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Angel Profile The 4 Key Secrets to Raising Early Stage Capital
By Jeff Parness There is hope for startups seeking early stage financing. I should know.
In the past 12 months, I co-founded three separate companies -- all
of whom successfully raised startup financing - VenturiFX, QWireless, and QOptics - the last an optical networking
software company which raised $11M from Warburg Pincus and now employs
39 people in New York City and Portland, Oregon.
My takeaway from the selling, due diligence,
and negotiating processes we underwent with top tier venture capital
firms is the following: there are four
key hurdles all entrepreneurs must cross to “close the deal” and secure
startup and early stage funding in 2002:
1. In this market, you must demonstrate
customer traction, and specifically, what I call “Buyability.” It used to
be that you could sit across the table from a VC and point to your past
sales experience and the sales track record of your founding team. Yes,
VCs need to know that you’ve sold before. But
in these times, your historical track record is not enough. In an environment
of constrained capital expenditures across all sectors, it is imperative
to demonstrate that you have identified customers who are actually
willing to buy what you intend to build
– and have them lined up and prepared to tell your potential investors
as part of due diligence -– “Yes, we will buy it when they build it
and here’s why we perceive it as a ‘must have’.” The VC cannot be the
first customer.
Even
though my partner, Alex Mashinsky and I had built and financed a company
that today services 150 of the world’s leading telephone companies (Arbinet-thexchange)
-- proof that we can sell - we still had to “sell the vision” for our
newest company, QOptics, to five telco service providers and line them
up as referenceable potential customers for extensive due diligence
by Warburg Pincus. Remember that it costs nothing to “sell the vision.”
While we hadn’t written one line of code, we demonstrated that we could
identify and pre-sell customers on our value proposition and have them
verify their willingness to buy. Without having lined up this all-important
“first duck”, I’m not sure that Warburg would have funded what was essentially
still a concept.
2. You must demonstrate a clear path to Profitability. Entrepreneurs starting a new business or raising capital for an existing enterprise have to assume that the money they are about to raise is the last outside funding they are ever going to see. No one is smart enough to forecast when the capital markets are going to come back. When sitting across the table from a VC in this market, it is essential to demonstrate a clear vision of what it will take to get the company to be self-sustaining. In today’s environment, spreadsheets are meaningless. Being able to articulate that you have first hand experience with business models that have achieved profitability, or at the very least, demonstrating a deep understanding of how other companies achieved break-even through similar strategies, is essential. 3. You need to bring relevant people to the table with relevant “Exit” experience. In 2002, it’s not enough to have an initial founding team of young, first-time entrepreneurs. That might have been the case in ’99 and 2000, but no more. VCs are not so easily going to back inexperienced teams and hope that they’ll find the right jockey later on. In this market, you need leadership that can take the company the “distance” – through product completion, critical mass of sales, and potentially all the way to a sale or public offering years away.
This is not to say that a new team cannot get funded without a CEO with previous public company experience. However, when selling the vision to outsiders and advisors, it is necessary to network your way to the “rock stars” and demonstrate access to those rock stars with relevant exit experience in the type of company you are trying to build.
Again, with QOptics, had we not found a CEO (Clive Cook) who had built core technology, run operations and product marketing, and sold his last company for $750 Million, we might not have been a “fundable” team in a very tough market.
4. Demonstrate your “Strategic Roadmap” by lining up the outside
relationships to take you to Exit -- now. In this market, you need to demonstrate that you understand the “strategic neighborhood” you are about to enter into. Most importantly, you need to line up all those personal and corporate strategic relationships right NOW, (development and marketing partners, lawyers and service providers, potential customers and acquirers) that will help you assist you in pursuing multiple exit opportunities later on.
Be forthcoming with VCs that you realize your early stage startup
may take many variations as it develops and
network your way to all those people who could help you achieve critical
mass and exit value as you go down those multiple
paths. The more you can demonstrate to VCs that you’ve lined
up people inside and outside the company who can help you achieve exit
- the better your chances will be in getting that wire transfer to help
you get started!
ABOUT
JEFF PARNESS jpaRness@startupsuccess2002.com Jeff Parness has raised $140 Million for growing companies from startups through IPO. He was the first Director of Investor Relations for IDT Corporation (NYSE:IDT), and helped raise $77 Million for Arbinet, the world’s leading telecommunications capacity exchange. His insights on selecting the best early stage investors to build long-term strategic business value are the subject of a Harvard Business School case study now being taught nationwide. Jeff’s newest company, StartupSuccess2002 just published Early Stage Investors 2002™, a 506-page directory of the 375 Funds still making Seed Stage and Series A investments in this market. To receive a free preview copy, please visit www.EarlyStageInvestors2002.com.
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