Raising Venture Capital, Tips for Entrepreneurs, Post 3

In our last post we took up part 2 of the executive summary; explaining the problem that needs to be solved. We talked about trying to avoid the mistake of finding a problem for the solution, as opposed to solving an existing problem. Today, I want to tackle a huge issue that many plans tend to leave incomplete:

3. Do you have a keen understanding of the market you intend to compete in? This sounds easier than it really is. Most entrepreneurs think that sizing the market and providing some competitive intelligence is sufficient. However, accurately understanding the market is a combination of finding the quantitative (the addressable market opportunity) and the qualitative (a true sense of your place in the addressable market).

To get to the quantitative you need to take a hard look at the piece of the overall market that applies to your solution. This can be very difficult and sometimes frustrating because information tends to be segmented and sometimes even double counted. For example, we have been sizing the market for software solutions in the event management space. While the overall market size is clearly huge and documented at an estimated $300-500 Billion for all events, meetings, etc., it only tells part of the story. Such a large percentage of those dollars are spent on travel related services and when you crunch all the numbers and come to understand that the software is aimed at the $3-5 Billion spent on event management solutions, you have a better idea of the potential size and scale of the business. Next, you need to appreciate current penetration rates in that addressable market. If current penetration is 80%, then your solution better be aimed at taking away market share. If it is only 20%, the market can be immature and leave plenty of land grab opportunity. Additionally, an understanding of your target customer is key here. If you are looking at middle market enterprises versus large companies, you need to further break down the rates.

On the qualitative side, you need to look at how the problem that you just defined is being solved today. Current solutions being inferior to yours is not the point. Clearly defining how your solution can change the current “value chain” and redefine the market is absolutely important. This view of the market can be really impactful and when combined with an understanding of the addressable opportunity, it helps the investor envision how you are going to expand, what eventual size your business can grow to and how you can all eventually reach an exit.

Next Post: 4. Who is the competition, both obvious and not so obvious?

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Raising Venture Capital, Tips for Entrepreneurs, Post 2

In the previous post we tackled the issue of keeping the value proposition simple and easy to socialize. Believe me, if we cant convince our wives or mothers, we will have a tough time convincing anyone. Lets now look at the second issue of the executive summary:

2.  Do you explain the problem that needs to be solved? What is it about the current environment that makes doing business either difficult, inefficient or downright impossible? I have read many plans that seem to be a solution looking for a problem. It is very common. You think you have created something of incredible value and given your intelligence and experience, you are convinced people will buy it because they see the world as you do. This is a dangerous place to be. I can tell you first hand that you spend more time trying to convince prospects of the problem than you do of the solution. This makes you a “nice to have”, not a “need to have”. Many VC’s fall into this trap as well. We get excited over something we like or know and forget to really define the problem. I suggest you spend a bunch of time on this critical section. It will define your business in the early stage of growth and help you strategize about how to meet the market of your product or service. Give it the sniff test. Ask industry vets whether they perceive the problem as small, medium or large. Ask them open-ended questions to discuss how to quantify it, what it would mean to them if they could solve the problem and how they best solve it today. Don’t even discuss your solution as much as you focus on the market intelligence. Once you “interview’ enough people and build a credible case, then you can support your theory with other qualitative research that builds your overall market case. This is critical, don’t miss this step, it will almost always disqualify you from a prospective funder. I look hard at this area to determine if we can really solve the problem together.

Next post: 3. Do you have a keen understanding of the market you intend to compete in?

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Raising Venture Capital, Tips for Entrepreneurs

This is the first in a series of posts I want to write on lessons learned from working at, and now with, Start-up companies.  In particular, I’d like to discuss several aspects of the fund raising process, which in many ways is downright brutal and cut-throat. I am hoping that the many gifted and talented entrepreneurs find this helps them in the process.  Despite the press going on and on about how there is too much venture capital in the market, paving the way for stagnated returns, the environment for early stage funding remains extremely challenging and competitive. The best plans and ideas usually find a way to attract interest, yet you would be surprised at how many common, completely avoidable mistakes are still made in the process. Having now spent years pouring over hundreds if not thousands of prospective business plans and listening to entrepreneurs pitch their companies, I thought it was about time I start cataloging what I believe separates the truly interesting and attractive from the more mundane and ordinary. Remember, this is just one person’s opinion, but I would bet it represents a good cross section of the early stage VC experience. The companies that typically get through our screening process share many of the common elements that I will write about over this series. This doesn’t guarantee our interest, but it certainly should help you get a handle on what VC’s tend to look for. Hope it helps

Part I: The executive summary

It amazes me to this day how many different definitions there must be about the Executive Summary; the first thing that usually crosses our desk. Does it convey the key value proposition right up front? Do you explain the problem that needs to be solved? Do you have a keen understanding of the market you intend to compete in? Who is the competition, both obvious and not so obvious? Who are the people running the show? How do you intend to distribute? Is the business model clear and compelling? Does it explain a detailed use of capital? What is the length of the document?  Lets take them one at a time. Future posts will detail the remainder of the issues.

