Want to get funding for your company -- or maybe even acquired? Here are pointers from venture capitalists and entrepreneurs who have succeeded at this game.
The Fed chairman may be skirting around the "R" word (recession), the President is pushing a $145 billion stimulus package to jumpstart the economy, and the subprime mortgage mess has filtered up from individuals to the international markets. The American venture capital market, however, continues to boom. Last year alone, VCs invested $29.4 billion in 3,813 deals, according to a MoneyTree Report produced by PricewaterhouseCoopers and the National Venture Capital Association.
Internet companies collected a $4.6 billion piece of the VC pie with 748 deals, resulting in a 12 percent increase in investment over 2006. Media and Entertainment, in turn, saw a $1.9 billion investment with 340 deals, also an increase from 2006. Silicon Valley Mohr Davidow Ventures Partner David Feinleib sums up the state of the VC industry succinctly: "Now's a great time to be an entrepreneur starting a company."
But for many, the question of how to transition from starry-eyed entrepreneur to head of a bonafide venture-backed tech company remains. What's the roadmap for convincing investors to share their millions and take a permanent seat on your board? Here, a few venture capitalists and tech veterans share their thoughts.
Finding funding
Virtually all venture capitalists agree that the characteristics that make a company a good investment are simply the same characteristics that make for a good company, period. Feinleib describes the key components as: a good, scalable idea, an idea that's relevant in a growing market, and a solid executive team that can help the company grow within its market.
Given the many open source development tools now widely available, many VCs increasingly expect internet entrepreneurs to approach them only after developing a prototype -- it's even better when that prototype has been released on a limited basis and has gained some traction within the market.
Feinleib cites social network and advertising site hi5 as a favorite example. Feinleib's Mohr Davidow Ventures led hi5's Series A round of $20 million, but the venture firm only went in after hi5 had launched and developed an active user base of more than 35 million. What's more, says Feinleib, the company developed its audience base on just $250,000 of seed money, proving its founders were remarkably resourceful.
Still other VC firms like to get involved even earlier. Oakland, California-based Claremont Creek Ventures Managing Director Nat Goldhaber says his group prefers to join up with a company at its seed stage, though that may be a result of his firm's focus on health IT companies. Goldhaber says the best way to impress his firm is to come in with a coherent pitch. "Get me excited about the idea, tell me why nobody else can copy me, and then tell me how you're going to make money. And tell me that story succinctly and clearly, and then you've got a really good shot at getting funded," he says.
Of course, the first step is getting past a VC firm's receptionist, which often requires connections. "Far and away the best way to get funded is to have a friend or colleague who knows the VC personally to say, 'This person has a good business plan,'" says Goldhaber.
That's exactly the tack Jameson Hsu followed when he sought funding for Mochi Media, his in-game advertising company, last year. When Hsu started Mochi Media in 2005 he found himself in a niche company in a still-forming market. Three years later, that market has exploded and Hsu realized he had a number of casual connections made at Silicon Valley parties that he could begin to call on. Eventually Hsu settled on Accel Partners, which led Mochi's Series A round of $4 million. But it took Hsu a lot of research to make his decision. He says he made an effort to screen the VC firms at the same time they were screening him.
Tikhon Bernstam, a co-founder of online document-sharing company Scribd, applied the same philosophy before accepting a Series A round of $3.5 million from Redpoint Ventures last year. "It felt a lot like dating to me at the time," Bernstam says. He likened finalizing the decision to go with one VC firm over another as akin to proposing marriage. "Make sure you're marrying the right person because you're going to be stuck with these venture capitalists for years and years and years," he says.