How does one go about getting money from a venture capital firm?
I have been at work in a venture capital firm for nearly ten years with one title or another. I have led or joined investments either independently or with VantagePoint Venture Partners in at least 20 companies. I have sat in at least a thousand presentations by entrepreneurs who are trying to get money.
(The math of 20 against a thousand sounds bad, but about 20% of the deals I looked at got money elsewhere.)
I still can’t figure out why one deal gets the interest of many investors while others languish. (Maybe I should change careers.)
The firm where I have worked is a large fund and invests in a ‘stage independent’ manner, meaning we have made seed investments of a few hundred thousand or later stage investments in the tens of millions.
I have seen seasoned entrepreneurs with success stories strike out and college professors with no business experience get funded.
Many venture firms or individuals publish their ‘filters,’ or the things they look for and how they like to be approached. Certainly, almost every venture investment firm has a website that has been painfully constructed to get across their story, but you have to remember that the VC firms are acutely aware that the constituents for the websites are as likely to be potential investors in the fund (LPs) as they are to be entrepreneurs, the latter being exuberant and the former, well, not so much.
So the sites are very conservative.
Venture Capitalists worry about ‘risks.’ (‘Why do they call you venture capitalists if all you worry about is risk?’ you might well ask.)
Technology risk. The product development will take too long. It will cost too much. The product won’t do enough.
Market risk. The market is not big enough. People aren’t ready to buy. No one has ever bought this before.
Management risk. The team is not complete. I don’t like the CEO. I think the CTO smells funny.
Competitive risk. Intel will respond and crush this company. Oh, that was the 80s. Microsoft will respond and crush this company. Oh, that was the 90s. Google will respond and crush this company. Oh, that is so 2005.
Rumor has it Cisco’s founders visited over twenty VC firms before they found Sequoia, who are possibly the industry’s most successful contrarians. I would think contrarian thinking would be a requirement for the business, but if you look at the actual behavior, there are often feverish races to invest in deals that look like the ones that other investors like. Sometimes I feel sheepish.
In any case, here is one way to get a venture investment, a true story.
I am riding on a plane from Chicago to San Francisco. There is a tap on my shoulder. It is T.J. Rodgers, who is sitting across the aisle with his partner Valeta. When I ran a high-tech ad agency, T.J.’s company, Cypress Semiconductor was one of my clients for many years. But that is another story. T.J. is from Wisconsin, an avid Green Bay fan, and they are flying home from the game. Go figure.
T.J. Rodgers took several tries 20 years ago to get his idea for a CMOS semiconductor company funded. After a lot of work, the contrarians at Sequoia and Sevin Rosen backed him, and he led Cypress to become a significant semiconductor company, building the first plant from scratch in an area of San Jose that is now, twenty years later, practically downtown.
He is a true technology nerd, but a nerd with money, which is a scary thing. He decided he could improve on how the French make Pinot Noir (using, you guessed it, technology) and reputedly got into some disagreements for blasting out caves for the wine on his lands on the outskirts of Silicon Valley without, so I understand it, the appropriate cave blasting permit.
His ‘Clos de la Tech’ sells for $100 a bottle.
T.J. has put a little money (an angel investment) and some of his technology for monitoring the fermentation of wine into a startup. The startup founders are semiconductor engineers who decided the world needs a peripheral for the computer that makes wine.
T.J. knows I am a VC, knows I like wine, figures I am the right guy for this one. So an email or two later and the founder has sent me the plan.
Since I focus mainly on Internet media and marketing, I am not going to lead this one, but my partners, and particularly the head of my group, Cynthia Ringo, can be contrarians, and this one is certainly contrary.
Who will spend $3500 for a home wine machine? Where is the market proof? Are we crazy?
Fortunately, the founders had actually built a working prototype, fermented some very tasty wine, and the presentation went very well to the partnership once enough wine had been consumed.
In the end, the founders got a term sheet and as I write this the company is on the road to a funding and launching of the product.
The moral of the story?
-Know an important tech guy? Helps.
-Have an important and influential angel? Very useful.
-Have a vision (or double vision) and make it happen? Totally helpful.
-Have a demo that lowers resistance? (I worry that they put the investing equivalent of rohapomyne in the sample wine). Very important.
-Be able to articulate the story in a way that gets investors excited? Kaching!
(More on that later.)
