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

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

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

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