are angels really angels?

My 10 year old daughter still believes in the tooth fairy. I give her about $5/tooth and a note written with my left hand so that she doesn't recognize my hand writing. She has whispered to me a few times that she knows the tooth fairy is not real and I don't try to convince her otherwise. We both know it's a game and since it benefits both sides, we continue to play it. She gets money and I get to have fun writing the note and giving her an incentive to keep her teeth clean since the cleaner they are, the more money she gets. You have to know how to play the game such that both sides get something out of it ... a basic win-win.

The same goes for the start-up & VC game. I saw lots of games played over the last few days. I just returned from a few days in Silicon Valley where I attended the "DowJones VentureWire Consumer Technology Ventures" conference. This is a great conference and a fantastic learning opportunity I strongly recommend for anyone considering a start-up, although the turnout this year was weak due to a Web 2.0 conference in San Francisco happening at the same time. The conference is small, but very well run. Each day starts with a keynote followed by panels and interviews with key people. The rest of the day is broken up into eight separate rooms and companies have 50 minutes to do their pitch. There were quite a few VCs attending, sharing their thoughts and advice. I'm definitely going to shoot for presenting here in the next year or two. If you're interested in knowing more, I would be happy to share more details.

The overall pitches and presentations were weaker than I would have expected for the valley, although there certainly were some that were excellent. There are some well documented things you need to cover and many missed major components which was shocking to me. There was too much focus on the idea itself and little on the management team and how the company was actually going to make money. Many of these companies need very experienced leaders, consultants or advisors with deep VC knowledge to help them raise money. A good idea simply isn't enough.

As a consumer, I saw lots of things I would probably use but with my VC hat on, I left many of the presentations being unconvinced they were real VC opportunities. Many were too small to be real standalone companies that VCs would invest in and would be better off sticking with angels, bootstrap like crazy and get profitable in a hurry to survive before flipping their companies to a bigger player. Some of these thoughts were echoed my many VCs. Having said that, there certainly were some that have significant merit and will hopefully get funded. I'll provide a summary of the highlights for my next post on Monday. Be sure to check it out because I'm convinced you'll find some services you'll want to use.

If you'll need VC money, start early

Many companies were of the right size and scope for a VC but started off with angel money, typically a few hundred thousands but sometimes more. They stretched the money extremely well and I was amazed by what they managed to develop with so little money. However, they now need VC money to take it to the next level and the lack of early engagement and experience with VCs showed. Because they haven't been talking to VCs up to now, it is a little late to start learning when you need money in a few months. Things just don't move that quickly. The way I figure it, if you're going to need VC money eventually, get involved with VCs as soon as possible and ideally even at the seed stage.

I know it sounds like I'm biased because I'm an EIR with a VC firm. This is really not the case. I've been considering looking at angel investing as well but as some of you know, I don't do things on a small scale. I think big and I know I'll need significant investment that will have to come from VCs. It is super critical to never ever lose sight of that, even if you do get a bit of money from angels to get things going. Getting money from VCs is RADICALLY different from working with angels in nearly every respect, including timeline, so the sooner you start talking with VCs the better.

Most VCs I know work much slower than you would think. If things go well, you'd be lucky to close anything within 6 months of first contact. The reality is that you'll start pitching to VCs and it will take many months before you'll get even a small nibble from a couple of them. Start-up teams often believe so much in their concept that they think it will sell itself and VC will immediately sign on but it is so much more complicated than that. I'll share a few tidbits to think about although it is definitely not a complete list.

Thing to think about when going down the VC route:

-do you have a fundable team, and especially a credible CEO
-the idea is great but probably wrong ... need a team that will adjust as necessary and have strategy to penetrate the market
-I have heard the following comment many times "good idea but they don't have a CEO"
-what is the exit strategy? M&A, IPO?
-it's fine to make piles of money but if the VC can't pull it out, it doesn't help much
-I would contend that you need to think big and be able conceive of an IPO in 5 years or so. If that is clearly never an option, that's a really bad thing
-is there is a history of IPO and M&A in the space you are entering and if so what were the valuations?
-VCs often start with the end in mind. Basically ... the VC needs to have a sense for the value of the company in 3-5yrs (i.e. what you could sell it for or raise in an IPO) and work backwards from there. Examples of similar companies that were acquired or did an IPO are very useful. YouTube is probably not a good example!
-timing timing timing
-you need to hit the market with your product just before the hockey stick inflection. The timing of the investment will depend on many factors. If it is S/W, you can fund closer to the inflection, perhaps 1-2 years. If it is hardware & software, you need to invest at least 2-3yrs. If it is silicon ... god help you. You need to invest at least 3yrs ahead in my opinion and need huge $$$
-VC partners often decide by consensus
-it is extremely important to find a champion and you therefore should do some research to find the right partner to pitch to initially but keep in mind that the others will need to be convinced as well.
-are there other companies in their portfolio that are in a similar space? That can work for you and against you.
-people like to place bets in a variety of different markets and types of opportunities
-does the VC have experience in the space you are pitching?
-if the answer is no, they will have a hard time with the due diligence required to make a big decision. Furthermore, they won't help open the doors you need. You may also get steered from one play to another. For example, they'll steer you from a consumer play to an enterprise play simply because it is closer to their experience, even if the market is not nearly as good.
-who are the other VCs investing?
-chances are, you'll need multiple VCs and working with VCs that have a history of working together is important (not absolute requirement though)

There is much more I could say here but I hope you get the point. Getting money from VCs is possible and new companies are successful in getting funded all the time but it is extremely complicated and takes a huge amount of time. You really need to know what you are doing and getting people with direct experience and contacts to help is absolutely crucial. I'm not such a person yet but am learning the game with the help of many people and personal perseverance. It has already highlighted major holes in my own initiatives that I know I need to sort out before I have a chance in hell to get funded.

If you have opinions to share on this topic, I'd be extremely interested to hear your thoughts. If you are willing to post these in the comments so that other readers can see them, even better.

Next Monday's post will include a summary and links for many of the cool technologies and services I discovered over the last few days. Don't miss it!

Cheers,

Allan Isfan
Entrepreneur with an Iron Ring