By Laurence K. Hayward
This is part eighteen of a twenty part series on this topic.
18. How do you plan to expand your labor force?
While the precise conditions of labor markets change, it is always a challenge to find the best people. VCs will not only be interested in the composition of your existing workforce, but also in how you plan to fill key positions now and in the future. Have you used an executive search firm? Do you have qualified candidates currently under review? Most companies include in their “use of proceeds” a line item for the expansion of human capital. Have you identified in advance people who will fill those roles? If not, how long will it take you to find them?
If these questions seem premature, consider that for early-stage companies labor costs are typically the largest operating expense. Have a basic understanding of what your staffing needs will be as the company expands. What human resources are necessary to achieve and to service the projected revenues? VCs will be interested in knowing how much of their invested capital will go to labor, that you’ve thought through this carefully, that you’re getting the most from your people, and that you’re expanding the labor base judiciously.
How will you compensate people, so as to attract, motivate and retain employees while keeping labor costs under control? VCs like to see incentive-based pay where appropriate, particularly as it aligns the motives of key personnel with the objectives of the company. They like to see management’s skin in the game, often in the form of direct investments and performance-based compensation. They will question salaries that seem excessive. While good people often cost more, there is the belief that if management does an effective job of communicating the vision for the company, people will gladly take part of their compensation in the overall performance of the company (distributed through bonuses, profit sharing, stock options, etc.)
This is one of the areas where operational experience is critical. As previously mentioned, entrepreneurs are often befuddled when others (including their own employees) don’t share their enthusiasm for the business model, concept or vision. All the creativity and brilliance that went into the business model ultimately depends on people. Those with operational experience understand the challenges (and the ugly realities) associated with building enthusiasm and ability to execute amongst the entire workforce.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
An online meeting place for entrepreneurs and investors to interact and engage in discussions on early stage investing and entrepreneurship. Learn more about our activities and our team by also visiting www.theventurelab.com
Tuesday, December 4, 2012
Tuesday, September 18, 2012
Part 17/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)
By Laurence K. Hayward
This is part seventeen of a twenty part series on this topic.
17. What is the anticipated lifecycle of your product or service offering? What are current and future plans for R&D investments?
All great things come to an end. Products mature, competitors offer substitutes and customers’ demand change. Have you anticipated when the earnings power of your product will run its course -- for first-time buyers as well as for follow-on sales to existing customers (e.g. upgrades)?
For early-stage companies, the most critical question is how you will get customers to repurchase or renew after the first usage. Once you’ve thought through that issue, then focus on related matters, such as your plans for R&D investments. How will you continue to generate revenues when existing products run their course? Many companies fail to include the costs associated with continued R&D in their financial projections.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
This is part seventeen of a twenty part series on this topic.
17. What is the anticipated lifecycle of your product or service offering? What are current and future plans for R&D investments?
All great things come to an end. Products mature, competitors offer substitutes and customers’ demand change. Have you anticipated when the earnings power of your product will run its course -- for first-time buyers as well as for follow-on sales to existing customers (e.g. upgrades)?
For early-stage companies, the most critical question is how you will get customers to repurchase or renew after the first usage. Once you’ve thought through that issue, then focus on related matters, such as your plans for R&D investments. How will you continue to generate revenues when existing products run their course? Many companies fail to include the costs associated with continued R&D in their financial projections.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
Tuesday, September 4, 2012
Part 16/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)
By Laurence K. Hayward
This is part sixteen of a twenty part series on this topic.
16. What alliances or partnerships have you entered (e.g. joint ventures, marketing alliances, licensing arrangements, selling/distribution agreements, channel partnerships, software agreements, etc.)?
It is important to remember that alliances can be assets as well as liabilities. VCs will want to know if any of your alliance agreements have compromised your intellectual property claims and if the company has any outstanding obligations to third parties. Some alliances can even have an effect on how revenues are recognized. When in doubt, speak to your lawyer and accountant about these issues.
In the marketing section of your business plan, demonstrate how alliances may have helped your company lock-up certain distribution or sales channels for your products and services. Do any of your alliances provide a competitive advantage? Do they create barriers to entry? Do they help you reach customers more efficiently? See question 15 covered in our last post for additional information on the value of alliances.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
This is part sixteen of a twenty part series on this topic.
16. What alliances or partnerships have you entered (e.g. joint ventures, marketing alliances, licensing arrangements, selling/distribution agreements, channel partnerships, software agreements, etc.)?
It is important to remember that alliances can be assets as well as liabilities. VCs will want to know if any of your alliance agreements have compromised your intellectual property claims and if the company has any outstanding obligations to third parties. Some alliances can even have an effect on how revenues are recognized. When in doubt, speak to your lawyer and accountant about these issues.
In the marketing section of your business plan, demonstrate how alliances may have helped your company lock-up certain distribution or sales channels for your products and services. Do any of your alliances provide a competitive advantage? Do they create barriers to entry? Do they help you reach customers more efficiently? See question 15 covered in our last post for additional information on the value of alliances.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
Tuesday, August 14, 2012
Part 15/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)
By Laurence K. Hayward
This is part fifteen of a twenty part series on this topic.
15. Who is the end user of the product or service offering?
Is this a consumer-based business, or will you sell your product or service to other businesses? What do you know about the demand for your product or service in that target market? What do you know about the buying habits of your target market? VCs want to know that you understand the unique buying habits of your target markets.
Do you anticipate any roadblocks? For example, will you have to educate the buyer? Many entrepreneurs have an incredibly clear understanding of the benefits of their product or service. They may have even worked for a company that would be a potential buyer for the particular offering, which may be how they originally came up with the idea. Yet, when they begin marketing the product, they find out (often with surprise) that others don’t share their enthusiasm.
It often takes longer than expected to get past the inertia associated with understanding a new product or service offering. As a result, questions such as these are critical to understanding the sales cycle and marketing costs. Ironically, in this instance, competition can be helpful because it helps to demonstrate that a market already exists for the product or service offering. You may be able to use your competition to your advantage if you can demonstrate that they’ve proven the market demand, but you are better positioned to deliver a solution that meets customers’ needs (and perhaps doing so more efficiently as well).
