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Looking for funding
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November 29, 2000: 12:06 p.m. ET
Venture capitalists are still willing to place bets, but entrepreneurs must prepare
By Jane Applegate
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NEW YORK (CNNfn) - When the dot.com boom went bust last spring, venture capitalists lost some of their bravura -- along with a few billion dollars. But there are still investors out there looking for strong businesses with solid management experience and potential for growth.
"No one who's seen our business plan has turned it down," says Michael Ash, CEO of Musclecarsnparts.com, an online auction site based in Tujunga, Calif., that's devoted to "muscle" cars. "Investors know that auction sites have a solid cash stream, and they're the most lucrative sites on the Web."
Finding the right investor for your small business is challenging, but not impossible. Most start-ups still depend on finding private investors, known as angels, to support companies in the first stages of growth.
Locating angels, even around the holidays, may be more difficult than connecting with a big venture capital firm, because angels tend to be less formally organized. Most operate below the radar of many entrepreneurs.
There are regional angel networks and groups like Angel Society, based in New York, and the American Entrepreneurs for Economic Growth, an offshoot of the National Venture Capital Association.
There are also niche investor groups such as WomenAngels.net, a group of high net worth women investors in the Washington, D.C., area. Unfortunately, many entrepreneurs look for financing without a clear strategy.
Lack of awareness hurts entrepreneurs
This lack of awareness and information is what hurts their chances for success according to Neil Greer, chairman and founder of V2 Commerce Corp., a company in San Diego, Calif., that automates data flow from the Web to the desktop. "If your business cannot grow into a $100 million dollar business, it will not be exciting to a venture capital firm," Greer said. "Venture capital firms are looking to make 10 or 15 times their investment back."
Greer, who also invests in other companies, said before last April's market collapse, venture capitalists expected to make their money back in multiples within a year, but "now we're back to a more traditional model, which usually takes five to seven years." Kent Barnett, chairman and CEO of Knowledge Advisors, an Illinois company that provides corporate "e-learning" programs, said despite the rocky stock market, he found investors quickly: "We incorporated in July, and set a goal of raising $1 million in seed capital.
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If your business cannot grow into a $100 million dollar business, it will not be exciting to a venture capital firm. Venture capital firms are looking to make 10 or 15 times their investment back.
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Neil Greer, chairman, V2 Commerce Corp. |
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By the end of September, we had offers for $2 million, at our terms, and we accepted $1.3 million." But Barnett wasn't a 23-year-old with a dot.com dream. In 1997, he sold his former company, Productivity Point International, for $100 million after running it for over a decade.
He parlayed his experience in running a large company and extensive connections with potential investors to launch his new venture. "I know some venture capitalists who used to say they'd never fund an Internet company run by anyone over 30," said Margarita Quihuis, director of the Women's Technology Cluster, an incubator for technology companies based in San Francisco. "But it's changed since April."
"We're going to see a return to the more typical investment model," she said. "The old guard venture capitalists came from operations, and they were looking for experienced executives. During the Internet boom, there was a swing toward younger financial engineers -- spreadsheet entrepreneurs -- who never cared about how the business would be run."
Personal connections remain crucial
Recent interviews with business owners, investors and financial experts revealed that no matter how great your business idea may be, personal connections are crucial to obtaining outside investment. "Venture capitalists are people-oriented. It may be a bad thing, but people really matter," says Neil Greer. "It matters so much, they won't say it."
She suggests making connections through strong relationships with your service providers. "The first hurdle is whether you can get a good lawyer to take you on. They will open doors to investors ... lawyers sometimes invest in companies themselves," she said. "The second hurdle is where you bank. It's a very tight community, venture firms are at the center, then lawyers and then banks."
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 CASH STILL FLOWS TO VC FUNDS
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U.S.-based venture capital funds raised $28 billion in the third quarter of 2000, up 16 percent from the second quarter, according to Venture Economics and the National Venture Capital Association. After three quarters this year, venture funds have raised $70.1 billion, compared to $59.2 billion in all of 1999.
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But retaining a well-connected lawyer and finding a good bank to back your business is only the first step. "It's up to you to build the relationship," she said.
If you are lucky enough to meet with a potential investor, you will usually have only about 15 minutes to tell your story. Greer recommends that you speak frankly about your business. "You should ask a lot of questions," Greer says, and, most importantly, "listen to what they tell you."
She tells of a successful woman she knows and her proven method for creating solid relationships with potential investors. "First, she flatters them by asking them their opinion about her business, and she does it in an informal setting, like at a party or mixer," says Quihuis. "Then, she asks the person to meet with her later, but tells them, 'I'm not going to ask you for money.'
"The investors always say 'Sure!' since they spend their days besieged by requests for investments," Quihuis said. "After two or three of these informal meetings, she sets up a formal meeting to ask for an investment. By that time, the investors know her, and she's been able to tailor her proposal to what she's learned about them. She's one of the most successful people I know when it comes to raising money for her business." 
Jane Applegate, a syndicated columnist and author of 201 Great Ideas for Your Small Business, covers small business for CNNfn. "Succeeding in Small Business" appears on CNNfn.com on Wednesdays.
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