By Brian Hill
Profit Dynamics Inc., a research firm
in Fountain Hills,
Arizona, recently conducted a survey of 74 venture
capital firms from all regions of the United States. They
were asked their views about the outlook for the early stage
capital market in the upcoming year. On the whole, the VCs
responded with at least a moderate degree of optimism, the
overall theme being--the worst may be over. They were then
asked this question:
What advice would you give to entrepreneurs looking for
early stage capital?
Here’s what they told us:
1. Be Prepared
In both good times and bad, this is good advice: Be thoroughly
prepared for the presentation to VCs and focus on why your business
will make money for investors.
2. Conserve Capital
In the late 1990’s, capital was much more plentiful and in some
cases, management teams looked at the term "burn rate" to literally
mean they had investors’ money to burn, and when one round of
financing ran out, they could easily go out and get more. From
2000 and up to today, a massive reality check occurred in the market
for early stage capital. The emphasis now is on conserving capital
and reaching as many milestones as you can on your own without
3. Be Committed
In the due diligence process, investors try to determine the
level of commitment the management team has to the business. Will
the team exhaust themselves trying to make this business succeed?
Part of that commitment can be financial, both in terms of
willingness to commit personal resources to the venture, and the
willingness to forego compensation until the cash flow of the
venture becomes positive.
4. Have An Outstanding Management Team
One way investors mitigate risk is to only put money behind the
very finest management teams. An ever-viable maxim applies (and
you imagine VCs carry this around in their wallets): a great team
with a mediocre idea succeeds more often than a great idea with a
mediocre team. The strength of the management team is even more
critical to them when the new venture will be trying to gain a
foothold in tough economic times.
5. Be Patient and Persevere
Even in the exhilarating days of the Internet boom, entrepreneurs
were sometimes shocked by how long it took them to obtain seed stage
or first round capital. For one thing, they did not take into
account the incredible number of ventures that were begun in a short
period of time, all pounding on investors’ doors at once. Today,
the number of entrepreneurs looking for capital has declined, but
at the same time, investors have become much more cautious. The
bottom line: nothing succeeds like perseverance.
Our survey pointed out a definite lifting of the gloom that has hung
over the early stage capital market for more than two years, but not
all VCs were in agreement, as quotes from these two VC’s show:
"Good entrepreneurs will get funding! Great companies are often
started in a recessionary environment."
"Keep your day job."
Perhaps this venture capitalist most clearly stated what entrepreneurs
looking for early stage capital in 2003 should keep in mind:
"Conserve capital, get customers, be patient, be persistent."
How to Manage Your
The number one reason why all businesses online and off-line fail,
is probable because the owners overestimate how much money they
have to spend. Many owners will spend more money than the business
is making and will eventually fall apart. Many businesses that
fail do not know how to manage their money properly and make a few
mistakes that cost them big time in the long run.