While attending a session at Lowenstein LLP for the inauguration of the 2013 First Growth Venture Network, I had the pleasure to speak with and listen to some of NY and the Valley’s top investors. Some of this advice on how to navigate the VC landscape comes from them.
You quit your job, labored months building a product, and found some traction. Then, you looked at your bank account and thought to yourself: “crap, I’ve got two months of runway left, three maybe if I stretch it. What do we do?”
This deck was put together after years of seeing these things, putting these things together, and having garnered from it some personal success, i.e. getting funded. It also built off of a few decks that were passed to me by VC friends. Unfortunately, I’m not at liberty to say who the companies were, but rest assured they’ve been in more Tech-Publications than you and I.
Be it the three F’s (Friends Family & Fools), Grants, Loans, Business Angel Investment and / or Venture Capital the vast majority of startups will need some form of capital to grow. What type of capital you need often depends on what your business does, what stage of growth it’s in and what industry space your company is in.
Which brings us to the point of this article. While it may seem obvious to many, entrepreneurs when faced with the need for Angel or Venture Capital will more often than not seek this anywhere they can find. Meaning, it’s not uncommon to see a business plan for a promising clean tech startup winding up in the bins of Business Angel networks and Venture Capital firms.
This happens predominantly due to two factors.
One. Entrepreneurs send their B-Plans (or we should say executive summaries because you never want to send a 25+ page business plan to a potential investor) to anyone and everyone whose address they can find.
This practice is detrimental for a few reasons.
First. Approaching all BA’s and VC’s in this manner will create negative buzz within the industry. In more mature markets investors speak with one another and a company who has presented everywhere will look amateurish, and this by itself will hinder the possibility of any future investment.
Secondly, this shows that you have not taken the time to conduct due diligence on those people who you want to become eventual business partners in your project. Meaning, if you care so little about who you have invest in your business, why would they take the time to conduct due diligence on you and your company and waste valuable resources that could be applied to a project which will fit their portfolio.
Two. Which leads us to the second point. Do your due diligence. Study the BA networks, he VC’s that actively invest in your industry. Identify what stage in the lifecycle their funds (that apply to you) are in.
This is exceptionally important, because if a fund is nearly exhausted the investor by taking you into their portfolio will not have any contingency capital in the event things go sour.
And most importantly try to get a hold of the management / entrepreneurs that these BA’s and VC’s have invested in to ask how the process when, whether the investor was fair, how they work with the company that has been invested in and /or / if they offer any assistance in terms of strategy.
In closing, you’re offering the investor a product, as they are offering you their services, it’s a two way street and due diligence needs to be conducted by both parties. Not only will this lead to increased synergies between you and the investor, but create a positive working relationship that in all likelihood will also increase your start-ups chances of success.
Crowd-financing is a great tool to get your project off the ground, but it takes a lot of work and can often keep you from what you should need to, or are working on – the actual business.
There are of course other forms of crowd-financing, such as crowd financed managed seed/investment funds – but the legalities, specifically from the fund management side can get a bit tricky. That aside, company founders have a plethora of other options when it comes to raising capital – however often times these choices are only available to larger firms with positive income streams.
So what’s an entrepreneur to do in this world? Well the good news is that there has recently been some innovation on the field, and it’s a concept that fundamentally crowd-sources start-ups and invests in 100-200 of them per year, so at a minimum, you’re seeing 2investments per week. Compare that to your traditional model of 5-10 annually and you’ll see why this is financially innovative.
So who’s ballsy enough to lead the way on this – it’s a group out of California called Right Side Capital Management. And if you think about it, it makes a lot of sense.
You’re basically taking the roulette table approach, if you spread your money across the table, one will eventually hit, the difference here is, that in this start-up version of the popular Vegas classis, more than one may hit, in fact 2-3-4 may hit, and one of those will hit big – and then there’s your flip.
While there may be problems involved in startup corporate governance, and especially with the way they’ve got their logistics set up, the concept as a whole is absolutely brilliant when it comes to getting money out to those companies that need it.
But how do you go about making investments into 100+ companies, clearly aside from having to increase your deal flow by a substantial amount, you need to employ a very different project valuation methodology rather than the traditional VC model.
From the RSCM website, and specifically the application page, it seems that they are very heavily focusing on the team makeup, and those individuals cash position or personal financial health. Meaning, good credit, probably some money saved up in the bank, or similar – so that you as an entrepreneur can maintain yourself while developing said product and going to market.
After all, an entrepreneur that has no money is one that isn’t going to devote his/her full time to the project. So if we’re right, I bet the assessment criteria would be 1. Team 2. Project 3. Progress.
We attended the BiCE summit this week at ESADE and overall we would say the event was a successful one, some interesting talks, some interesting companies, one that we’ll be covering sooner than later in our Startup Saturday series even.
However what we believe was the most interesting part of the whole thing was the panel of Angel, VC (venture capital), and PE (private equity) investors into the clean tech space, as well as a discussion on the development of clean tech in the CEE region. The low point – a long winded forum of government officials talking about sustainability and efficiency and elaborating on the need to create overly complex programmes to work together with the private sector and banks. So let’s start there –
Government and Clean Tech
Clearly one of the more important roles if any of government is to set policy, and provide incentives for enterprise in it’s own market. This is all good and well, and in our most humble of opinions this is simply something that needs to be done via tax abatement. After all, the stakeholder mentality is undoubtedly focused on the bottom line.
So what’s the problem? There should be none, government should have instituted tax abatement programmes for clean-tech initiatives a long time ago, the same for energy efficiency etc… etc… not only to offset the cost of installation, but also to create incentives for non eco-knowledgeable business to implement eco-friendly methodologies and practices into its day-to-day operations.
But @ BiCE, these governmental entities failed at promoting just that, instead they discusses large bogged down in bureaucracy initiatives, that lacked any sort of clear vision. Notwithstanding what really stood out – in terms of the negative – were comments made by various government individuals that “each case is different” and that a “different programme needs to be established for different companies”. Socialist, sure, but worse that that it screams of 1. Inefficiency, and 2. Higher Taxes. After all someone’s got to pay for all these new programmes.
What’s the solution, simple, Ockham’s Razor – entities should not be multiplied unnecessarily. Create an initiative that fosters the implementation of Clean Tech and Enviro-Friendly practices, give tax breaks to those who participate in the programme, and that’s pretty much all you need.
Clean Tech & Energy in the CEE
Elena Yordanova an investor in the clean tech area with Astra Capital spoke on this topic and although it was brief, it was also very informative. The region as a whole has huge potential for clean tech implementation, specifically in the area of en energy generation.
The SEE is rich in sunshine, there are various opportunities for hydroelectric as well as the north, i.e. Poland, and the Baltics can capitalize on coastal wind farms. Barriers to entry are still fairly low, and the region has massive growth potential across the board, however certain markets such as Romania already have met 2020 targets and over 30{abb65e2b6815f549a727af2ea9f3a377a727ddc064972a198a74f88a6b766686} of their energy production coming from renewable sources.
Investment Outlook for Clean Tech
This is a tricky one, as we all well know – investors want a high margin quick return. Clean tech companies however are not suited for this model, time to market may often be ten years or more, and investments are typically very capital intensive.
At the same time, the industry or sector is as a whole very new, and there is very little if any PE activity within the clean-tech space.The good news however is that you’re starting to see VC’s grouping their funds together for truly large scale capital investments into new technologies that otherwise without this money could not be realized. This is a good thing, the bad thing is the lack to BA’s in the field and their reluctance to throw money at clean tech startups – after all, there needs to be a call to a social cause when investing 500k-2m and expecting generally lower returns over a longer period of time.
