I get tons of questions regarding the state of venture capital (or any equity capital) in today's economy. My answer is that the market is dormant right now for new investment. To prove my point - please read the following:
Received an email from SCORE today outlining an interview they had with Guy Kawasaki. The interview is titled, 'Getting Cash For A Biz'
Background - For those of you who do not know who Guy Kawasaki is:
Guy Kawasaki has been on the cutting edge of entrepreneurship for a quarter century. Formerly an Apple Fellow at Apple Computer, he is currently a managing director of Garage Technology Ventures; co-founder of Alltop, an "online magazine rack" of popular topics; and a columnist for Entrepreneur Magazine. His latest book, Reality Check, is an all-in-one guide for starting and operating great organizations.
(I think he has 8 books out now and Garage Technology was one of the leading VC firm for modern Venter Capital today - especially for tech).
Q: How has the credit crisis affected venture capital?
A: The credit crisis has put much of the venture capital business in a deep funk. Most investors don't feel like "spending money" because of the recession and lack of liquidity options. Some of this reasoning is simply flawed; the lack of IPOs and acquisitions are irrelevant for a company that's just starting. This part is "mental."
It's true that companies and people are buying less, so start-ups will take longer to achieve significant revenue. But, start-ups are always late anyway. Venture capitalists are finding it harder to raise new funds because the portfolios of many limited partners, pension funds, foundations, etc. are down, so they are less likely to invest too.
Q: What are venture capitalists looking for today?
A: Most venture capitalists say they are looking for a great team, but you only really "know" you invested in a great team after the company succeeds. Most investments fail. However, at the time of the investment, it's not like the venture capitalist thought the team was lousy and invested anyway.
My theory is that you invest in people who are creating the product that they want to use and hope that there are many others like them. This is what Steve Jobs and Steve Wozniak did when they created Apple.
Q: In your book, Reality Check, you suggest that entrepreneurs take a "public relations approach" to get investors' attention? How does this differ from an "advertising" approach?
A: The "public relations" approach means that other people are telling the investors about you. For example, your corporate finance attorney who's done many deals with the venture capitalist calls her to tell her that, "this is the best idea I've seen since Google." Or, Stanford computer science professors tells his venture capitalist buddies that this student team makes the Google founders look like dummies.
The "advertising approach" means that the entrepreneur has to do the bragging. That's not nearly as effective because every entrepreneur says the same things: "We're a proven team who are the only people who can do this."
Q: If an entrepreneur elects to pursue angel capital, what should he or she do in order to make a winning case?
A: They should act like they are pitching to a venture capitalist and not think angels are "easy marks." Many entrepreneurs don't take them seriously enough. They should always pitch at the highest, most professional level possible. It would be ideal to show up with a prototype and growing business.
However, this is often unrealistic for angel investments. You generally seek much less money from angels than entrepreneurs. The key is to understand that angels like to invest in sectors they understand because of their work background, and in people whose company they enjoy.
Q: What if you need more money-can you ask the existing investors, or do you have to find new investors?
A: Both, actually. The existing investors like to know that new investors are also smitten with the idea. This will make them want to double down. New investors like to know that the old investors still believe in the company and want to stay in the game-if not increase their share.
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