1.   Does it convey the key value proposition right up front? Many plans we see tend to focus on a quick summary of the solution, whether that be technical or business model based, but forget the obvious elephant in the room; can you explain your solution and why it’s superior in a few sentences or less. What is the takeaway? Remember, we see literally dozen of plans all competing for attention. Give me the obvious takeaway. Make me want to read more. I am not suggesting that we aren’t sophisticated enough to find the gem, believe me if we are interested, we will dig until we find it. But, you would be amazed at how simple is truly better. We have to socialize the deal among friends, partners and associates and build a case for spending time on your plan. By having that transportable value prop, you make that easier for all. Some of the examples we have seen that illustrate this point; the “Lending Tree” for student loans, mobile content concierge, salesforce for the events business. They are all easy to explain (or sell to our constituents) and compel us to want to dig in. Keep it simple stupid has real meaning here.

Next Post:
2.  Do you explain the problem that needs to be solved?

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Operating in the Board Room

Please see the blog written November 11, 2009 in the online version of The Wall Street Journal entitled “Start-Up CEOs Gripe About VCs’ Lack Of Operating Experience” (http://blogs.wsj.com/venturecapital/2009/11/11/start-up-ceos-gripe-about-vcs-lack-of-operating-experience/tab/print/ ).

The main point of the article is based on a survey of start–up CEO’s that points to a lack of real world entrepreneurial and operational experience at the board level. Cava was founded on this very premise. Having been a veteran of five previous start-up experiences, I can tell you first hand that the lack of operational talent in the board room is frightening, especially in early stage companies. That is not to say there aren’t smart people in the room or those wanting and willing to help. The problem is if you haven’t woken up at 3am in the morning worried about making payroll that day, or how to get the marketing plan done to drive traffic growth, you cant possibly be all that useful. Being strategic is fine, but what early stage companies typically need most is tactical help. Be there to help scrub the pipeline. Be able to help create an HR plan that makes use of limited resources. Know what suppliers might be consolidated, negotiated with or added. Open a few doors at prospective clients that could change the game on the quarterly plan. These are all real issues and ones that you must have dealt with regularly to add value. If you make your entrepreneurs successful, you will be successful. Influence where you can. Be willing to be operational, even if it means sitting on fewer boards and getting more tactical with each.

Jim Caparro, a member of the Cava Network, puts it this way:

There is an artful balancing act between an entrepreneur executing on his vision and building a successful business, and the interests and motivations of a funding sponsor. Having experienced it firsthand, I totally appreciate the challenge.

These inherent conflicts need not be overwhelming to either side. It’s all about aligning interests and expectations within realistic timelines for both sides. Then the “art” is managing the process and relationship in a way that the environment created seems supportive and encouraging, yet demanding of results. Build a strong and progressive culture that motivates leaders. Many say it, few execute it.

Good luck investing out there. The opportunities are exciting, lets make them successful.

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53% of VC Execs say Industry is “Broken”

Here’s the Scoop

http://blogs.wsj.com/venturecapital/2009/06/29/majority-of-vcs-in-survey-call-industry-broken/

 

Here’s the Summary

While VC’s are traditionally a very optimistic group, a new survey shows they aren’t all exactly confident about their current business model.  “The survey from executive search firm Polachi Inc. polled more than 100 venture capital executives, 70% of which were partners or managing partners. It found that a majority, 53%, of respondents indicated the venture capital industry is “broken.”