Think about how you can leverage partners or resellers to reach your target markets. In many businesses, establishing effective sales channels enhances the scalability of the enterprise. It is often difficult to achieve the rapid sales growth VCs desire through organizational growth alone. Building out the sales and marketing function requires time and money, and significant effort in recruiting and training. However, key partnerships may help in spreading the message or expanding the sales channel to support rapid growth. If this approach is appropriate for your business, it should be outlined in the marketing section of your business plan.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
This is part fifteen of a twenty part series on this topic.
15. Who is the end user of the product or service offering?
Is this a consumer-based business, or will you sell your product or service to other businesses? What do you know about the demand for your product or service in that target market? What do you know about the buying habits of your target market? VCs want to know that you understand the unique buying habits of your target markets.
Do you anticipate any roadblocks? For example, will you have to educate the buyer? Many entrepreneurs have an incredibly clear understanding of the benefits of their product or service. They may have even worked for a company that would be a potential buyer for the particular offering, which may be how they originally came up with the idea. Yet, when they begin marketing the product, they find out (often with surprise) that others don’t share their enthusiasm.
It often takes longer than expected to get past the inertia associated with understanding a new product or service offering. As a result, questions such as these are critical to understanding the sales cycle and marketing costs. Ironically, in this instance, competition can be helpful because it helps to demonstrate that a market already exists for the product or service offering. You may be able to use your competition to your advantage if you can demonstrate that they’ve proven the market demand, but you are better positioned to deliver a solution that meets customers’ needs (and perhaps doing so more efficiently as well).
Think about how you can leverage partners or resellers to reach your target markets. In many businesses, establishing effective sales channels enhances the scalability of the enterprise. It is often difficult to achieve the rapid sales growth VCs desire through organizational growth alone. Building out the sales and marketing function requires time and money, and significant effort in recruiting and training. However, key partnerships may help in spreading the message or expanding the sales channel to support rapid growth. If this approach is appropriate for your business, it should be outlined in the marketing section of your business plan.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
Thursday, July 26, 2012
Part 14/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)
By Laurence K. Hayward
This is part fourteen of a twenty part series on this topic.
14. What drives customer satisfaction for this industry and for the product? And, how do you know?
Have you conducted research in order to assess what is truly important to your customers? Do you know what product features are critical vs. those that are ancillary? A classic mistake in product development is to perfect unwanted features, sometimes at the expense of critical ones. For example, a company focuses on adding certain bells and whistles to its product at the expense of timely delivery, which as it turns out was the customers’ top decision factor. In your business plan, an understanding of critical product features or determinant attributes (what most determines or affects a customer’s purchase) can be used to distinguish your offering from that of your competitors.
Once you've acquired customers, ensuring ongoing satisfaction and tracking changing needs become critical. How will you support the product or service once it is launched? What will be the expenses associated with support? It is common to underestimate the time and expense associated with product or service support. Will existing customers purchase your product or service again? Will they recommend it to others? Regular and consistent customer feedback is essential in order to obtain answers to these types of questions.
If a VC has interest in your business, you can expect at some point that they will engage in ‘customer due diligence.’ If you don’t yet have customers, they may interview potential customers or industry experts to ascertain their demand for your product or service at the proposed price points. If you have customers, they will want to contact them to ascertain level of satisfaction and likelihood of repurchase. You will want to identify potential candidates and inform them in advance if a VC is planning to conduct customer interviews. If you are approaching a syndicate of investors (multiple VCs), coordinate the process (usually with the lead investor), so that the same customers aren’t approached repeatedly with the same questions again and again.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
This is part fourteen of a twenty part series on this topic.
14. What drives customer satisfaction for this industry and for the product? And, how do you know?
Have you conducted research in order to assess what is truly important to your customers? Do you know what product features are critical vs. those that are ancillary? A classic mistake in product development is to perfect unwanted features, sometimes at the expense of critical ones. For example, a company focuses on adding certain bells and whistles to its product at the expense of timely delivery, which as it turns out was the customers’ top decision factor. In your business plan, an understanding of critical product features or determinant attributes (what most determines or affects a customer’s purchase) can be used to distinguish your offering from that of your competitors.
Once you've acquired customers, ensuring ongoing satisfaction and tracking changing needs become critical. How will you support the product or service once it is launched? What will be the expenses associated with support? It is common to underestimate the time and expense associated with product or service support. Will existing customers purchase your product or service again? Will they recommend it to others? Regular and consistent customer feedback is essential in order to obtain answers to these types of questions.
If a VC has interest in your business, you can expect at some point that they will engage in ‘customer due diligence.’ If you don’t yet have customers, they may interview potential customers or industry experts to ascertain their demand for your product or service at the proposed price points. If you have customers, they will want to contact them to ascertain level of satisfaction and likelihood of repurchase. You will want to identify potential candidates and inform them in advance if a VC is planning to conduct customer interviews. If you are approaching a syndicate of investors (multiple VCs), coordinate the process (usually with the lead investor), so that the same customers aren’t approached repeatedly with the same questions again and again.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
Tuesday, July 10, 2012
Part 13/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)
By Laurence K. Hayward
This is part thirteen of a twenty part series on this topic.
13. How do you plan to acquire and keep customers?
It surprises many people to learn that ‘marketing’ is commonly one of the weakest elements in most business plans (along w/ the financial projections). It’s almost as if the entrepreneur assumes that with the right business model, the products and services will sell themselves. There are many innovative and brilliant business concepts that never become real businesses, just as there are many so-so concepts that become the basis of major successes. I’m reminded of a successful entrepreneur who put a plaque on his wall that read, “nothing happens until somebody sells something.”
A well-developed business plan includes marketing strategies that demonstrate an understanding of market realities and customer behavior. For example, your revenue projections call for 100 units of X product to be sold next year. How will they be sold? Who will be selling them? Why is this projection realistic, do you have relevant industry, product or customer experience that guides this assumption? This is one reason VCs look for industry experience in their management teams. The appropriate experience should provide insight into the dynamics of the sales process and customer behavior, knowing for example the key decision factors (the sometimes harsh realities) of the customer group. Having a well constructed sales pipeline and a disciplined selling process will also help.
