The Diablo Venture Alliance hosted a Venture Capital Forum event this evening in San Ramon. James Hart from Ernst & Young presented VentureOne's Q3 VC results, and Jay Morrison from Newbury Ventures and Tim Wilson from Partech International were members of the VC panel discussion.
The VC statistics presented by James Hart reflected some stablization in the venture funding activity. Following the 2000 Internet bubble, when venture investment peaked, the charts tend to look like a black diamond run at Squaw Valley - very steep and down to the right. With 2004, we're on pace to exceed 2003 venture investment, so there's some stabilization in the market - if you're a skier, we're now on a green circle run - mostly flat with occassional bumps. In fact, seed and 1st stage investment is up about 30% from Q3 2003 levels.
James' presentation also had an interesting comparision between 1995 (the last "normal" VC funding year) and 2004 (which is showing similar characteristics). Both years saw the large firms closing large funds, a stabilization in funding activity, and and increase in early stage/seed funding activity. (Think we'll see another bubble in 4 years?)
In the panel discussion, Jay and Tim, though from different firms, had very similar philosophies and perspectives as to what it takes to get funding. Good takeaways for entrepreneurs:
- There is no "right time" to seek funding. Some companies get funding at the initial idea - "5 guys, a dog and a PowerPoint"; others after they have tens or hundreds of millions in revenues. The industry sector you're in (e.g., communications, semiconductor, software, biotech, medical devices) impacts the funding dynamics and amounts a lot.
- Make sure your business plan can be communicated. Tim Wilson talked about his "13-year old daughter test" - if he can go home and communicate the story to his daughter, and she understands it, then it's probably an idea that others can get excited about. If not, it's probably not being communicated well enough.
- No business plan looks the same after VC's like Tim and Jay have been through it. After that, no business plan looks the same after seeing "reality" of engaging with customers. You continue to tweak and modify, and the optimism gets tempered with successive iterations.
- What mistakes do entrepreneurs make? 1) Presentations that are too long, e.g., 60 slides. 2) Using words that don't resonate - entrepreneur might talk for half an hour, and the words sound great individually, but at the end, it's still unclear what they do. 3) Presentation should include a) what you do, b) why we should care, c) how it will make investors rich.
- You don't need to overthink the problem - say, "These are the people, this is the big problem, they know they have a big problem, and the big guys [with competing or legacy solutions] aren't addressing it, and here's why they're not addressing it."
- Most entrepreneurs focus too much on the product development side of the business, and not enough on the market validation part of the business. Tim said a great way of thinking of it is having an "internal team" and "external team" on parallel paths. While the internal guys are building, the external guys are interacting with the market, understanding the needs and pain points, and confirming that this solution really does solve the problem. Frequently it's different skill sets involved. Jay talked about his nephew who is in an advanced field of chemistry - he's one of the smartest people Jay knows, but networking takes up a lot of energy for him and isn't much fun. Better for someone like that to team with someone who does like networking and getting out and talking to people.
- First rounds of funding used to get companies to a beta product - now it's more common to show revenue.
- More term sheets are including multiple traunches of funding, with step-ups based on achieving milestones. So an initial round might be at $1/share, and upon milestones, another round of funding is available at $1.10/share. The funding is all there but it's measured out by milestones.- What about the CEO? What's his or her role? The panel felt the CEO's role is to get the team on the same page and work together. Early stage CEO's don't need to have run divisions of Fortune 500 companies, but they do need to be able to run a project. They have to understand all the different disciplines and get people to work together and like it. CEO's should be asking "What do you think?" and "What do the customers think?" but make their own decisions. They cannot be worried about keeping everyone happy all the time. Frequently it's a lonely role, too, since there are typically few employees you can be open with, and for many issues, you cannot be open with your board or investors either.
Tim and Jay presented themselves well and clearly have a lot of experience building companies. Thanks to Jeff Lindgren and the team at Morgan Miller Blair for organizing an excellent event!
