June 24, 2005

Being paranoid about your idea doesn't help

Guy Kawasaki explains why in his Forbes.com Q&A column:

What stops someone who already has the money from implementing your idea? Time, expertise and passion to name three factors. Venture capitalists don't want to be entrepreneurs. They want to invest in entrepreneurs. They don't want to do the work, they want to find people to do the work. The deal they want is: I give you money, you create something great.

...Here's another way to look at it. If merely telling someone your idea means that it can be ripped off, then you hardly have a defensible product. If secrecy is your main weapon, then it will be hard to find investors. By the way, what happens when you ship? Are you going to ask every customer to sign a nondisclosure too?

There is no way to force a nondisclosure agreement with any potential investor whose money you'd want. If you can get an investor to sign it, just to learn what you're doing, then that's dumb money. Even if you get a nondisclosure agreement, then there's no way to enforce it--what funds will you use to sue the investor? Do you think your investor is going to say, "Sure, take the million I gave you and sue."

So the bottom line is: Use your head, don't show your stuff to someone who has a competitive portfolio company. Figure out which investors really should be interested, unveil enough for him to understand what you're doing (as opposed to giving him source code), and go for it.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

June 21, 2005

Five things that make a great deal

Extracts from a recent IBD Network event on Venture Capital (held at Menlo Park, CA) featuring Ron Weissman, Apax Partners (as Moderator); Raj Atluru, Draper Fisher Jurvetson; Tim Chang, Gabriel Venture Partners; and Venky Ganesan, Globespan Capital Partners:

1. An idea that fits with one of the VC's investment theses
2. A rock star team
3. A business model that is highly capital-efficient
4. The VC having good chemistry with the team
5. The ability for the VC to really add value (helping with liquidity events, or helping to hire talent)

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

How to pursue multiple exit strategies and opportunities

Don't smell like you're trying to get liquidity. That's not very attractive. Pursue your core business, grow smartly, and others (VCs or potential acquirers) will see what an integral part your business could play that will benefit them, and that's where you will find yourself - cutting the deals.

- Michael Markson, VP, Business Development, Topix.net in IBD Network

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

June 15, 2005

Each venture firm has a different process

David Beisel, a VC and former entrepreneur, explains:
For example, I know of one firm that formally assigns both an “advocate” partner and a “skeptic” partner to evaluate a potential investment. Others will consider an investment less formally. Some will write diligent investment memorandums based on specific, itemized checklists to ensure that all basis have been covered. Others rely on more of an intuitive approach to evaluation. Some have regularly-scheduled investment meetings, while others will convene when a deal is “hot.” Some firms have a formal voting process, while others are consensus-driven.


Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

June 14, 2005

Why a VC firm's fund size matters to entrepreneurs

Jeff Bussgang explains:
Well, a critical thing for an entrepreneur when fundraising is to find a firm that's going to fit their capital profile. After all, if a VC is trying to force too much money down the entrepreneur's throats, it will mean more dilution than they'd like. And not having deep pockets means there's a risk of getting caught short just at the moment when a few extra million might be needed to get to the next level. Thus, the Goldilocks Rule applies to VCs and fund size: not too big, and not too small, but just right.

How much capital does fund X really want to put in behind each company? The marketing materials may say one thing (I once saw a VC claim they would do deals from $50K to $50M!), but the reality is there's a sweet spot that every firm has and if you are in their sweet spot, you're better off than if you're not. The nature of that sweet spot comes down to the size of their current fund, not their total capital under management, for all the reasons discussed above. Thus, always ask a firm what their current fund size is, not what they have under historical management.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

June 10, 2005

And here's why you should remain small even as you think big

Seth Godin on why "Small is the new big":
Enron (big) got audited by Andersen (big) and failed (big.) The World Trade Center was a target. TV advertising is collapsing so fast you can hear it. American Airlines (big) is getting creamed by Jet Blue (think small). BoingBoing (four people) has a readership growing a hundred times faster than the New Yorker (hundreds of people).

Today, little companies often make more money than big companies. Little churches grow faster than worldwide ones. Little jets are way faster (door to door) than big ones.

Today, Craigslist (18 employees) is the fourth most visited site according to some measures. They are partly owned by eBay (more than 4,000 employees) which hopes to stay in the same league, traffic-wise. They’re certainly not growing nearly as fast.

Small means the founder makes a far greater percentage of the customer interactions. Small means the founder is close to the decisions that matter and can make them, quickly.

Small is the new big because small gives you the flexibility to change the business model when your competition changes theirs.

...Small means that you can answer email from your customers.

...A small law firm or accounting firm or ad agency is succeeding because they’re good, not because they’re big. So smart small companies are happy to hire them.

...A small venture fund doesn’t have to fund big bad ideas in order to get capital doing work. They can make small investments in tiny companies with good (big) ideas.

...Small is the new big only when the person running the small thinks big.

Don’t wait. Get small. Think big.




Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

Acting like a big company from the beginning

BusinessWeek has an interesting article on how entrepreneurs should prepare for growth:
Doing it all may be encoded in entrepreneurial DNA, but it's hardly the best way to manage a growing company. Entrepreneurs risk burning out and taking down their businesses and their personal lives with them.

...Managing growth successfully comes down to getting the right help at the right time. At the outset, it's important for entrepreneurs to develop relationships with professionals such as accountants and lawyers, then make sure the right hires come on when they're most needed. As the company grows, it may be wise to explore partnering or outsourcing -- or even stepping back from the helm of your company.

...It's important to keep an eye on the future, even if you're working out of a spare bedroom. "Start out acting like a big company from the beginning," advises Marty Schmidt, president of Solution Metrix, a small business consultancy in Boston. At a minimum, create professional accounting procedures and hire an accountant who specializes in small businesses.

...Getting started on the right foot extends to office space, too. Yes, cost can be an issue. But Humphrey found that several would-be employees who sounded promising on the phone failed to show up for interviews. "I realized later that candidates had been driving up, seeing this ugly building, and driving off," says Humphrey.

...That little epiphany prompted him to stop thinking like the founder of a struggling startup and to start acting like the CEO of the company he hoped DrinkWorks would become. In 2000 he hired a director of operations. The next year, DrinkWorks moved into a 2,000-square-foot space with room to expand. "We created a fun, amazing environment, with a large creative room for brainstorming and a surround-sound system on which we played our favorite music," says Humphrey. "Immediately we found that good people wanted to work for us and we had almost no turnover." By 2003 the $6 million company had 14 employees.


Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.

June 05, 2005

How to do due diligence on a VC

Rick Segal of J.L. Albright Partners has some interesting tips on how entrepreneurs can check out VCs they plan to do business with:
Ask different questions. The purpose, like the above, is to get insight into who you are dealing with so, go down a list of things like:

A. What's your favorite blog?

B. What kind of laptop do you have?

C. Which cell phone do you favor?

D. Do your kids do the SMS thing?

E. What do you hate about serving on boards?...

...Show up unannounced to the firm just to drop by. See what kind of reaction you get. Think about it. We are family, working close together, long term relationship, blaah blaah. Right. Show up unannounced, ask to use an office, the phone, grab a free pop, whatever, but note the vibe, it will be telling.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.