In the marketing section of your business plan and presentation, VCs will look for more than a list of your marketing initiatives. You can anticipate questions like: what are your company's customer acquisition costs? Have you calculated average and target revenue per customer? Do you know how many customers are required to break even? Do you know the product sales cycle? Think quantitatively as well as qualitatively.
In addition, the most successful companies know how they will retain customers -- even before they acquire them. It is said that it costs five times as much to generate business from new customers as it does from existing customers.
Customer retention is critical to the long-term success of most enterprises. How will you get customers to return?
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
This is part thirteen of a twenty part series on this topic.
13. How do you plan to acquire and keep customers?
It surprises many people to learn that ‘marketing’ is commonly one of the weakest elements in most business plans (along w/ the financial projections). It’s almost as if the entrepreneur assumes that with the right business model, the products and services will sell themselves. There are many innovative and brilliant business concepts that never become real businesses, just as there are many so-so concepts that become the basis of major successes. I’m reminded of a successful entrepreneur who put a plaque on his wall that read, “nothing happens until somebody sells something.”
A well-developed business plan includes marketing strategies that demonstrate an understanding of market realities and customer behavior. For example, your revenue projections call for 100 units of X product to be sold next year. How will they be sold? Who will be selling them? Why is this projection realistic, do you have relevant industry, product or customer experience that guides this assumption? This is one reason VCs look for industry experience in their management teams. The appropriate experience should provide insight into the dynamics of the sales process and customer behavior, knowing for example the key decision factors (the sometimes harsh realities) of the customer group. Having a well constructed sales pipeline and a disciplined selling process will also help.
In the marketing section of your business plan and presentation, VCs will look for more than a list of your marketing initiatives. You can anticipate questions like: what are your company's customer acquisition costs? Have you calculated average and target revenue per customer? Do you know how many customers are required to break even? Do you know the product sales cycle? Think quantitatively as well as qualitatively.
In addition, the most successful companies know how they will retain customers -- even before they acquire them. It is said that it costs five times as much to generate business from new customers as it does from existing customers.
Customer retention is critical to the long-term success of most enterprises. How will you get customers to return?
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
Wednesday, June 20, 2012
Part 12/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)
By Laurence K. Hayward
This is part twelve of a twenty part series on this topic.
12. What is your valuation?
This could be one of the most difficult questions of all. Answer too high and many investors will simply reject the opportunity outright. Why would they do that even if they like the opportunity? They may take it as a sign of inexperience and excessiveness, or they may simply view it as unproductive – that is, it will be too risky and time-intensive to find acceptable terms. Answer too low and you’re giving up more of your business. The common saying in venture capital is that it is better to have a piece of something, than all of nothing. But, that doesn’t provide much help after all, unless you’re down to your final option.
One way to think about valuation objectively is to step outside ‘negotiated thinking’ for a moment and imagine you were trying to set the price of a new product you were preparing to release. How would you determine the price? Most likely you’d study the market demand for the product first and seek information regarding the elasticity of potential buyers. You’d try to get objective and independent feedback of various price points. You’d try to understand the perceived value of the product because ultimately that will likely yield a higher price than some ratio to cost. You’d compare it to other similar product offerings already on the market.
Try to find a trusted source or two to help you with an analysis like this for your business. Also find someone who can help you understand the most appropriate valuation methods based on the characteristics of your business situation. Sound like a lot of work? It is. This is why many believe that raising capital is a full-time job, and find outside advisors to assist with the process.
Don’t forget Economics 101, which tells us that price is ultimately determined by supply and demand. How does this apply? First, don’t “shop” (promote indiscriminately) your deal else you’ll unintentionally make it appear oversupplied and less valuable. Second, don’t stop at the first investor who seems interested. Try to find other (carefully targeted) investors who are interested. While it is rare to encounter a bidding war, having credible investors interested in your company can raise its perceived value. Third, understand the nature of syndicates (multiple VCs investing together in a round), which is how many early-stage deals are done today. The lead investor typically sets the valuation and the other investors in the round follow. Know with whom you need to focus your negotiations.
Information regarding valuation does not belong in the business plan. Rather it is included in a private placement memorandum (PPM) and subscription booklet. If you are seeking funds primarily from VCs, valuation will likely be handled in the form of a term sheet developed by the VC to be negotiated between parties. If you are seeking funds from accredited investors or angels, the valuation will usually be covered in the PPM or subscription agreement.
This is part twelve of a twenty part series on this topic.
12. What is your valuation?
This could be one of the most difficult questions of all. Answer too high and many investors will simply reject the opportunity outright. Why would they do that even if they like the opportunity? They may take it as a sign of inexperience and excessiveness, or they may simply view it as unproductive – that is, it will be too risky and time-intensive to find acceptable terms. Answer too low and you’re giving up more of your business. The common saying in venture capital is that it is better to have a piece of something, than all of nothing. But, that doesn’t provide much help after all, unless you’re down to your final option.
One way to think about valuation objectively is to step outside ‘negotiated thinking’ for a moment and imagine you were trying to set the price of a new product you were preparing to release. How would you determine the price? Most likely you’d study the market demand for the product first and seek information regarding the elasticity of potential buyers. You’d try to get objective and independent feedback of various price points. You’d try to understand the perceived value of the product because ultimately that will likely yield a higher price than some ratio to cost. You’d compare it to other similar product offerings already on the market.
Try to find a trusted source or two to help you with an analysis like this for your business. Also find someone who can help you understand the most appropriate valuation methods based on the characteristics of your business situation. Sound like a lot of work? It is. This is why many believe that raising capital is a full-time job, and find outside advisors to assist with the process.
Don’t forget Economics 101, which tells us that price is ultimately determined by supply and demand. How does this apply? First, don’t “shop” (promote indiscriminately) your deal else you’ll unintentionally make it appear oversupplied and less valuable. Second, don’t stop at the first investor who seems interested. Try to find other (carefully targeted) investors who are interested. While it is rare to encounter a bidding war, having credible investors interested in your company can raise its perceived value. Third, understand the nature of syndicates (multiple VCs investing together in a round), which is how many early-stage deals are done today. The lead investor typically sets the valuation and the other investors in the round follow. Know with whom you need to focus your negotiations.
