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#9 - Accept the fact that there are outside forces at play and beyond your control

While it may seem personal to you, most of the time there are outside influences which impact the marketplace and either assist or impede your ability to raise capital.  Keep this in mind when talking to investors and accept that this sometimes happens.

Most entrepreneurs have a pre-conceived notion of dealing with very early stage venture investors or angels - they take too long, they ask a bunch of wrong questions, there's too many people involved, I can never figure out what is happening.  At various times, those sentiments may be true.  Getting early stage money is usually hard to do for two reasons: (1) because your company is hard to gauge the value for and (2) because there are many reasons unrelated to your company that investors choose not to invest.  Those reasons can include: they've soured on the space, they have other more interesting investment opportunities, they're waiting for other investments to mature or realize, they're busy with non-investing activities or they've made a number of investments recently and decide to take a break.

Getting investment can be like sales - it's a numbers game - the more people you talk to, the less you're beholden to one investor or group and the greater your chances of securing investment.

Don Jones

www.VentureDeal.com

Walt Disney was never satisfied.  He wasn't satisfied with the poor quality of animated motion pictures when he set out to redefine the cartoon.  When television came upon the scene, his programs were among the first to popularize it with quality programming and then to bring television into the world of color instead of black and white. 

Amusement parks had been around for a long time when he came up with the vision of Disneyland, forever changing the definition of the ultimate amusement park, and in the face of many who said it would fail.

By now, it's a cliche to "never be satisfied" with your work or your company.  The Japanese called it continuous improvement.  GE calls it Six Sigma.  It is called by many names and it tends to go against our natural desire to finish something - we want to be done with it!

From a business perspective, never being satisfied can be a matter of seeing your company or your market(s) through the eyes of your competitors.  They want nothing more than to knock your company off.  They're busy thinking of ways to take market share from you, they're trying to improve their services or products by comparing them to yours and trying to improve either the products themselves, or the ways in which they are marketed and sold.  They're probably planning to leapfrog your offerings with something that completely changes the game.  They may be looking to acquire other companies to gain advantage through scale.  In sum, there are numerous competitive threats from within or outside your industry that are appearing or will soon appear.

So in my view it is a necessity to never be satisfied with your company's position - not for a moment.  Ask yourself: how could my industry or business model be disrupted, and by what type of company?  Is there an adjacent or similar industry where companies are actively changing the landscape?  How could those changes affect my industry or company?  How can I take the initiative to "change the game" in my industry in ways that would be advantageous to me?

Don Jones

www.VentureDeal.com

(Previous post - #7 in a series)

#8 - Be honest with investors

I'm not accusing anyone of willfully trying to deceive investors, but you need to be candid when talking with them about the current and future state of the company.  For example, if you're close to finalizing a deal but are unsure of the timing, then be honest when asked.  It is better to say "I'm not sure" than having to sheepishly explain later why there's still no signed agreement when the paperwork was supposedly being faxed a week ago.

Remember, investors have a pretty good memory, especially if you're telling them something important or material about your company.  If they like what they hear, smart money investors will confirm it in due diligence.  Why go through the process only to stall out in due diligence because of some exaggeration or representation that didn't match reality?  Investors want to deal with people they can trust, so being that kind of person will do the most to increase your chances of getting venture capital.

Don Jones

www.VentureDeal.com

I've been reading the colossal (860 pages) biography of Walt Disney by Neal Gabler and aside from the fascinating details of his life, personality and influence on American culture, I noted a number of interesting themes throughout his life that bear directly on entrepreneurship.  This starts a series on my thoughts about how his beliefs and actions relate to what it means to start and run a successful entrepreneurial company.

Walt Disney had an obsession with quality.  In fact, he believed that the quality of his animation studio's productions was the main differentiating factor between his films and those of other studios. 

As an example of how he improved quality, in the 1920's and 1930's, when Walt Disney Productions produced such classics as Snow White, Fantasia and the Mickey Mouse character, Disney spared no expense in requiring his entire animation crew to attend weekly fine art classes held at their Los Angeles studio by illustrious Chouinard School of Art professors.  He believed that continually educating his employees would result in a sufficiently higher quality product that audiences would have no choice but to notice and appreciate the difference.

He was right.  Disney's animations swept the world and created animated icons that exist to this day.  His focus on quality separated his company from the pack of other animation studios at the time. 

If you want to separate your company from others in your industry, ask yourself some questions: how can you increase the quality of your customer's experience with your product or service?  Can you measure it?  How do you know what your customers care about?  When and how will you ask them?  Are you afraid to ask?

Don Jones

www.VentureDeal.com

Date    January 23, 2007
Time    11:00 am - Noon, Pacific Standard Time
RSVP    RSVP here

VentureDeal is pleased to invite you to a live online demonstration of the VentureDeal Database.

The purpose of the 45 minute online demonstration is to highlight the various ways that VentureDeal can help you in achieving your business goals, whether you want to learn more about venture capital deals, connect with the right venture investors or offer your services to recently funded companies.

To receive login details for the demonstration, simply RSVP here with your email address and name and we'll send you the demonstration login details.

Don Jones

www.VentureDeal.com

I recently came across an interesting web site that's worth a look: TalentPoolNews.

TalentPoolNews [east] is an online journal that covers Executive-level movements at venture-backed emerging technology companies on the east coast of the U.S.  Published quarterly, the journal keeps track of company hiring, board appointments, VC profiles and related venture transactions.

