Start talking to entrepreneurs and side project startups in Portland—or throughout the Silicon Forest in Oregon—and the conversation will inevitably turn to one topic: venture capital or the lack thereof.
For every Oregon company that has had success attracting capital for their pursuits—Jive and AboutUs come to mind—there are hundreds who struggle with where to begin and how to engage the Angel or VC community.
It’s a difficult issue. And no one seems to put his or her finger exactly on the problems or how to solve them. Some say “buck up and play the game.” Others say “the game needs to change.” People talk about staying in Portland and figuring out how to bootstrap. People talk about leaving Portland in order to get funding.
What’s the answer?
Don’t look at me. To get there, I think we’re going to have to keep the discussion going. And last week, a couple of articles from The New York Times gave me a good reason to chat with Erik Benson of Voyager Capital about his thoughts.
The first article focused on the need for VC, at all, given the accessibility of today’s technology. “Do Web entrepreneurs still need venture capitalists?” the Times asked.
One of the key roles of venture capital, Mr. Hendershott argues, is providing the money needed to prove that a new technology works and that a market for the technology exists. During this period, start-ups rely on outside capital because they are not making any money for themselves.[HTML2]
That period may no longer be necessary….[HTML2]
They can do so with only a few thousand dollars and, in some cases, they end up quitting their day jobs. “In this situation, financing is no longer a crucial component to an entrepreneur’s creativity and passion,” Mr. Hendershott writes.
I asked Erik for his opinion on this theory as it applied to Portland. His take?
“Picking the right type of VC with the right mix of proven value adds, right number and experiences of their partners and right fund sizes is critical for any technology business regardless of a web orientation or otherwise,” he said. “Most of the VC funds with offices in Portland can and do invest in capital efficient technology categories but there are at least two funds that are too large for these categories and have traditionally made very large investments of $10-$20m in clean tech, bioinformatics, and semiconductor businesses.”
So how what’s a Web company to do when it comes to picking investors who are pre-disposed to working with Web companies?
“If you’re a web-based startup with total funding expectations of $5-$10m or less over your company’s lifecycle, you should look for a VC fund that has no more than $30-40m per general partner/managing director to put to work,” Erik said. “A $200m fund size with 5 general partners yields approximately $40m per GP. Each GP can then make 5-6 investments out of that fund in bite sizes of $5-10m. With an average of two venture funds under active management at any one time by VC firms that gives a General Partner no more than 7-9 board seats at any one time which really is the maximum number of boards for a partner to be an effective board member for early stage companies. This is why you’ll see many firms with 4-5 general partners and $250m or larger fund sizes investing $15m-$30m per company making investments in less capital efficient technology categories such as bioinformatics, cleantech and semiconductors, and not $2-5m investments into web-based, more capital efficient companies.”
Okay, so you’ve got some insight on how to target the right kinds of investors for your startup. So now what? Write a business plan and you’ll be in business right?
Again, The New York Times highlights that business plans aren’t the be all and end all of VC decision making.
Researchers found that venture capitalists, who screen hundreds or thousands of solicitations each year, pay little or no heed to the content of business plans. Instead, the study said, because they make decisions “under conditions of high uncertainty,” venture capitalists rely on instinct and their expertise in ferreting out information by other means to evaluate the prospects of a business.
Sure. Not exactly rocket surgery there. Obviously, VCs pay attention to more than the business plan. But according to the NYT’s article, they’re a complete waste of time.
“In general, business plans don’t matter,” said Brent Goldfarb, an associate professor of management and entrepreneurship at the Robert H. Smith School of Business, who wrote the study with David A, Kirsch, also an associate professor at the school, and Azi Gera, a doctoral student. “Nobody is going to read them.”
Erik, however, disagrees. There is value, he says, in the journey.
“Writing a business plan and thinking strategically about your business during that process, will help you answer many of the questions a VC will ask in their evaluation,” he said. “The areas to focus on in both the business plan development and the Q&A with VCs over a slide deck include value proposition, compelling reason to buy the company’s products or services, whole product, target customers, market sizing, product road map, and long term sustainable competititve advantage.”
So while you might not show your business plan to a VC, in Erik’s opinion, it’s still a good idea to work on one.