Information regarding valuation does not belong in the business plan. Rather it is included in a private placement memorandum (PPM) and subscription booklet. If you are seeking funds primarily from VCs, valuation will likely be handled in the form of a term sheet developed by the VC to be negotiated between parties. If you are seeking funds from accredited investors or angels, the valuation will usually be covered in the PPM or subscription agreement.
Tuesday, June 5, 2012
Part 11/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)
By Laurence K. Hayward
This is part eleven of a twenty part series on this topic.
11. When will your company break even in terms of profitability and cash flow?
I remember when I first became financially independent of my parents. The thrill of freedom was quickly followed by the burden of responsibility. Still, my income exceeded expenses, and I no longer required financial support. In accounting terms, I was solvent. Likewise, my parents had one less thing to worry as much about, financially speaking anyway. The concept is not unlike that of a venture capital investment. Once your business is financially independent and solvent, you become less of a liability to a VC. Certainly there may be opportunities to continue investing, but that might be focused on expansion rather than “staying alive.” VCs would like to get their portfolio companies to this point as quickly as possible. Many only invest in companies that have already passed this mark. Profitable businesses are more attractive to potential buyers and the public markets.
In order to estimate when your company will break even, it is important to have the appropriate financial projections. Many entrepreneurs develop income projections, but fail to fully appreciate the application of the balance sheet and cash flow statement. For example, capital expenditures can drain significant cash upfront even though the effect on the income statement as depreciation expense can be minor in a given year (because the expense is spread over a number of years – the depreciable life of the asset). Likewise, accounts receivable cycles and inventory can have a significant impact on cash flow, which fundamentally is the most critical element to survival. If you do not have the appropriate financial experience, seek out a well-trained advisor who can assist you with your financial projections.
A well-developed business plan will include projected income statements, balance sheets and statements of cash flow five years forward. Many entrepreneurs also provide information regarding the assumptions used to generate the financials.
For example, they may provide pricing and volume data in order to demonstrate how and when revenues are recognized. Whether you present this information in the plan, or reserve it for more detailed discussions with investors is up to you.
However, it is critical that you can support the assumptions logically (with hard data), that your calculations (within the given set of assumptions) are accurate, and that the approach used to arrive at the final set of projections is methodical.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
This is part eleven of a twenty part series on this topic.
11. When will your company break even in terms of profitability and cash flow?
I remember when I first became financially independent of my parents. The thrill of freedom was quickly followed by the burden of responsibility. Still, my income exceeded expenses, and I no longer required financial support. In accounting terms, I was solvent. Likewise, my parents had one less thing to worry as much about, financially speaking anyway. The concept is not unlike that of a venture capital investment. Once your business is financially independent and solvent, you become less of a liability to a VC. Certainly there may be opportunities to continue investing, but that might be focused on expansion rather than “staying alive.” VCs would like to get their portfolio companies to this point as quickly as possible. Many only invest in companies that have already passed this mark. Profitable businesses are more attractive to potential buyers and the public markets.
In order to estimate when your company will break even, it is important to have the appropriate financial projections. Many entrepreneurs develop income projections, but fail to fully appreciate the application of the balance sheet and cash flow statement. For example, capital expenditures can drain significant cash upfront even though the effect on the income statement as depreciation expense can be minor in a given year (because the expense is spread over a number of years – the depreciable life of the asset). Likewise, accounts receivable cycles and inventory can have a significant impact on cash flow, which fundamentally is the most critical element to survival. If you do not have the appropriate financial experience, seek out a well-trained advisor who can assist you with your financial projections.
A well-developed business plan will include projected income statements, balance sheets and statements of cash flow five years forward. Many entrepreneurs also provide information regarding the assumptions used to generate the financials.
For example, they may provide pricing and volume data in order to demonstrate how and when revenues are recognized. Whether you present this information in the plan, or reserve it for more detailed discussions with investors is up to you.
However, it is critical that you can support the assumptions logically (with hard data), that your calculations (within the given set of assumptions) are accurate, and that the approach used to arrive at the final set of projections is methodical.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
Monday, April 23, 2012
Part 10/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)
By Laurence K. Hayward
This is part ten of a twenty part series on this topic.
10. Does your company have proprietary intellectual property in the form of patents, trademarks, copyrights, etc.?
What do you own? What can you protect? These are two important questions in evaluating an investment opportunity.
Patents can play a critical role in protecting the research and development investments of the company and in helping to ensure that there is a window of opportunity (usually before competitor offerings arrive) for the company to realize a significant share of revenues for a particular category. People tend to think of patents in terms of protecting a physical matter or product. However, patents can be used to protect a business method or process as well, and this may be more appropriate for your business. The use of patents can vary significantly by industry with some finding them to be essential and others less so depending on the ability to use them as a barrier to entry.
No matter what industry you are in, the company's intellectual property is generally regarded as a indication of uniqueness and a source of "sustainable" competitive advantage (how sustainable will be debated). Intellectual property (IP) comprises more than patents, many companies intentionally keep some of all of their IP undisclosed, i.e. the public won't see it in a published patent application.
Trademarks and copyrights are critical to protecting the company's intellectual assets and its "brand." VCs will want to ensure that you've taken the proper steps (through non-disclosure agreements, non-competes and employment agreements) to ensure that the company is protecting its intellectual capital.
For information on patents and other forms of intellectual property protection, consult your attorney or visit the United States Patent and Trademark office’s website at http://www.uspto.gov/.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
This is part ten of a twenty part series on this topic.
10. Does your company have proprietary intellectual property in the form of patents, trademarks, copyrights, etc.?
What do you own? What can you protect? These are two important questions in evaluating an investment opportunity.
Patents can play a critical role in protecting the research and development investments of the company and in helping to ensure that there is a window of opportunity (usually before competitor offerings arrive) for the company to realize a significant share of revenues for a particular category. People tend to think of patents in terms of protecting a physical matter or product. However, patents can be used to protect a business method or process as well, and this may be more appropriate for your business. The use of patents can vary significantly by industry with some finding them to be essential and others less so depending on the ability to use them as a barrier to entry.
No matter what industry you are in, the company's intellectual property is generally regarded as a indication of uniqueness and a source of "sustainable" competitive advantage (how sustainable will be debated). Intellectual property (IP) comprises more than patents, many companies intentionally keep some of all of their IP undisclosed, i.e. the public won't see it in a published patent application.
