"Financing the Entrepreneurial Venture: Art or Science?"
James L. Watts, Managing Director, Pacific Summit Capital

Catching the interest of the financing source is as much art as science. Whether approaching a venture capitalist, an investment banker or an angel investor, first impressions are critical. Unfortunately, all types of capital providers are busier than ever in today’s markets. With the advent of the Internet, information travels faster and more efficiently. Also, forming a new business is quicker and easier today than in the past so there are more deals floating around the investment universe. Consequently, there are vastly many more business plans than there is funding capacity.

Two critical questions shape the process: 1) what does it take to make my deal fundable? and 2) how can I present my opportunity in the most favorable light to maximize my chance of actually receiving funding?

Making the Deal Fundable

To develop a business strategy that will catch the interest of the financier, consider two significant aspects. First, develop a viable, somewhat unique business model. If you are totally unique, you may ultimately gain the "first mover advantage" but you will have a much tougher sell. It’s usually better to be one of the first few out of the gate offering significant improvements over the first guy. In that situation, you can point to the industry leader as proving the business model and showing that the core concept will actually work.

Second, create a carefully thought out strategy to prove that your business plan is actually an improvement upon the existing model. "Me too" deals are a dime a dozen. Business strategies that actually improve upon an existing model are really quite scarce. Henry Ford didn’t invent the automobile; he just figured out how to mass produce it economically.

Building the Management Team

I’m always amused when approached by someone who says, with a straight face, "We have a great idea, all we need is management and money." I want to reply, "And what, actually, do you bring to the table?" Success is 5% inspiration and 95% execution. To execute you need strong management.

Looking at some of the Internet deals today, I reflect back to the days of the computer whiz kids of the late 1970s and early 1980s. Jobs, Wozniak and Gates were all young, idealistic and ultimately successful. However, by the mid-80s, venture capitalists began seeking a few gray hairs in the deals they funded.

Once again, today we see young and inexperienced entrepreneurs managing to create, in some cases, hugely successful deals (only time will tell whether their core businesses will also be successful). Companies have been founded, financed and gone public at huge market capitalizations. Smart money is beginning to bet, however, that such inexperience will not be the model for the future.

Consequently, today’s search is for deals with a management team with a successful track record in the core business, pre-Internet. If you are building an auction site for a widget vertical, be sure someone on your team is from the widget business and truly understands that industry.

Marketing the Deal

Once you have created a sound strategy built upon a solid business model and staffed your initial team with successful individuals from the core business, it comes time to sell it to the money. And here, as in other areas of business and finance, the world is changing. Whereas it used to be mandatory to have an extensive Business Plan with supporting schedules and projections, now clarity and conciseness are the order of the day. If your Executive Summary is more than five pages long, it probably won’t get read. And you need that Summary to open the doors.

When putting together your documentation, get input from everyone you trust. Make sure that a non-industry person reads it. Find a bright young English major to do a proofread. If he or she understands what you are trying to do, you have made your point. On the other hand, if you ramble on for pages about how wonderful your technology is without explaining how you will implement it, you will never get funded. You must tell the story!

And finally, be realistic and persistent. You will hear a lot of "no’s," many from self-confident individuals who really don’t understand what you are trying to do. If they don’t make an effort to understand your deal, ask politely if they have any referrals to someone who may be interested and thank them for their time. One of my old law partners from Washington, DC is the brother of the fellow who put the Cabbage Patch Dolls transaction together after all the smart money had passed on the deal. Today, he is very rich from that deal and the smart money missed an opportunity because they failed to understand the potential.

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