Ted On Flash: Venture capital 101

Venture capital 101

DIGG IT! 16 Comments Published Tuesday, October 31, 2006 at 8:34 PM .

With the creation of the Adobe $100 Million dollar venture fund, there are a lot of questions about venture capital within the development community. I have been around the block with start-ups (4 times) and venture capital (2 times) and there are some important things everyone needs to know.

DISCLAIMER - I work for Adobe but I do not have any involvement in the venture fund. This post is based on my own experience in venture capital and the start-up process.

Plan, Plan, Plan!
You must have a business plan, period. No VC is going to give money without a plan, not one cent. Investors need to see a business plan to judge an investment in terms of quality. No plan, no money.

Test your plan!
Your business plan will be scrutinized in every detail from every angle by many people. If you do not explore the plan and test it in detail, you are toast.

60 Second Rule!
The plan needs to be simple, easy to communicate, and easy to understand. If you cannot communicate the plan in 60 seconds with 1 presentation slide, you are toast.

NDA, NDA, NDA!!!
Get an NDA signed in advance of talking about anything. Fail to do this and you are toast. This NDA item was on the line. I use an NDA but many VCs will never sign them. In hindsight, striking this one is advisable.

Focus on "What" not "How"
"How" will change but "what" (your goals/objective) will not. Whether the business delivers using Apollo or Mobile or AJAX is unimportant when compared to the value you are going to provide. If you are building a mouse trap, first you need to decide "what" you are going to catch, "how" your particular business works comes later.

WAG, WAG, WAG!
Make sure that you take into account all inputs and outputs of the business. Do your best to identify all inputs/outputs in terms of time, money, ip, and people. When you are unsure about an area, insert a WAG, or Wild Ass Guess. Adding WAGs into your business plan is smart because it accounts for the unknown. There are 1000s of unknowns in a new business and if you do not account for them, you will not have enough money and resources when it matters most.

Asking for more!
Unless you have accomplished your goals with money received, do not ask for more. If you fail to accomplish your goals with funding asking for more is a brutal. If you take funding, you need to know that you can deliver 150% of what you promise. Fail to deliver and asking for more will cost you an arm and a leg.

Demo First!
Failure to have a working demo is a mistake. You need to have a working demo or a complete product ready. If you are looking for first round money, you will be taken to the cleaners without something working. VCs like to avoid risk, if you have a working application, your venture is far less risky in their eyes. Having something working means you understand the problem well and that you have thought deeply about solutions. A demo is worth 10000 words.

Make sure you need the money!
If you ask for VC money make sure you need it. For every dollar you receive you will be giving up ownership and control of the business. VC money is not free and comes with a price in terms of equity control. The flip side of this argument is that funding adds tremendous value and capability to a venture. Just make sure when you decide you need funding that you in really need it.

Early money, larger bite!
The earlier you get funding in a venture, the larger equity stake the investment will take. The driver here is investment risk. Early money takes a much larger risk than late money and thus typically gets a larger stake. In many cases, the first money is the most important because it established a base value of the business investment-wise. Say you take $1M dollars for 25% of the company, investment-wise the company is worth $4M based on the investment. Assume you take $10M in a second round for 10%, the company investment-wise is now worth $100M based on the 2nd round investment. $4M to $100M is a big jump in value yet the 2nd round got far less of the company than the 1st round did. The key is that the first round was far riskier than the 2nd round for the investors.

Exit Strategy
Create 3 exit strategies for your business. VCs will evaluate your business on its ability to return the investment or exit. If it doesn't have a viable exit in being sold, going public, or profits then your business will be viewed as less desirable. Show the ability to exit well and you are golden!

Be a First Mover!
Have an original idea and be a first mover. These ventures get funding. The only exception is when you have a delivery model that is dramatically better than what exists. VCs look for ideas that are hard to duplicate and are defensive in the marketplace. If you do not present something original or something better you will have little hope of getting funding.

There will be a lot of companies created to develop Apollo based applications. If you are serious about wanting to create a company around Apollo do this first:

1. Create a Plan.
2. Create the killer application/demo.
3. ~~Get a high quality NDA.~~
4. Create a 3 Slide presentation and a 60 second elevator pitch.
5. Pound the pavement shopping for funding.
6. Never give up, Take no prisoners!

The irony is that venture capitalists must find companies to invest in. They must fund businesses in order to grow returns for investors. If you have a great idea and have what it takes, there are investors ready to fund the next big thing.

Adobe has committed $100 Million to funding business around Apollo and is looking for investments. I strongly encourage everyone to get started today by creating a plan and getting started with Flex.

Cheers,

Ted :)

16 Responses to “Venture capital 101”

# jdowdell October 31, 2006 9:03 PM

Great stuff, Ted, thanks!
# Peter Bell October 31, 2006 9:26 PM

Hi Ted,

Some great advice, some less great advice (IMO - FWIW). I've started a number of companies and raised capital as the founder and CEO of a tech startup in the past.

(i) NDA - No competent VC will sign an NDA and asking them to is a major "clueless" factor. The fact is that no matter how amazing and unique you think your confabulator XX2.0 is, 20 other people are working on one now and if you don't know the names of one or two of them you'll be seen as doubly clueless. Unless you really are a rocket scientist or molecular biologist, it's execution and experience a VC will be backing - not your unique nobody ever thought of that before idea.

(ii) Exit Strategy - There clearly needs to be an exit strategy within the lifetime of the fund (typically 5-8 years)- no VC is looking for an annuity. That said, most companies won't have three credible exit strategies. Mention a credible exit strategy at the end of the pitch or in response to questions, but don't focus on it too much. VCs want someone who understand the importance of an exit strategy, but they also want someone who's building a business, not just a "play" so too much focus on exit can be counterproductive in the pitch.