Trademarks and copyrights are critical to protecting the company's intellectual assets and its "brand." VCs will want to ensure that you've taken the proper steps (through non-disclosure agreements, non-competes and employment agreements) to ensure that the company is protecting its intellectual capital.
For information on patents and other forms of intellectual property protection, consult your attorney or visit the United States Patent and Trademark office’s website at http://www.uspto.gov/.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
Monday, April 2, 2012
Part 9/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)
By Laurence K. Hayward
This is part nine of a twenty part series on this topic.
9. What gives your company a competitive advantage?
VCs want to know how you plan to outmaneuver the competition -- and this doesn't just pertain to existing competitors. They want to see that you've thought about future market entrants and how you will stave them off. "First-mover advantage" is rarely a sufficient response to this question. A more effective answer depicts intellectual property barriers or the ability to reach the target market in a manner that is more effective than the competition. What is unique about your company that gives it an edge?
Positioning matrixes in business plans can demonstrate visually how a company is differentiated from its competitors. A matrix shows the space your company plans to occupy in the market relative to everyone else. People often mistakenly assume that a crowded marketplace is ‘bad’. What is more important is the relative strength of the competitors. For example, it may be preferable to have a number of fragmented competitors than to be up against just one Microsoft. So, in your business plan, be sure to address the strength of your competitors and why some may be greater threats than others.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
This is part nine of a twenty part series on this topic.
9. What gives your company a competitive advantage?
VCs want to know how you plan to outmaneuver the competition -- and this doesn't just pertain to existing competitors. They want to see that you've thought about future market entrants and how you will stave them off. "First-mover advantage" is rarely a sufficient response to this question. A more effective answer depicts intellectual property barriers or the ability to reach the target market in a manner that is more effective than the competition. What is unique about your company that gives it an edge?
Positioning matrixes in business plans can demonstrate visually how a company is differentiated from its competitors. A matrix shows the space your company plans to occupy in the market relative to everyone else. People often mistakenly assume that a crowded marketplace is ‘bad’. What is more important is the relative strength of the competitors. For example, it may be preferable to have a number of fragmented competitors than to be up against just one Microsoft. So, in your business plan, be sure to address the strength of your competitors and why some may be greater threats than others.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
Wednesday, March 28, 2012
Part 8/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)
By Laurence K. Hayward
This is part eight of a twenty part series on this topic.
8. Who are your competitors?
You've heard the dictum "never say never." When answering the above question, the maxim might well be "never say none." There is more to the question than may first be evident. Certainly VCs are interested in learning about the extent of competition your business will encounter and how you will distinguish your company. But, they also might be assessing your maturity as a businessperson.
The answer "none" is almost always incorrect because a business usually has at least two competitors: substitutes and apathy. Potential buyers might use a substitute even if that substitute doesn’t appear as effective as your product (e.g. paper/pencil versus keypad). Or potential buyers could simply "do nothing" and continue to function without the product. Finally, if the market you are pursuing is really as attractive and large as claimed, it is usually difficult to accept that there is no competition at all.
If the investor is aware of competitors that you have not considered (as many have researched particular segments independently), he or she will lose faith in your business assessment skills.
One way to stay abreast of competitive offerings is to keep active with various trade associations and industry groups. It can also be helpful to attend the relevant venture capital forums, or at least review the publications to find out who is getting financed. Venture Wire and Venture One (now Dow Jones) provide resources to help you track venture financings – many offer database-type products that will allow you to perform searches and queries using keywords that pertain to your offerings or industry.
This is part eight of a twenty part series on this topic.
8. Who are your competitors?
You've heard the dictum "never say never." When answering the above question, the maxim might well be "never say none." There is more to the question than may first be evident. Certainly VCs are interested in learning about the extent of competition your business will encounter and how you will distinguish your company. But, they also might be assessing your maturity as a businessperson.
The answer "none" is almost always incorrect because a business usually has at least two competitors: substitutes and apathy. Potential buyers might use a substitute even if that substitute doesn’t appear as effective as your product (e.g. paper/pencil versus keypad). Or potential buyers could simply "do nothing" and continue to function without the product. Finally, if the market you are pursuing is really as attractive and large as claimed, it is usually difficult to accept that there is no competition at all.
If the investor is aware of competitors that you have not considered (as many have researched particular segments independently), he or she will lose faith in your business assessment skills.
One way to stay abreast of competitive offerings is to keep active with various trade associations and industry groups. It can also be helpful to attend the relevant venture capital forums, or at least review the publications to find out who is getting financed. Venture Wire and Venture One (now Dow Jones) provide resources to help you track venture financings – many offer database-type products that will allow you to perform searches and queries using keywords that pertain to your offerings or industry.
Tuesday, March 20, 2012
Part 7/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)
By Laurence K. Hayward
This is part seven of a twenty part series on this topic.
7. What are the risks facing this opportunity?
Most people tend to think of "the competition" when people ask them about risks facing their business opportunity. However, competition is only one risk. Other risks include changes in technology, governmental and regulatory policies, labor market conditions (availability to find qualified labor at a reasonable cost), capital markets and the business climate. Then there are risks specifics to your business such as potential product liability and human resource issues (e.g. fraud, irreconcilable disagreements among management, etc.). Don't forget the financial risks. What happens if the capital you intend to raise doesn't allow you to reach breakeven or your next financing event? Especially during less favorable market conditions, investors take notice of management teams that have carefully thought through contingency plans.
A business risk assessment of potential threats to your business can help you prepare for the scrutiny of investors. Many business advisors and consultants provide such a service, just be careful to select one that has the requisite experience as per your industry and offering. If you cannot afford a business consultant’s fee, consider finding someone who can help facilitate a strategic brainstorming session with your management team and board of advisors that includes a risk assessment component.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
This is part seven of a twenty part series on this topic.
7. What are the risks facing this opportunity?
Most people tend to think of "the competition" when people ask them about risks facing their business opportunity. However, competition is only one risk. Other risks include changes in technology, governmental and regulatory policies, labor market conditions (availability to find qualified labor at a reasonable cost), capital markets and the business climate. Then there are risks specifics to your business such as potential product liability and human resource issues (e.g. fraud, irreconcilable disagreements among management, etc.). Don't forget the financial risks. What happens if the capital you intend to raise doesn't allow you to reach breakeven or your next financing event? Especially during less favorable market conditions, investors take notice of management teams that have carefully thought through contingency plans.
