Entrepreneur.com asks 8 questions, via TheStreet.com (then some quick comments):
1. Are you a technology company?
2. Can you be a market leader?
3. Will it be cheap to make this company?
4. Is there a clear distribution channel?
5. Can this product be distributed without significant support?
6. Can the product or service generate gross margins of more than 50%?
7. Can the company go public or be acquired?
8. Can the company achieve $25 million in sales, and are there prospects for $50 million to $100 million in sales?
I’d add # 9 and 10 as follows:
9. Are you and your company in a city that is geographically close to a financing hub? Not too VCs, after all, want to hop on a flight to make sure their investment is safe, sound and growing.
10. Do you have a track record as a successful (with an exit, basically) entrepreneur.
I think VC is a fantastic route for many companies, but seeing how this comes from Entrepreneur.com, I think it’s worth adding a couple of points:
As an entrepreneur, there are some trends you realize, some opportunities you that lead you to take the risk to start a company.
Many VCs are indeed former entrepeneurs themselves, but they usually have great perspective on broad management and financial issues, or they might be strong operationally or within an industry, but they just might not have a comfort zone with your industry, your target market or simply, you.
When VCs approach you or when you hit them up, they’ll have a lot of good feedback. The process takes time and is not always fruitful.
At some point, you have to ask yourself:
Do you want to build a company that you think will be successful or a company that VCs feel comfortable in financing and maybe sharing in that success?
Sometimes, those are one and the same thing, but if they are not, you might then run the risk of becoming a me-too company in a crowded and saturated space.
Last year when I started WatchMojo.com, a producer of original video, the conventional wisdom was that we should go the user-generated content route. I thought it was madness: by doing so, we’d go from being one of the largest producers of original video content to being one of the smallest (and late entrants) in the UGC space. But the smart money felt that that was the way to go. I realized that was beyind my comfort zone, and ultimately, I was wasting my time. That’s not a knock at anyone, I swear, it’s an admission that I realized my time would be better served. Today, most video sites are moving away from UGC… reinforcing the decision to stick to our guns last year. Had we listened to please VCs (even though there was no guarantee of raising funds), we would have wasted a lot of time and not become a leader in the areas that we are today. I’m extremely fortunate that we did not really need VCs, but if you look around too, you’ll see VC is a nice to have, and not a need to have.
To quote Marc Andreessen, VCs are like baseball players in that they will strike out a few times, ground out, miss a home run by an inch… they’ll probably have a single and double and if they’re lucky, one home run will make up for the remaining so-so at-bat’s.
Because there are no guarantees in the financing or startup process, my rule of thumb is spend 5 hours on business development and sales for every hour you spend on corporate development. Then, and only then, can you too have a batting average worthy of winning.
Related:
- Has Web 2.0 Become a Farce?
- Hubris 2.0
- Has the Bubble of Pocket moved from Video Sharing Sites to Video Ad Networks?
- Could super angel investor Ron Conway possibly be wrong on…
- Not sure about the crazy valuations, frankly.
- Funding Myths, Tips, Random Advice
- What is the anti-VC?
- Are VCs Jumping on Broadband Content Bandwagon
- An Open Source VC?
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