Bo Peabody, who founded Tripod, one of the first dotcoms, when he was a 19-year-old Williams College student, says that raising money is like a video game. In order to get from one level to the next you have to accumulate power and weapons, and in the money-raising game the analogous power and weapons are the milestones of success and credibility.
Venture capital is a post-World War II phenomena. The idea is credited to J.H. Whitney, founder of Whitney & Co., the first venture capital firm, now headquartered in Stamford, Connecticut. Prior to Whitney, new ventures were typically funded by wealthy private individuals. The development of a more formal, institutionalized investment process, embodied in professional venture capital firms, has played a major role in an expansion of access to growth capital for innovators and entrepreneurs with good ideas and the creative means to execute a successful business.
Advice for before you go to the VC
- Choose the appropriate audience. If you’re looking for financing under, say, $5 million, don’t go to a professionally managed venture-capital fund. Find angel investors instead.
- No NDAs. Never ask professional investors to sign a nondisclosure agreement (NDA) up front. They won’t do it. VCs will immediately view you as a rookie. Don’t provide sensitive information in your business plan. Once you’ve garnered investors’ interest, you can start to let them in on the secret.
- Forget cold calling. Find a contact who knows the investor to introduce the opportunity. Unsolicited business plans are returned just as quickly as first-time novels.
- Keep it short. The longer the plan, the more likely it will be put aside for later reading that often never occurs. Never submit a full business plan. A three-page executive summary is the outer limit that they will read.
- VC money is nervous money. VCs look for a low burn rate, a solid revenue model, grizzled management, and partnerships with genuine strategic value.
- Follow through. Don’t count on the VCs to get back to you.
- Don’t stop looking.
From “What to Know Before You Go to the VCs” by Joseph Bartlett. Fast Company, November, 2000.
In a poetic metaphor, Ray Smilor of the Ewing Marion Kauffmann Foundation compares an entrepreneur’s persistent interactions with a venture capitalist to the formation of a pearl inside an oyster. The entrepreneur can be an irritant in the body of an established VC firm. Though a gem does not always form, it takes an entrepreneur to be the catalyst that helps a venture capitalist form a pearl of great value.