A business risk assessment of potential threats to your business can help you prepare for the scrutiny of investors. Many business advisors and consultants provide such a service, just be careful to select one that has the requisite experience as per your industry and offering. If you cannot afford a business consultant’s fee, consider finding someone who can help facilitate a strategic brainstorming session with your management team and board of advisors that includes a risk assessment component.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
Monday, March 12, 2012
Part 6/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)
By Laurence K. Hayward
This is part six of a twenty part series on this topic.
6. What is it about your management team that makes them uniquely capable of executing on the business plan?
You've probably heard the statement that the three most important things in private equity investing are management, management and management. More specifically, VCs are typically looking for three things in management: experience in building successful businesses, experience in the industry (or with the product) and strong character. What comprises the latter? VCs look for managers who demonstrate passion, resourcefulness, integrity, perseverance, risk-taking ability and mental horsepower. Also, a quality sometimes overlooked (and hotly debated) is that of humility -- for example, will founders step aside and let someone with more experience lead the company if appropriate?
The depth of the management team is also important. For example, does the combined team have proficiency in operations, marketing, sales and finance? An effective management team often requires a balance of skills and temperaments. A visionary should be balanced with someone who closes the loop by executing ideas and concepts. Many VCs look for management teams that have a history of working together believing that this will mitigate human resource risks and inefficiencies between people who are still getting to know one another.
If a lack of financial capital precludes assembling the dream team of management at this time, leverage your business and personal contacts to build an advisory board (note this is a distinct group from the Board of Directors). The latter can add credibility and lend critical business experience and contacts. Select board advisors who will actively contribute and have a vested interest in seeing your business succeed (thereby justifying their continued effort and support). A word of caution, during the Internet bubble many entrepreneurs cited marquee names in their business plans in order to generate investor attention. However, in some cases these so-called advisors weren’t really actively involved in the companies. Investors will be skeptical. To gain the credibility associated with marquee advisors, identify the specific areas of participation and contribution.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
This is part six of a twenty part series on this topic.
6. What is it about your management team that makes them uniquely capable of executing on the business plan?
You've probably heard the statement that the three most important things in private equity investing are management, management and management. More specifically, VCs are typically looking for three things in management: experience in building successful businesses, experience in the industry (or with the product) and strong character. What comprises the latter? VCs look for managers who demonstrate passion, resourcefulness, integrity, perseverance, risk-taking ability and mental horsepower. Also, a quality sometimes overlooked (and hotly debated) is that of humility -- for example, will founders step aside and let someone with more experience lead the company if appropriate?
The depth of the management team is also important. For example, does the combined team have proficiency in operations, marketing, sales and finance? An effective management team often requires a balance of skills and temperaments. A visionary should be balanced with someone who closes the loop by executing ideas and concepts. Many VCs look for management teams that have a history of working together believing that this will mitigate human resource risks and inefficiencies between people who are still getting to know one another.
If a lack of financial capital precludes assembling the dream team of management at this time, leverage your business and personal contacts to build an advisory board (note this is a distinct group from the Board of Directors). The latter can add credibility and lend critical business experience and contacts. Select board advisors who will actively contribute and have a vested interest in seeing your business succeed (thereby justifying their continued effort and support). A word of caution, during the Internet bubble many entrepreneurs cited marquee names in their business plans in order to generate investor attention. However, in some cases these so-called advisors weren’t really actively involved in the companies. Investors will be skeptical. To gain the credibility associated with marquee advisors, identify the specific areas of participation and contribution.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
Monday, March 5, 2012
Part 5/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)
By Laurence K. Hayward
This is part five of a twenty part series on this topic.
5. How do you know that your business has high growth potential? How did you estimate your revenue figures? How will the business scale?
VCs want to know how you "draw down" your revenue estimates from the market potential figures (which hopefully include estimates from external sources). Ultimately, they want to see a large growth opportunity that scales quickly, thereby allowing them to realize the payoff on their investment as soon as possible. Be prepared to explain in detail the process used to estimate revenues from market potential.
Scalability is one attribute that distinguishes venture capital from other types of investing. It is not sufficient to build a ‘going concern.’ VCs are looking to invest in big opportunities. Once the business is generating revenues, how will it grow to the next level? How much continued investment will be required to build the business? Are large capital expenditures required? Will the gross margins improve with time? What are the limits to growth and how will the company overcome them?
Businesses requiring continued investments to cover capital expenses also require patient investors who are comfortable with the additional financing risks. The risk is not only whether capital can be raised in the future, but also the diluting effects of capital from additional investors.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
This is part five of a twenty part series on this topic.
5. How do you know that your business has high growth potential? How did you estimate your revenue figures? How will the business scale?
VCs want to know how you "draw down" your revenue estimates from the market potential figures (which hopefully include estimates from external sources). Ultimately, they want to see a large growth opportunity that scales quickly, thereby allowing them to realize the payoff on their investment as soon as possible. Be prepared to explain in detail the process used to estimate revenues from market potential.
Scalability is one attribute that distinguishes venture capital from other types of investing. It is not sufficient to build a ‘going concern.’ VCs are looking to invest in big opportunities. Once the business is generating revenues, how will it grow to the next level? How much continued investment will be required to build the business? Are large capital expenditures required? Will the gross margins improve with time? What are the limits to growth and how will the company overcome them?
Businesses requiring continued investments to cover capital expenses also require patient investors who are comfortable with the additional financing risks. The risk is not only whether capital can be raised in the future, but also the diluting effects of capital from additional investors.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
Thursday, February 23, 2012
Part 4/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)
By Laurence K. Hayward
This is part four of a twenty part series on this topic.
4. Why would someone be "compelled" to purchase your product or service? What specific needs does it address?
VCs look for businesses with products or services that address a demonstrable market need or demand. Is your product or service something the buyer needs? Does it solve a problem? Or is it something that would be “nice to have”? It is said that VCs prefer innovations that resemble aspirin to those that resemble vitamins. The idea being that people feeling pain will swallow the aspirin; while vitamins may be beneficial, people may or may not take them.
