often revealed
opportunity."
Perspiration has helped, too. As
conference panelist Gil Beyda, founder and managing partner of Genacast
Ventures, a venture capital firm in partnership with Comcast Ventures, noted:
"I like to paraphrase Thomas Edison, who said that genius is 1%
inspiration and 99% perspiration. To me, a startup is 1% a good idea and 99%
perspiration and execution." According to Beyda, while millions of people
have good ideas, it is not about the idea; it's about the execution.
Gauging the Risks
To bring an idea to fruition, Cohen
reminded the audience of the importance of evaluating various types of risk:
the size of the market, the potential for market penetration, the ability to
secure financing, adequate technology development, and an assessment of
barriers presented by the competition.
All risks are not equal, said
venture capitalist Josh Kopelman, who has helped found many companies,
including Half.com, Infonautics and TurnTide. As a seed stage firm, his current
company funds prelaunch concepts. "We bet on the team," he said.
"The bulk of what you are selling in your first pitch is yourself. The
investor has to have confidence in you and in your ideas." Then Kopelman
looks at the product and its market through the "lens of the entrepreneur
... how you prioritized your key decisions."
To Beyda, it's about evaluating the
risk-reward ratio. The more an entrepreneur can reduce the risks -- including
team risk, market risk, competitive risk, product risk, etc. -- the more
interested his company will be. Also, considering that it is so easy to start
many businesses on the web or in the cloud, he asked, "Why not find a
technology co-founder and build a prototype?"
Panelist Rob Coneybeer, co-founder
of Shasta Ventures, which focuses on mobile and web start-ups, noted that for
his firm, "a high quality introduction" reduces some of the risk;
"it's a test of whether you are any good at partner building." He doesn't
care where you went to school; what he is looking for are "entrepreneurs
who understand storytelling to build brand."
An entrepreneur who fits the model
that Coneybeer outlined -- i.e., a good storyteller -- is panelist Joe Cohen,
co-founder and CEO of Coursekit, an academic social network, for which he has
raised two rounds of capital to date. "I spend all day, every day, selling
to venture capitalists, to recruits, to our team. Everything is sold, not
bought," said Cohen, who came up with the idea for his company when he was
a freshman at Wharton. In his sophomore year, he left school to make his vision
-- a product that gives instructors the tools they need to manage their class
-- a reality. His ability to tell his story, in a compelling way, was key to
his success securing funding. Coursekit's website describes the company's
product as combining "tools like ... file management, communication, and
calendaring with social networking features so students can communicate with
each other."
To bring the storytelling process
into focus, Kopelman asked the audience: "How many of you have read
Stephen King, John Grisham or Danielle Steele?" Many raised their hands.
"And how many of you have read those books twice?" The number of
hands significantly declined. That was his pitch for Half.com, which sold used
books and was eventually acquired by eBay. "I could have said that I
was going to create a person-to-person marketplace for used consumer mass media
products," he said.
According to Coneybeer, your story is
not a novel; it's a short story or a two-minute elevator pitch. And in telling
that story, he added, you need to talk about your product, not yourself. Your
product is a lens for who you are and for your company's sell.
Other Ways to Evaluate Ideas
For a company that evaluates ideas
at the seed stage, Kopelman noted that it is easier to evaluate a "save
time" product, such as Uber, which enables users to request a car from
their mobile phones, than it is to evaluate a "kill time" product,
such as YouTube. "When we saw Aaron Patzer, the founder of Mint.com [an
online personal financial management service], he pulled out his laptop and we
understood the benefit that was there. The same was true when we saw
Uber." He added that "kill time" products can make money, but
it's harder to see until after the product is built.
One of the lenses that Coneybeer
uses to evaluate products is mobile. Some products, such as Facebook and other
social networking tools, are strictly in the mobile environment. Other products
have been strongly influenced by mobile, such as Uber or Cherry, which he
described as an Uber for car washing. Car washing, he added, is an example of
an industry that hasn't experienced significant innovations for a long time but
that is now being woken up by mobile.
As a venture capitalist with a lead
limited partner, Genacast's Beyda uses Comcast's resources as a lens to
evaluate companies for his firm to consider supporting. The companies he does
choose to invest in do not need to have any connection to Comcast, but
"Comcast NBC Universal is a great platform for diligence," he said.
When Genacast's executives looked at a fashion e-commerce company, they checked
with Comcast's E! and Style networks; when they looked at a social marketing research
company, they talked with the NBC research division.
All the panelists left attendees
with one final thought. "The most frequent reason we pass is not because a
business is not a good business, and not because you can't make good money
there, but because it may not fit the profile of what a VC is looking for ...
[in terms of] expected returns or performance or market size," Kopelman
said. "One of the biggest challenges I have is to say, 'I think you will
make a lot of money, but I don't think I will make a lot of money,' which is
why I'm not going to fund you."
For Beyda, the last take-away was
the need for entrepreneurs to ask themselves the tough questions first. He is
surprised by the number of startups that have gaping holes in either their
business model or their research. "You have invested your time and life in
this. Don't you want to know the competitive landscape? Don't you want to know
how big this opportunity can be? Aren't you interested in building some
defensibility?"
Coneybeer cautioned the audience to
always prepare well for presentations, to make sure they understand their
competition, their product and their customer. The better your preparation, the
deeper and more interactive the meeting can be, Coneybeer noted, adding that he
spends at least 40 minutes trying to understand each idea and or product he is
asked to review.
The conference ended with the
straightforward advice of recently minted entrepreneur Joe Cohen: "In
starting a company, there are a few things you need -- a new idea, a team, product,
capital. You need all these things. What happens is because you don't have one,
you don't do it, or because you only have one of out of three, you don't. There
is inertia, so you go to school or do something else. What I found is that
these are excuses." In the words of a famous Nike advertising slogan,
Cohen's parting words were: "Just do it."
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2946
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