I recently attended the Rockies Venture Club presentation entitled “Truth About Venture Capital,” where four different venture capital firms discussed their views on how they can or cannot help entrepreneurs.
The participants were pretty unanimous in their view that entrepreneurs first need to be able to significantly succeed without venture capital before they are remotely interesting to venture capitalists. That is because venture capital is attracted to relatively obvious rapid growth business opportunities that will lead to an eventual sale or IPO in less than eight years. Twelve out of every 100 Americans indicated that they started up a business within the last year. There were 1000 venture capital deals, many close to the geographical region of Silicon Valley. So, the odds of an emerging company getting the venture are pretty low.
So how do businesses make it if they do not have the next financially obvious “sure thing” with great connections to capital? My opinion is that if entrepreneurs consciously and consistently focus on increasing company value, money will almost always follow either through investment or, even better, through sales revenue. Some suggestions to create value include:
1) Build and protect your product and brand
Every way that you hold yourself out (website, stationary, marketing material, product, services) constitutes your brand. You can protect yourself through relatively inexpensive intellectual property means (trademark, copyright, trade secret agreements), but it is important to think out and document a complete portfolio strategy. Think of each protection as a piece of a puzzle. Your exit or investor wants to assure you that you will protect the whole thing, not just various pieces.
2) Maintain relative product secrecy through confidentiality and trade secret agreements
There is no better way to secure your competitive advantage and interest investment than to make sure you maximize the aura of having a secret sauce and that the sauce will remain secret. This involves creating legally enforceable agreements that the entrepreneur can enforce.
3) Be nimble, celebrate, and take a salary as soon as you can
Building a viable business is very difficult and involves balancing expertise in product development, operations, legal, accounting, sales, and marketing. Keep calm and carry on. Celebrate the fact that you have gotten as far as you have, pay yourself if you can, and trust your instinct to make capital, human resources, and services or product modifications in your business (regardless of what you wrote in any business plan) that will keep your business vessel sailing. These steps will help assure your stability, which will make you a more resilient entrepreneur who can lead growth.
4) Meet with (with some limitations) whoever will meet with you
Just because there is limited possibility for most entrepreneurs to secure venture (or outside angel), capital does not mean that it is not a good idea to meet with any interested individual who passes the litmus test of having some value to the company. Most investors I have met are very intelligent, experienced in business, and are not scared to share their opinions. And if you do want to raise money, it is somewhat of a numbers game, so you need to get out there to succeed. However, you also need to balance that need with the other things you need to do to grow the business.
In summary, businesses succeed by having stamina, creating value and competitive advantage while overcoming obstacles. Venture financing can be definitely helpful, but regardless, it does not change the requirements of what the entrepreneur needs to do to create success. Success in business usually breeds success in the capital. It rarely works the other way around.