However, if the product or service is more like a vitamin, then it becomes that much more important to establish how people will come to demand it based on certain market trends. And, in either case, it will be important to demonstrate how substantial the problem or opportunity – how many people have it, and how much are they willing to pay for a solution?
Can you demonstrate convincing and tangible evidence of market acceptance by credible potential users (not just proposed distributors or technology-development partners) who are willing to be contacted for due-diligence purposes? The answer to this question directly addresses an investor's concerns about marketability and profitability. It is your opportunity to demonstrate the need for your offering within the targeted market segment and its corresponding revenue potential.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
This is part four of a twenty part series on this topic.
4. Why would someone be "compelled" to purchase your product or service? What specific needs does it address?
VCs look for businesses with products or services that address a demonstrable market need or demand. Is your product or service something the buyer needs? Does it solve a problem? Or is it something that would be “nice to have”? It is said that VCs prefer innovations that resemble aspirin to those that resemble vitamins. The idea being that people feeling pain will swallow the aspirin; while vitamins may be beneficial, people may or may not take them.
However, if the product or service is more like a vitamin, then it becomes that much more important to establish how people will come to demand it based on certain market trends. And, in either case, it will be important to demonstrate how substantial the problem or opportunity – how many people have it, and how much are they willing to pay for a solution?
Can you demonstrate convincing and tangible evidence of market acceptance by credible potential users (not just proposed distributors or technology-development partners) who are willing to be contacted for due-diligence purposes? The answer to this question directly addresses an investor's concerns about marketability and profitability. It is your opportunity to demonstrate the need for your offering within the targeted market segment and its corresponding revenue potential.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
Thursday, February 16, 2012
Part 3/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)
By Laurence K. Hayward
This is part three of a twenty part series on this topic.
3. What makes your business different or unique?
While seemingly straightforward, this question actually can have two wrong answers. That's because a business can be both too common and too unique for a particular investor. If it's too common, the VC will be concerned with the competition and the lifecycle of the business. More specifically, is the window of opportunity large enough and will the company be able to build a viable business amidst many competitors? If it's too unique, the VC will be concerned with whether a market really exists and the time required to achieve critical mass. As David Gladstone writes in his book Venture Capital Investing, “The product or service should not be revolutionary; rather, it should be evolutionary.1” Many truly revolutionary products require educating the marketplace, and that can be an uncertain and lengthy undertaking. With that said, VCs tend to favor those opportunities that are unique in some critical aspect. For example, the concept of coffee sold retail was not unique, but the idea of creating a strongly branded national chain that sold high-priced, coffee-based concoctions in an upscale setting helped set Starbucks apart.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
This is part three of a twenty part series on this topic.
3. What makes your business different or unique?
While seemingly straightforward, this question actually can have two wrong answers. That's because a business can be both too common and too unique for a particular investor. If it's too common, the VC will be concerned with the competition and the lifecycle of the business. More specifically, is the window of opportunity large enough and will the company be able to build a viable business amidst many competitors? If it's too unique, the VC will be concerned with whether a market really exists and the time required to achieve critical mass. As David Gladstone writes in his book Venture Capital Investing, “The product or service should not be revolutionary; rather, it should be evolutionary.1” Many truly revolutionary products require educating the marketplace, and that can be an uncertain and lengthy undertaking. With that said, VCs tend to favor those opportunities that are unique in some critical aspect. For example, the concept of coffee sold retail was not unique, but the idea of creating a strongly branded national chain that sold high-priced, coffee-based concoctions in an upscale setting helped set Starbucks apart.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
Thursday, February 9, 2012
Part 2/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)
By Laurence K. Hayward
This is part two of a twenty part series on this topic.
2. How did you calculate market potential? How did you determine industry sales and growth rate?
It is common for entrepreneurs to include very large market potential figures in their business plans and then indicate that they require only a miniscule fraction (e.g. ½ percent) of the market to achieve their revenue projections. These figures are typically suspect. If the company is capturing such a miniscule fraction of the market, then what is so special about what the company has to offer? Extremely small percentages beg the question of what is the company’s real value and position relative to the competition. VCs tend to prefer companies that are trying to be the leader in a particular segment, even if that segment is more narrowly defined. The reason for this will be further explained in questions 9 and 10.
On the other hand, it is important to be realistic in your projections, forecasting a large market share in just a few years may make your business plan seem amateurish. Wherever possible, support market potential estimates with independent research and use bottom-up as well as top-down calculations. Top-down calculations begin with market size estimates for the broader category (beverages) and narrow down to potential customers for the offering (soft drinks, then colas); they are important in demonstrating potential. Bottom-up calculations begin with near-term assumptions regarding what you expect to sell (units and price/unit) and scale upwards with realistic assumptions about how the business can be expanded; they are important for demonstrating what is achievable based on operational capacity and real customer data (if available). If the company is pre-revenue, then sometimes a comparable can be used to help demonstrate bottom-up potential.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
This is part two of a twenty part series on this topic.
2. How did you calculate market potential? How did you determine industry sales and growth rate?
It is common for entrepreneurs to include very large market potential figures in their business plans and then indicate that they require only a miniscule fraction (e.g. ½ percent) of the market to achieve their revenue projections. These figures are typically suspect. If the company is capturing such a miniscule fraction of the market, then what is so special about what the company has to offer? Extremely small percentages beg the question of what is the company’s real value and position relative to the competition. VCs tend to prefer companies that are trying to be the leader in a particular segment, even if that segment is more narrowly defined. The reason for this will be further explained in questions 9 and 10.
On the other hand, it is important to be realistic in your projections, forecasting a large market share in just a few years may make your business plan seem amateurish. Wherever possible, support market potential estimates with independent research and use bottom-up as well as top-down calculations. Top-down calculations begin with market size estimates for the broader category (beverages) and narrow down to potential customers for the offering (soft drinks, then colas); they are important in demonstrating potential. Bottom-up calculations begin with near-term assumptions regarding what you expect to sell (units and price/unit) and scale upwards with realistic assumptions about how the business can be expanded; they are important for demonstrating what is achievable based on operational capacity and real customer data (if available). If the company is pre-revenue, then sometimes a comparable can be used to help demonstrate bottom-up potential.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
Thursday, February 2, 2012
Part 1/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)
By Laurence K. Hayward
This is part one of a twenty part series on this topic.