So what—exactly—are VCs looking for? Erik offers that you might work on a something a little more compact.
“Early stage VCs prefer to see a 3-page written executive summary, a well thought-out slide deck and a demo of the software or service,” he said.
See? Not as scary as you thought. And those were just a few examples of how simple questions can make that nebulous venture capital world seem a great deal more straightforward—and less intimidating.
Continuing the VC conversation
Looking for the chance to ask more questions?
You’re in luck! Mike Rogoway at The Oregonian will be hosting another online chat, this Friday. The guests will be VCs from the Portland area for “an online roundtable on venture capital in Oregon.”
David Cremin of DFJ Frontier and Eric Rosenfeld of Capybara, who recently partnered to give DFJ a more hands-on presence in Oregon. Capybara has backed AboutUs, Attensa and Eleven Wireless. In 2007, DJF and Capybara jointly invested in Vancouver-based ClearAccess.[HTML2]
Diane Fraiman of Voyager Capital, which has invested in Oregon companies AboutUs, Elemental Technologies and Kryptiq.
Interested in participating? Simply swing by the Silicon Forest blog at 9 AM on Friday.
(Image courtesy mashmal. Used under Creative Commons.)
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VC capital CAN be seed money. Example: We (OVP) put $1M into Stuart Cohen’s company, Collaborative Software Initiative in Portland when it was just him, and a fairly general PowerPoint pitch – no product, no customers, no team.
So, why did we do that and not all the others we turned down?
1) He had a great track record in the domain he was designing his company to serve, including leading a high-powered team
2) He had great contacts in the customer base he was planning to serve
3) His approach was disruptive in a very large space. So if it worked, he might grow a very meaningful sized-company.
4) The business model made sense. It was not hope or a nice-to-have, it was ROI based for the customer.
Most start-ups we see are lacking in at least one of these attributes. Many lack more than one.
I know this doesn’t make me popular with the Oregon entrepreneurial community sometimes – but while we VCs can be wrong more often than we are right (in fact, we ARE wrong more often than right!) – if you try to get VC money and get turned down, it is much more likely to be a problem with your team, your technology, your market, and your business model than it is that we are somehow “conservative” or “clueless”. OK, maybe clueless – but definitely not conservative. Or that money somehow “isn’t available” here.
Last year (not a great VC year, right?) we invested in 9 new companies – more than we ever have in our 26 year history. We’ve already done 2 in 2009, with more pending. Sadly, not one was in Oregon (yet) – but it wasn’t for lack of interest.
Personally, I’d much rather drive than fly to board meetings. These days, I’m on 8 boards in 4 states – with just 3 of those here locally. So, Oregon deals will always get the benefit of the doubt. But, in the end, we are here to make money for our investors and so will choose the best we see regardless of state boundaries.
Oregon entrepreneurs simply have to measure up to national standards to get funded. Some do every year. We wish there were more, and await them eagerly.
Lack of funding can have its benefits. It can force you to look at your business and question if what you have developed is simply a good idea, or a good business idea. There is a difference. Bootstrapping forces you to make good ( and sometimes extreme) decisions to build a quality product that people will purchase and serves a real need, focus on a niche and establish growth in phases vs. spending years developing a product that is not tested in the market and may be obsolete when actually launched.
Feeding your family and paying your mortgage are also prime motivators, a big and scary-as-hell step when you think about taking your side-project into a full-time gig. But then again if you are not willing to take the risk to put everything you have into your business, then why should an investor? Investment like a mortgage should not be easy money, maybe we are learning a lesson here.
Agree. I think there’s also an underlying issue of “friends and family.” I see a lot of bootstrapping, personally, and then looking to jump to Angel or VC. Seems there’s a step missing there. Or maybe we just need to have some more “friends” in the area who are able to invest.
I think we really need to shift the conversation to one about seed capital, not VC money. Jive didn’t take VC until they were an established company with strong sales and a good number of employee’s. AboutUs benefited from a founder that could financially carry the company until a modest first round of funding came in before they took traditional VC.
Most projects and startups in Portland are no where near the VC stage. We need to get these companies generating revenues and supporting at least 1 full time employee (but preferably more) before we even start talking about VC investments.
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