The site was launched in April, 2006 by publishing veteran Janet Stites.  Janet was the co-founder of Alley Cat News, a technology & finance magazine focused on New York emerging companies.  She also has written for Fortune Small Business, OMNI Magazine and has been profiled in Folio and Worth magazines.

If you're a start-up founder or executive based on the east coast, check it out at http://talentpoolnews.com/frontpage.asp.

Don Jones

www.VentureDeal.com

A Due Diligence Case Study

Find the skeleton in the closet

I recently evaluated a start-up that makes sensor systems for law enforcement and military applications.  Due to my strong interest once the company was presented to the angel group I belong to (the Band of Angels), I ran point on performing as much due diligence as possible.

Conveniently for me, the company was quite organized in its documentation, to the point of having many of the supporting documents in PDF form available online for viewing.  I concluded that good organization and transparency were both good signs.  So I spent the hours piecing together the company's history, which had involved a previous merger and significant intellectual property (IP) that was important to the company's valuation and potential future defensibility.

As I focused more intently on the IP, I had to work hard to follow and confirm the chain of title, since there had originally been three co-inventors on the core patent and title had changed hands among them and between them and other parties on several occasions.  This involved spending a lot of time on the USPTO.gov site, the government patent and trademark office site for searching patent and trademark claims, matching company-supplied documentation with government confirmation documents.

After probably 10-15 hours of work, and despite a written opinion from a well-respected law firm that had given the IP a clear chain of title, I concluded that the company really had rights to only 2/3rds of the patent and that one of the original inventors had not sold or granted his interest to the company.  Presenting this conclusion to the CEO, he admitted that it was indeed the case, and that the other patents the company had filed or received were essentially designed to "box in" this hold-out inventor, so that if he sold his interest to a competitor, the competitor would not be able to use the interest to harm the company.  Furthermore, the CEO intended to negotiate with the hold-out from a position of strength after the financing round closed, in order to obtain the final 33% right to the patent.

I accepted his explanation, as did my colleagues who also subsequently invested. 

The moral of this story is that there are almost always skeletons in the closet of start-up companies.  It's your job as an angel investor to find them so that you know exactly what you're buying.


Don Jones

www.VentureDeal.com

#7 - Become an expert at follow-through

Your follow-through with potential investors is indicative of what your habits will probably be like with employees, customers, partners and your board. 

A deal can "stale out" in an investor's thinking if they haven't heard anything about it in a while.  Investors are busy, usually reviewing multiple deals at one time.  If they haven't chosen to invest yet, your steady and consistent follow-through will help keep them on track, keep them involved in the process and give them a sense that the deal has momentum.

With investors, until you receive their investment check in hand, don't assume that you can stop following up with them.  Anything can happen in their mind that can change a previously-communicated decision to invest.

For many investors, the final "Go" decision is sending out the check or wiring the funds.

Don Jones

www.VentureDeal.com

(Previous post - #5 in a series)

#6 - Less is often more

Practice quickly answering the following three questions:

1. Who is the team?

2. How big is the market?

3. What is the business?

If you can accurately convey the opportunity in less than two or three minutes, then you will be able to grab your audience’s attention for the details that follow.

There’s a school of thought about company presentations - start with the punchline. Why? Venture investors are busy and extremely knowledgeable about business in general. They understand that most good businesses are fundamentally easy to understand, so they distrust a long and complicated explanation of the opportunity.

To use an analogy, think of your company presentation as an “introduction.” When you’re introducing yourself to someone new on a personal level, you don’t start the introduction with a long-winded description of your background. You start off with a short greeting and then ease into the conversation. Asking questions, providing bite-sized information about yourself and learning about the other person. It’s the same concept with presenting your company.

Less is more. If investors are interested in your “introduction,” they’ll pursue the opportunity to get into the details later.

Don Jones

www.VentureDeal.com

(Previous Post - #4 in a series)

#5 - Mitigate Investor Risk

Early stage investors are not risk averse, but they are cautious when evaluating totally unproven technology.

Ways to reduce investor hesitancy include obtaining referenceable customers and having demonstrable technology. If you have a weak management team, try to engage industry leaders as company advisors, so investors feel that there is “adult supervision” in place.

I would go even further to say that it is preferable to get a marquee customer/pilot-ready account. Early stage investors see companies who have pilots ready to start all the time. What will make your company stand out from all the rest is having a well-known company ready to test-drive your product or service.

As far as demonstrable technology goes, the level of development will also determine the valuation of your company in the eyes of investors. The further along you are, the greater the valuation. The more you can develop your product with your own funds, family and friends, etc., the more you’ll reduce technology risk to the investor.

Once you’ve attained the level of development you can before starting your funding search, be honest with investors about your description of the stage your product or service is in. I can’t tell you how many times a company says they have a “beta” version of their product, when they really don’t even have an alpha version - it’s just barely a prototype. That results in a big letdown by the investor and is the wrong way to start. Investors will find out the stage of your widget anyway during due diligence anyway - just be candid up front.

How do you get industry leaders as advisors? If your solution really is a big advancement, they should be able to see it.  Add some stock options and limit their time and effort required and with a little luck you’ll be able to put their name on your PowerPoint deck.

Don Jones

www.VentureDeal.com