1. What is the market potential for your company's product or service offering(s)? What is the revenue potential for the industry, and what is its growth rate?
A VC wants to quickly ascertain whether the investment opportunity is substantial enough to pursue. What determines that? Typically, it hinges on whether or not the VC will be able to achieve a healthy return within a designated timeframe. The timeframe varies depending on the focus of the VC’s fund, which typically has a designated set of criteria. Some VCs prefer early-stage investing (e.g. a five to seven-year horizon), while others focus on later-stage opportunities (which could be just a couple of years). Generally speaking, the longer the horizon, the greater the risk and therefore the greater the required return. The return can be achieved by lowering the purchase price, which means owning a larger share of the company for the investment amount contributed, or by achieving greater appreciation. In most cases an early-stage VC will look for both.
What constitutes a healthy return? This will vary from fund-to-fund, but most VCs accept a notion that the majority of their investments in a given portfolio will fail or “muddle along.” Therefore they strike for a high return in order to compensate for the inherent risks involved with private equity investing. You can expect targeted returns of investment (ROI) to be 50 percent or more; and discount rates to be in the 20-50% range. To clear that significant hurdle, VCs look for companies with considerable market potential for their products or services (often $500 million, $1 billion or more). Investors prefer growing markets with plenty of steam still left in them. Finally, most VCs focus on specific industries or sectors, so they'll be trying to ascertain whether this deal is within their bailiwick. This last point is a critical one. Many entrepreneurs spend considerable time chasing investors who aren’t an appropriate fit for their companies. Just as you would research a customer before pitching your product or service, know the investor before soliciting an investment. In researching investors, keep in mind that there are usually specific investment criteria or attributes associated with the VC firm, the specific fund and the individual partner (Venture Funds are typically structured as partnerships; partners within the Fund generally have specific areas of focus such as certain industry verticals).
I will get to the rest of the questions in my following posts...
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
This is part one of a twenty part series on this topic.
1. What is the market potential for your company's product or service offering(s)? What is the revenue potential for the industry, and what is its growth rate?
A VC wants to quickly ascertain whether the investment opportunity is substantial enough to pursue. What determines that? Typically, it hinges on whether or not the VC will be able to achieve a healthy return within a designated timeframe. The timeframe varies depending on the focus of the VC’s fund, which typically has a designated set of criteria. Some VCs prefer early-stage investing (e.g. a five to seven-year horizon), while others focus on later-stage opportunities (which could be just a couple of years). Generally speaking, the longer the horizon, the greater the risk and therefore the greater the required return. The return can be achieved by lowering the purchase price, which means owning a larger share of the company for the investment amount contributed, or by achieving greater appreciation. In most cases an early-stage VC will look for both.
What constitutes a healthy return? This will vary from fund-to-fund, but most VCs accept a notion that the majority of their investments in a given portfolio will fail or “muddle along.” Therefore they strike for a high return in order to compensate for the inherent risks involved with private equity investing. You can expect targeted returns of investment (ROI) to be 50 percent or more; and discount rates to be in the 20-50% range. To clear that significant hurdle, VCs look for companies with considerable market potential for their products or services (often $500 million, $1 billion or more). Investors prefer growing markets with plenty of steam still left in them. Finally, most VCs focus on specific industries or sectors, so they'll be trying to ascertain whether this deal is within their bailiwick. This last point is a critical one. Many entrepreneurs spend considerable time chasing investors who aren’t an appropriate fit for their companies. Just as you would research a customer before pitching your product or service, know the investor before soliciting an investment. In researching investors, keep in mind that there are usually specific investment criteria or attributes associated with the VC firm, the specific fund and the individual partner (Venture Funds are typically structured as partnerships; partners within the Fund generally have specific areas of focus such as certain industry verticals).
I will get to the rest of the questions in my following posts...
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
Tuesday, January 31, 2012
Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)
By Laurence K. Hayward
Remember the game Twenty Questions? The contestant uses the best combination of questions, which can be answered with a simple "yes" or "no," in order to discover a piece of information held secret by the other player. The objective is to reveal the unknown information with the fewest questions possible.
This game shares several similarities with an interview between an entrepreneur seeking financing and a venture capitalist (VC) evaluating an investment opportunity. As the interviewed entrepreneur, you can expect pointed and challenging questions. You might feel like the interviewer is trying to box you in as he or she narrows the choices, in order to hone in on the "answer" as quickly as possible. Recognizing that venture capitalists (VCs) reject a far greater number of deals than they accept, the quickest way for this interviewer to finish the game is to find a fatal flaw, a deal-killer, a quick "no."
The primary difference between the game Twenty Questions and the venture capital interview is that you, the interviewee, can't answer the questions with a simple "yes" or "no". So, in order to help you prepare, outlined in the following posts are twenty questions that VCs frequently ask entrepreneurs. Following each is a brief explanation of what the VC might be trying to uncover and some guidance on how you might prepare a response. While the order of the questions will vary, the winnowing process was taken into consideration when creating this list.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
Remember the game Twenty Questions? The contestant uses the best combination of questions, which can be answered with a simple "yes" or "no," in order to discover a piece of information held secret by the other player. The objective is to reveal the unknown information with the fewest questions possible.
This game shares several similarities with an interview between an entrepreneur seeking financing and a venture capitalist (VC) evaluating an investment opportunity. As the interviewed entrepreneur, you can expect pointed and challenging questions. You might feel like the interviewer is trying to box you in as he or she narrows the choices, in order to hone in on the "answer" as quickly as possible. Recognizing that venture capitalists (VCs) reject a far greater number of deals than they accept, the quickest way for this interviewer to finish the game is to find a fatal flaw, a deal-killer, a quick "no."
The primary difference between the game Twenty Questions and the venture capital interview is that you, the interviewee, can't answer the questions with a simple "yes" or "no". So, in order to help you prepare, outlined in the following posts are twenty questions that VCs frequently ask entrepreneurs. Following each is a brief explanation of what the VC might be trying to uncover and some guidance on how you might prepare a response. While the order of the questions will vary, the winnowing process was taken into consideration when creating this list.
Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here
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