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.

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

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

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