Venture capital firms (VCs) look for specific qualities in the startups they fund, agree the three venture capital partners who made up the panel for the recent VC discussion in the SiliconAngle Cube. But equally, they say, entrepreneurs should bring their own list of requirements to the table. And they need to base those needs in reality. The full transcription is available on Wikibon.org.
The first piece of reality that they need to understand going in, says Charles Beeler, partner at El Dorado Ventures, is that “the hardest financings today are the series B financings for these companies.” Therefore, entrepreneurs should seek enough funding in their first round to get their idea fully realized and established in the market.
“If you're building complex technologies, it's going to take 12-18 months to build and get to market, you've got to be funded to get through that point,” he says. “If you don't appropriately fund your company through the series A and give yourself time to get to market, get the product out, have some customers work with it, it's going to be really hard to raise a good follow-on financing round. Most of the companies that we're seeing are not going to get to profitability on $2 million.”
So one thing an entrepreneur needs in a VC or super-angel is a company that has enough capital to invest to ensure a successful start, says Pete Sonsini, partner at New Enterprise Associates (NEA). “People don't always knock it out of the park after their first financing, they have to have successive deals, and its an up-and-down ride. Today there is a lot of pressure on firms that aren't going to be able to raise future funds.” So entrepreneurs should look for partners who can provide extra backing when they need it, and if possible participate in the second funding round as well.
Playing Well Together
It is also vital that entrepreneurs choose VCs or angels that will work well with them. “It's hard to get an investor to come into your company, but it's ten times harder to get him out,” Mr. Beeler says. “You've got to get that right, because it can absolutely kill a company if you get the wrong one.”
“The most important thing is get to know the people who will be investing in your company,” says Ping Li, partner at Accel Partners. “Spend the time to get to know the VC. We're all very accessible, we return telephone calls, whatever it takes. And that's true for the angels. Get to know everyone, and that will help you to make the right decision.”
Then, of course VCs also bring added values including the ability to help their entrepreneurs manage their businesses and avoid strategic mistakes and introduce them to others in the VC's network who might become valuable partners. And this, says Mr. Li, is true of angel investors as well.
Angels are more than just passive funds, and they play an important role in funding entrepreneurs, he says. “We work with a lot of angels, we have angels in a lot of our companies. So I think they definitely provide an important segment of the creation of startups, today than ever.”
The one thing to understand about an angel is that they seldom participate in subsequent funding rounds, whereas a strong VC who gets involved in the initial funding may also participate in subsequent rounds, making things much easier for the entrepreneur. “Figuring what the business needs should help you to figure out whether you go with angels, VC, or a combination,” Mr. Li says. “I don't think there's one formula. I do encourage entrepreneurs to take the time to figure their funding strategy out.”
Action Item: Entrepreneurs need to create a strong funding strategy when launching their start-ups. This is a vital part of their business plan because without sufficient funding they are almost guaranteed to fail. Some start-ups can self-capitalize, but those in particular that are building hardware or developing complex technologies that will require time and expensive expertise to realize will need outside help. They should make sure they have enough funding to get their startup into the market and if possible into positive cashflow at least in their first round, and it is often wise to get some of that funding at least from a VC with the capital to participate in the second funding round as well.
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