When the dot-com boom went bust last spring, venture capitalists lost some of their bravura, along with a few billion dollars. But there are still investors out there looking for strong businesses with solid, experienced management and potential for growth.
“No one who’s seen our business plan has turned it down,” says Michael Ash, CEO of Musclecarsnparts.com, an online auction site based in Tujunga, Calif., that’s devoted to “muscle” cars. “Investors know that auction sites have a solid cash stream, and they’re the most lucrative sites on the Web.”
While Ash has good leads and lots of interested investors, he hadn’t closed a financing round yet as of the end of November.
“We’re making sure the terms are right and expect to finish this process in a few months,” Ash says.
Finding the right investor for your small business is challenging, but not impossible. Most start-ups still depend on finding private investors, known as angels, to support companies in the first stages of growth.
Locating angels may be more difficult than connecting with a big venture capital firm because angels tend to be less formally organized. Most operate below the radar of many entrepreneurs. There are regional angel networks and groups like Angel Society (www.angelsociety.com), based in New York City, and the American Entrepreneurs for Economic Growth, an offshoot of the National Venture Capital Association. There are also niche investor groups such as www.womenangels.net, a group of high-net-worth women investors in the Washington, D.C., area.
Unfortunately, many entrepreneurs look for financing without a clear strategy. This hurts their chances for success, according to Neil Greer, chairman and founder of V2 Commerce Corp., a company in San Diego that automates data flow from the Web to the desktop.
“If your business cannot grow into a $100 million dollar business, it will not be exciting to a venture capital firm,” Greer says. “Venture capital firms are looking to make 10 or 15 times their investment back.”
Greer says that before last April’s market collapse, venture capitalists expected to make their money back in multiples within a year, but “now we’re back to a more traditional model, which usually takes five to seven years.”
Kent Barnett, chairman and CEO of Knowledge Advisors, an Illinois company that provides corporate e-learning programs, says despite the rocky stock market, he found investors quickly. “We incorporated in July, and set a goal of raising $1 million in seed capital. By the end of September, we had offers for $2 million, at our terms, and we accepted $1.3 million.”
But Barnett wasn’t a 23 year old with a dot-com dream. In 1997, he sold his former company, Productivity Point International, for $100 million after running it for over a decade. He parlayed his experience in running a large company and extensive connections with potential investors to launch his new venture.
“I know some venture capitalists who used to say they’d never fund an Internet company run by anyone over 30,” says Margarita Quihuis, director of the Women’s Technology Cluster, an incubator for technology companies based in San Francisco. “But it’s changed since April.”
“We’re going to see a return to the more typical investment model,” she says. “The old-guard venture capitalists came from operations, and they were looking for experienced executives.”
Recent interviews with business owners, investors and financial experts revealed that no matter how great your business idea may be, personal connections are crucial to obtaining outside investments.
“Venture capitalists are people-oriented. It may be a bad thing, but people really matter,” Greer says.
“All other things being equal, the thing that will make or break you is a personal connection,” Quihuis agrees. “Being able to work a social network is a test in and of itself.”
Quihuis suggests making connections through strong relationships with your service providers.
“The first hurdle is whether you can get a good lawyer to take you on. They will open doors to investors,” she says. “The second hurdle is where you bank. It’s a very tight community, venture firms are at the center, then lawyers and then banks.”
But retaining a well-connected lawyer and finding a good bank to back your business is only the first step.
Greer recommends joining your local chamber of commerce to start building your personal network.
“They have mixers every month. I would stand there with a stack of business cards,” Greer says. “People that you’ll meet who don’t have any money will lead you to the people that do have money to invest.”
Greer also suggests trying to network locally through university entrepreneurship programs. If you meet with a potential investor, you will usually have only about 15 minutes to tell your story. Greer recommends you speak frankly about your business.
“You should ask a lot of questions,” Greer says, and, most importantly, “Listen to what they tell you.”
As director of an incubator for start-ups, Quihuis has seen a lot of entrepreneurs come and go. She tells of a woman she knows and her method for creating solid relationships with potential investors.
“First, she flatters them by asking them their opinion about her business, and she does it in an informal setting, like at a party or mixer,” Quihuis says. “Then, she asks the person to meet with her later, but tells them, ‘I’m not going to ask you for money.'”
“The investors always say, ‘Sure!'” since they spend their days besieged by requests for investments,” Quihuis says. “After two or three of these informal meetings, she sets up a formal meeting to ask for an investment. By that time, the investors know her, and she’s been able to tailor her proposal to what she’s learned about them. She’s one of the most successful people I know when it comes to raising money for her business.”
Totally believing in your idea will help convince others to believe in it, too.
“You have to be completely head over heels in love with the idea,” Greer says. “If you are, that will come across, and that will get people’s attention.”
(Jane Applegate is the author of “201 Great Ideas for Your Small Business” and is the CEO of SBTV.com, a multimedia site providing small-business resources. Contact her by e-mail at [email protected] or by mail to P.O. Box 768, Pelham, NY 10803. This column was prepared with the assistance of Reporter Sarah Prior.)
12/29/00–Rochester Business Journal