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Thursday, February 01, 2007

Article from the VC company Cannan Partners

Raise your venture capital


By
Maha Ibrahim
General Partner, Canaan Partners


The venture capital industry is strong again today. That means there is no lack of money for highly promising entrepreneurs with good, well-formulated ideas, whether they're creating a startup from scratch or seeking later-stage financing for a growing venture with promise. Just look at the numbers. In Q2 of 2006, VCs invested $6.3 billion in 856 deals—the highest dollar amount and the most deals in more than four years, according to PricewaterhouseCoopers.
And the well is hardly dry. U.S. VC firms raised $4.3 billion in Q1 of 2006, the latest figure available—a 69 percent increase over the same figure a year earlier, according to Dow Jones VentureOne.
VCs are deploying these dollars somewhat differently than they have in the past. Consumer-oriented investments, especially in wireless communications and Web 2.0 startups, are dwarfing traditional networking and enterprise-oriented deals. VCs are also placing most of their bets on new startups or late-stage deals. Their hope is that they can make as much as five times their money within three years or so. And they are investing much more internationally in rapidly developing nations such as India and China.
Prospective entrepreneurs should bear these trends in mind. Here are tips to help you raise VC—ways that can enhance your odds and avoid undermining your chances.
Do
Use your network to approach VCs. Cold-calling VCs—who receive hundreds of business plans weekly—doesn't work. If you already know some VCs, approach them initially. If you don't, see whether an adviser, lawyer or a board member has entree to VCs.

Prepare a realistic, believable business plan—one that targets a healthy market in which customers are relatively easy to find and support. Make sure there is a clear and compelling case for your product. It would be a mistake to develop and sell a generic hardware platform to a dozen customers, each of whom uses the platform to support a different application. This model is too obtuse to attract a lot of new customers.

Develop a good "narrative." Be willing and able to tell a strong story about the potential of your startup. Don't assume the startup will sell itself. Build the theme that there is a significant hole in the market, and that your startup will address it squarely and grow rapidly.

Show that you have good insight into competitive threats. One good way to do this is to develop a matrix itemizing points such as product features, price points and technical differentiation. Then outline the relative strengths of your startup on each point and the relative weaknesses of the competition. VCs want to see graphically who is chasing the same dollars and why your competitive edge is superior.

Build a business that has barriers to competition. There are lots of startups in the Web 2.0 space, for example. But those with a good shot at success have a significant marketing, ease-of-use and technology edge over the competition, whether it's a better way to navigate the site or a novel way to attract many users.

Don't
Claim you have no competition. Almost everybody does, and you have to respect it. VCs have to feel comfortable that you have a good sense of what is happening in your target market.
Build a product without talking to prospective customers. VCs expect startups to go to market with products that are painstakingly analyzed, and that means the developers have incorporated a lot of feedback from those who will buy and rely on the product. Good customer communication is also imperative for growth.

Present your ideas informally or sloppily. A lot of entrepreneurs think they can initially communicate with VCs in an informal discussion. As busy people with time constraints, VCs want to see good ideas clearly and succinctly presented. They also want to know that prospective entrepreneurs are sufficiently organized to capture the essence of their business plan in a 20-page PowerPoint presentation.

Create the suspicion that your startup suffers from a lack of focus. For example, don't say that you will develop six products in six months. Startups focused on one product, let alone six, rarely make their initial timetable, partly because products rely on input from beta customers who chronically insist on changes.

Foster the impression that you don't have a solid plan for taking your product to market. Startup founders often get wrapped up in technology at the expense of strong marketing and sales plans. Entrepreneurs often don't realize that it's equally important to show how they intend to get their product into the hands of customers cheaply and quickly. Don't fail to address whether you're going to rely on a corporate partner or third-party resellers to sell your product, and why or whether you need to develop an internal sales team from the start.
From the EE Times

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