Here’s Our Take

The survey is new, but we’ve been saying this for a while now.  If you didn’t get a chance to see our April 20th post, please read it now.  We agree, that’s why we formed Cava…

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Another muse on Early Stage Investing

VC is broken! OK, we get it, lets move on…

Another muse on Early Stage Investing:

Over the past 6 months there have been a myriad of articles written on the changing face of Venture Capital investing. I could list each article and it would easily fill this page. Instead, let me summarize:

  • Returns Stink 
  • There are no exits 
  • Many portfolio companies are overvalued by today’s standards
  • Government regulation of PE/VC is coming
  • There is too much money chasing too few really good opportunities
  • LP’s are not meeting capital commitments or they are selling positions on the secondary market
  • Fundraising is next to impossible
  • VC and Private Equity investing is struggling to survive amidst the liquidity crisis

While these all are true and have been exacerbated by the recent economic meltdown, the proverbial “elephant in the room” is the VC model itself… which must innovate, immediately! It’s not acceptable to call yourself early stage yet have fund sizes that exceed your ability to deploy capital appropriately in this area. Many funds are now confused as hybrid venture, growth capital and private equity funds. This makes it difficult for investors to choose best in class managers at each stage and therefore dilutes the entire industry in the process. We founded Cava Capital to focus only on early stage investing. This is hard stuff; you need to get your hands dirty and help out tactically, not just strategically. Our roadmap includes:

  • Keeping the funds small and nimble while focusing on creating great companies with fantastic entrepreneurs
  • Finding those innovative ideas and companies that are built to be capital efficient and funding them appropriately
  • Focusing on profits and cash flow, even in small companies
  • Getting involved! We created a proprietary consultative process designed to enable tactical implementation of strategic goals. It is built to accelerate success, adding real value via our active, truly hands-on, strategic & operational guidance. We utilize our committed “Growth Network” of over 25 successful investors, financiers, executives and specialists with 200+ years of combined start-up experience and integrate them throughout our process
  • Thinking forward, not simply following/chasing markets. We believe in the development of sector “points of view” which help guide our selection of investment opportunities. We then pro-actively generate deal flow through our network to find those companies that fit our positions on a market or sector. If companies don’t exist, we will help to start them using our EIR program and incubator relationships on both coasts. We believe this process results in a diverse, top down and bottoms up portfolio construction
  • Aiming for doubles. Our model for success is slightly different: We don’t count on 1 or 2 home runs to carry the fund. Our expectations for exits are more in line with the $75 million acquisition than the billion dollar IPO. We believe this gives us more opportunities to transact in different environments and increases the likelihood of success for an investment
  • Being friendly and having empathy. Running a start-up is hard enough… we know, most of us have been there multiple times

Innovating the current business model of venture capital is not that difficult and it takes many forms. We have seen new age incubators, seed funds of large, established firms and other new models appearing every day. This is a welcome change and one that will help the entire industry rethink the vision for the next generation of startups. The need for venture is greater today than over the last 20 years! Job creation, innovation and new technologies will help lead us back to a growing, leading economy… but we need it at both ends; investor’s and the market’s acceptance and support.

We believe in Start-ups and will fund them appropriately if they meet our investment criteria. Have fun. Life is too short.

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Watershed Moment for Early Stage VC

This morning we all read about the new Google Ventures group being formed to support the growing and recently re-emerging early stage investment opportunity.  This $100 Million dollar fund is intended to be focused on early stage investments in a variety of areas including consumer Internet products, IT, health care and biotech.  They plan on deploying their capital fairly quickly and making investments that range from several hundred thousand to several million dollars.  Personally, I am pumped by this news.  This is an important milestone in a series of events that have occurred over the past few months that are reshaping early stage VC.  Along with every other private equity class, VC has been brutalized in the mainstream press, blogs and by VCs ourselves.  In some cases it has been justified, in other cases it’s more of a “baby with the bathwater” reaction.  The facts, however, are clear.  Venture capital raised ever larger funds over the past years; necessitating larger investments.  At the same time, technology development cost structures have radically changed.  Simply put, it is cheaper to get a business built now than it was even a few years ago.  As the Funds grew large, this left a gap in funding at about $2-5 Million that was filled by Angels and others.  With the markets taking their toll on investor net worth’s, so goes the Angel’s capacity to do larger deals.  Thanks to the recent valuation correction in both public and now private markets, we have seen many new players adopt strategies to reinvent the early stage model.  Some call this Micro-VC.  I tend to think of it more as “traditional” early stage capital.  The formation of a host of new venture models designed to get money in the hands of entrepreneurs who are forging ahead with innovative ideas has been in full swing for about a year now.  This is why I call it a re-emerging opportunity.  Cava takes one approach but there are many others ranging from new incubator models to institutional seed capital funds.  We welcome this as a sign that the market for early stage capital is undergoing its own iteration, which will eventually lead to better returns and choices for investors.  We wish Google all the best and welcome the opportunity to look at exciting opportunities together.

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