VCs Set Expectations

If you're looking for VC money, don't presume no one else has considered your unique idea, be prepared to show you have a solid customer roster and don't expect to find the easy money of yesteryear.

Those were among the takeaways of a panel presentation I attended earlier this month with five VCs and a company that received venture funding. It was moderated by Bloomberg TV's Taking Stock anchor Pimm Fox. 

As a prelude to the panel, PricewaterhouseCoopers' partner David Silverman revealed PwC's annual MoneyTree report, which gave the lowdown on last year's dismal year for venture funding that was tighter than ever. Investors only pumped $17.7 billion into companies, down 37 percent over 2008's $28 billion.

There are indications that it is starting to bounce back incrementally this year, with signs trending toward $20 billion, Silverman said. As reported, funding remains tight -- but VCs still see opportunities in areas such as cloud computing, smart phones and green technology. VCs are looking at smaller deals and companies that have proven and viable customer bases.

The takeaway: Those seeking big payouts of yesteryear should reset their expectations, the VC's warned. "I think the classic VC model is broken," said First Round Capital founder and partner Howard Morgan

"The mathematics are simple; if you raised a billion dollar fund and you wanted it to return 20 percent, you needed to return $3 billion. If you own 20 percent of your companies that exit, you needed to create $15 billion worth of market cap. If you were in YouTube and Skype and MySpace and a few others, you may be halfway there. That part is broken. What's not broken is that companies need capital."

Vytas Kislieulius, CEO of Collections Marketing Center, a software-as-a-service startup that runs a collections exchange and describes himself as a "serial entrepreneur," said it is important to be realistic when making your case to potential investors these days.

"I have never been one to believe that the investors are here for my benefit but for our benefit. If I make it good for them they'll make it good for me," Kislieulius said. “If I can't make it good enough for both of us, I know who’s going to win. It's not me. That's the way the deal works."

That also means startups should go to investors with a solid business case. "There's less willingness to let it ride now than there used to be," Kislieulius said. "It takes so much more proof that there's a real market and that there's real customers."

Finally, he warns, those seeking funds should scope out potential investors carefully. "You have to choose them as carefully as they choose you because if you just take the money and it's a mismatch, it's brutal, I can promise you that."

Have you reached out to the venture community for funding? Or are you seeking alternative forms of funding your business? Drop me a line at [email protected] and follow me on Twitter @JeffreySchwartz.

Posted by Jeffrey Schwartz on March 31, 2010