Posted: June 01, 2009
VC is out there – if you’ve got the right stuff
Active investors advise entrepreneurs at 21st Annual Colorado Capital ConferenceMary Butler
The good news is venture capitalists are still funding Colorado startups. The bad news is VCs are taking far fewer risks.
Entrepreneurs need to create business plans that require less money; they need to do more bootstrapping; and most of all, they need to have real customers and real profits.
These were among the messages of four venture capitalists, who spoke at the 21st Annual Colorado Capital Conference on May 12 as part of a panel titled, “The State of Colorado Venture Capital – Active Investors in Today’s Market.” The Capital Conference is for investors, inventors, entrepreneurs and supporting service professionals.
Today’s A round is “what used to look like a B round,” said Joe Zell, general partner with Virginia-based Grotech.
Stephanie McCoy of Denver’s Meritage Funds said she’s looking for companies that are “more mature” and have “meat on their bones.”
That said, the group of VCs said they are funding companies at all stages. But a company seeking funding has to meet a couple of core requirements right off the bat. The most important condition is to have an appropriate management team.
“All of our firms have different things that we fall in love with,” Zell said. “But we reject more deals because the leadership team is inappropriate.” A company seeking venture capital absolutely must have a “backable CEO,” Zell said. “Some of these companies just don’t get it,” he said. “You need a CEO who has done it before.” Without that, Zell said, the odds of receiving funding are automatically slashed by 75 percent.
Bruce Dines of Englewood-based Liberty Global said he’d rather invest in a mediocre plan with a great team than a great plan with a mediocre team.
The second-most important “must” is to have a clear message. An entrepreneur ought to be able to articulate in 90 seconds why his or her venture is unique, sustainable and why it can be No. 1 or No. 2 in its market. “If you can’t answer those questions, you will get passed on,” Zell said.
Money is well spent with a communication consultant, “to clarify your story and help you get it clear and simple,” Zell said.
Carl Ledbetter, managing director of Salt Lake City-based UV Partners, cautioned entrepreneurs against using buzz words. Packing a presentation with words such as “Web 3.0,” “synergy” and “virtual” is instant death.
“We don’t want to hear a 15-second elevator pitch,” he said. “If you can’t explain your business to me quickly and succinctly, you don’t know what your business is.”
“If you’ve got a great team, a great idea and a great market, we can go out and execute,” McCoy said.
Ledbetter emphasized that VCs are wrong two-thirds of the time. “When you’ve got some customers, my opinion doesn’t matter anymore,” he said.
And that’s the catch – in this economic climate, a company without customers is a start-up with slim hope of securing VC.
The startup market in Colorado continues to be “robust,” said McCoy, noting that Meritage invests locally, but also nationally and internationally. Ledbetter agreed. “We see lots of opportunity here. I have not had a period in my 16 years where I’ve seen more interesting deals,” he said.
The problem for companies seeking funding is that a lot of VCs don’t have money, McCoy said. “They have to wait for exits before they can raise the next fund,” she said. “Every venture market is at risk … and Colorado is no exception.”
However, Ledbetter noted that the economy appears to “rounding the bend” at the bottom, which means investors with cash will be looking to get good deals while they can still be had. “We will finally get out of this – and when we do, most of us expect it to be a pretty big bounce,” he said.
Can’t get VC? Talk to a “human capitalist”
For all those entrepreneurs who can’t get the money they need to get their business off the ground, there’s Brian Tsuchiya, founder of Startup Guru.
Tsuchiya attended the Capital Conference to tell entrepreneurs about his sweat equity concept, in which people invest their time in companies in exchange for shares. He helps connect people’s skills with the startups that need them.
“The average business that receives angel funding is 13.5 years old and has $1.5 million in profits,” Tsuchiya said. “They’re already successful. It’s a perfect angel deal.”
But so many people have the “Lotto mentality” that they’re going to hit it big, he said, they don’t realize how much money they’re really going to need to get their business going and then grow it.
With his idea, Tsuchiya said, you don’t really need any money to get your business off the ground. You just need skilled professionals.
His website promises: "Trillions of dollars of seed funding have been lost in this economy. 13.2 million people are unemployed. We will show you how to tap into sweat equity, a truly abundant resource, to fund your new business."
Mary Butler is ColoradoBiz's online editor.