(iii) Be a First Mover - Who cares? Fast followers with proven management will probably be given the resources to steamroller the first movers with a better concept and a weaker team and VC. It is nice to be ahead of the pack, but as long as you're not doing a web video start up now, you're fine. Rule of thumb: if you've read about a space, anywhere other than an obscure blog you've missed the window.

Just my 2c!
# Anonymous October 31, 2006 9:54 PM

I've never received VC but I've talked to a few... and they all seem to poopoo the idea of NDA's and first mover advantage. But I guess ymmv.
# Ted Patrick October 31, 2006 11:21 PM

Peter,

First Movers will be given funding to distance Fast Followers. The Fast Follower methodology seems to have worked for Microsoft, "Chase Taillights, never blaze headlights".

It all depends really.

Ted :)
# Brajeshwar November 1, 2006 1:35 AM

Good post and thanks for sharing it Btw, I would suggest that "Digg" button to bear the "Digg" button with this This Digg URL
# David Coletta November 1, 2006 2:16 AM

Great post. About the demo: I have recently learned the importance of the demo for VCs. And not just a demo that you can trot into their offices and show for them on their projector. We didn't get demo traction until we had a live site that they could play with themselves.

Another point is the importance of the founders' track records. If the founders are well known in the VC community, a lot of other criteria fall away. And vice versa, if they're not, then everything is harder.

At some point I made myself a rule of thumb that in order to feel sufficient comfort level, VCs need two of the following three things: 1) a great business plan; 2) proven track record; 3) live demo site.
# Ted Patrick November 1, 2006 2:31 AM

Brajeshwar,

Added the Digg API into my blog, it should be posting soon. Good catch.

Ted :)
# Ted Patrick November 1, 2006 2:35 AM

One item I forgot is maintaining a venture book. It is very helpful to maintain a book about your company. The book contains all key documents supporting the business cases along with any PR/Press the business receives. Over the life of a business in venture stages having this book is invaluable. For later rounds it provides context to early investment, pr, why things happened and major milestones. Think of it as a company scrapbook from day one and you got it.

ted :)
# Claus Wahlers November 1, 2006 7:24 AM

Re: "Demo First": It's a bit hard to have a working demo handy for technologies that only exist in alpha quality with significant features missing (which are crucial for the demo to work in the first place) ;)
# Anonymous November 1, 2006 10:53 AM

I've heard a lot about the vc fund, but haven't been able to find a link to get more information on how to submit a proposal?
# Vasiliy Nuzha November 13, 2006 9:41 AM

Dear Ted,

I am the Technical Director of Korax Pty.Ltd Company which specializes
in software solutions development. You appreciated in value the program
Korax Site Statistics (http://kss.korax.ru) we have worked out. Also we have planned multiple
functions and personal settings, which are leaving behind contemporary
rival�s analogues.

I would like to ask for the advice concerning the program. Does it worth
applying Korax Site Statistics program for the Adobe Venture Fund?

Highly appreciate your assistance,
Vasily Nuzha
# Sidney Strachan December 6, 2006 12:51 PM

Hi talk about great...

That is a great article. I am in the Bahamas and want to attract funding for a project based here. I understand your concept of a Business plan, but, would lenders get involved with an idea and fund from business plan and Due dilligence through to start-up?

How and where can I seek financing at about U.S.$2m for a venture which potentially pays of by the second year and almost doubles by the end of the second year?

It involves sand mining which is a very lucrative business with little to no competition here and produce an average annual return of $3m less $0.6m in annual expenses.

Thank you!
# Sidney Strachan December 6, 2006 12:52 PM

Hi talk about great...

That is a great article. I am in the Bahamas and want to attract funding for a project based here. I understand your concept of a Business plan, but, would lenders get involved with an idea and fund from business plan and Due dilligence through to start-up?

How and where can I seek financing at about U.S.$2m for a venture which potentially pays of by the second year and almost doubles by the end of the second year?

It involves sand mining which is a very lucrative business with little to no competition here and produce an average annual return of $3m less $0.6m in annual expenses.

Thank you!
# Anonymous December 6, 2006 12:53 PM

Hi talk about great...

That is a great article. I am in the Bahamas and want to attract funding for a project based here. I understand your concept of a Business plan, but, would lenders get involved with an idea and fund from business plan and Due dilligence through to start-up?

How and where can I seek financing at about U.S.$2m for a venture which potentially pays of by the second year and almost doubles by the end of the second year?

It involves sand mining which is a very lucrative business with little to no competition here and produce an average annual return of $3m less $0.6m in annual expenses.

Thank you!

info@arsmousike.com
# tony toh April 22, 2007 11:54 AM

i am looking for us$36 million to assist me to buy a majority stake in a mining land about 7200 hectare square in south mongolia. they are now in an exploration stage and already showed promising indicating results of deposit of us$300 million of gold which need further confirmation of its reserve, and we locate some copper belt in the land which we still do not know where it lead to. we beleive there are 2 possiblities, either in the ming land or outside the minging land. if it is outside, we need to buy more concession to expand the ming land. thanks. my email is bukitmimosa@yahoo.com
# Anonymous November 21, 2007 2:28 PM

All the posts has helped me tremendously. After meeting with VC, PE, & BANKS regarding our efforts to raise $55 million for our Entertainment venture, i have been told to buff-up my prospectus and add various elements: financial ratios & EXIT strategy. Any advice or templates that could help me. email: averbuch1984@yahoo.com

Ted Patrick - Demos & MAX @ Adobe Systems

Note: This is the personal blog of Ted Patrick. The opinions and statements voiced here are my own.

Venture capital 101

16 Responses to “Venture capital 101”

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