Venture capitalists aren't worrying about failures and drop-offs in the e-business arena. They're not falling for the dot-com con game any longer.
With the seemingly endless supply of VC money, entrepreneurs may think any Web-related idea jotted on the back of a napkin is a sure bet to win VC hearts and purse strings. Nothing could be further from the truth.
Venture capitalists attending the CRN Venture Capital Roundtable say business basics,not slick presentations,are what gets their attention and, ultimately, their money.
"There's a difference between being articulate and showing leadership and being somewhat eloquent and being a promoter. VCs don't particularly like promoters," says Janice Roberts, general partner at The Mayfield Fund, Menlo Park, Calif.
"[Many entrepreneurs] show you the products and technology, and [when we ask them] 'How are you going to get from here to there?' the gap is not filled in," Roberts says. "Sales strategy is often an afterthought; channel strategy is an afterthought."
Business skills and the ability to manage people at rapidly growing companies are what VCs value most, says David Carlick, partner at VantagePoint Venture Partners, San Bruno, Calif.
"If they can't articulate, are they going to be leaders? Are they going to be able to convince employees to join? Are they going to be able to ride the troops hard? Are they going to be able to communicate the company's vision?" Carlick says.
VCs say the best way for entrepreneurs to win funding is to demonstrate an understanding of what it takes to grow and sustain a business, rather than focusing on the technology they hope to bring to market.
"The most important thing entrepreneurs can do is tell us a good story about the company, and often they get bogged down in telling us about the product," says J.T. Treadwell, associate at Bessemer Venture Partners, Menlo Park.
VCs note that there's an alarming lack of business management skills among entrepreneurs.
"[Entrepreneurs] will show you plans that have them ramping from 25 to 50 to 75 to 100 to 150 people," says Gordon King, partner at Evolution Capital, Santa Monica, Calif. "You'll have a small discussion about what those organizational dynamics are in terms of management . . . and all the things you need to build a company so that it can actually work. And you have almost no conversation."
The recent spate of dot-com failures, coupled with the crash of some Web-related stocks, makes management acumen imperative for entrepreneurs, King says.
"This path of ignorance to an IPO, where that money is going to make up for all these mistakes, that doesn't exist anymore," he says. "The ability for companies to self-correct when they're on a management slide is fatal in and of itself, no matter what the product and go-to-market strategy is."
A lack of sales skills among entrepreneurs is a particular concern, according to VC executives. Entrepreneurs often don't understand how to market their skills and tend to wait for business to come to them.
"Entrepreneurs today misunderstand sales," VantagePoint's Carlick says. "Everybody who is young doesn't want to be in sales. They want to be in business development because they don't want to be loud and smoke cigars. Technical entrepreneurs go terribly awry because they hire people who look like stereotypical salespeople."
Adds Mayfield's Roberts: "I have a sales and marketing background, and I'm spending all this time with our portfolio of companies because there is a huge gap in really understanding go-to-market strategy and then executing it."
Finding entrepreneurs who want to be CEOs is a major challenge as well, says Evolution Capital's King.
"No one in this accelerated, get-rich-quick atmosphere wants to believe there's a tedious nature required to build a company," he says. "You have to come in early. You have to sit at your desk for long hours. Someone has to get HR going, turn on the water, the 401ks, the health insurance. . . . It's hard in this economy to find anybody that wants to sit for 40, 50, 60 hours a week and build a company."
Simply recruiting a seasoned CEO for a start-up company that doesn't have management talent may not always be the answer, King notes. Talented managers, he says, are looking for companies that have long-term growth potential. Although new CEOs may be willing to do some restructuring, "they don't want to be part of something that looks like the first six months is trying to go back over and fill potholes and repair bridges," he says.
But King tempers his lament. He warns high-tech investors not to turn a blind eye to entrepreneurs who don't come bearing winning personalities or catchy presentations.
"Every hustler in the world is compelling and articulate," King says. "One of the things that's a disservice as a venture capitalist is to get wrapped up in looking for the articulate and well-crafted presentation. We don't listen hard enough to some really talented people. There's not enough time and attention spent on young entrepreneurs who don't fit a slick profile."
VC executives say the flood of funding isn't slowing down, and they are zeroing in on e-commerce infrastructure companies in particular. Still, VC executives caution entrepreneurs to do their homework.
"There's more money than good ideas, and more good ideas than good people," says VantagePoint's Carlick.
For entrepreneurs trying to get their foot in the door, the best strategy is a personal referral.
"I don't think we've funded one company out of a 100 that came in over the transit," Carlick says. "We have limited partners who have invested money who send us deals. We have our start-ups that send us deals. All priority has to be given to those folks in terms of evaluating and spending time."
Executives advise entrepreneurs to first check VC Web sites to see which companies VCs have funded, and then try to find a fund that matches their market segment. "And if you're looking for $500,000, don't go to a billion-dollar fund," Carlick says.
The sheer volume of funding requests out there limits VC firms' ability to sift through stacks of new proposals, according to these executives.
"The industry is essentially reactive," Mayfield's Roberts says. "We've talked about everyone wanting to be proactive. I think we're trying, but it tends to be reactive. So some form of personal referral and sort of focused approach is the key."
Referrals sometimes come from other venture capital funds. An entrepreneur may have a well-crafted business strategy and a strong technology solution, but the business simply doesn't fit in with the VC's long-term strategy. When that happens, funds often refer those prospects to other VCs.
"We see a fair amount of those referrals," says King.
However, some VCs say they're taking different approaches for scouting and funding new start-ups as a way to stay on the cutting edge of technology trends.
"We tend to find companies [in several] ways," says Bessemer's Treadwell.
A referral comes through a "trusted friend," he says. Bessemer also examines the market segments of companies from which it gets referrals, and then goes out and "scours that space," Treadwell says. Sometimes, he adds, Bessemer finds a company that's better.
Another approach, Treadwell says, is to proactively target an interesting or emerging market and then go out and find a company in that space. But, he notes, "In current exuberant times, it's hard to do that on an ongoing basis."
Marcia Savage & Larry Hooper contributed to this story.