The dirty secrets of venture capital

So this month, instead of writing about a subject of my choosing, I thought I'd let the market dictate the topic by addressing some of your questions.

Q: "I am an entrepreneur with a great idea, (a great) team and an awesome product. I have heard that raising money right now is close to impossible (especially with decent terms). How can I maximize the chances for success in my fund-raising endeavors?"

A: You are right; raising money right now is incredibly tough. But funding does still happen, and there are concrete steps you can take to increase your fundability. If I had to pick the one thing that would increase your odds of getting funded, it would be building the right team. In the eyes of a venture capitalist, nothing is more important than the people they back. I suggest you spend most of your time upfront getting the right people in the company.

And I mean the right people. Look at everyone on the team with an incredibly harsh eye--even yourself. If anyone in senior management doesn't have deep domain expertise in your field, consider replacing them. The good news is that there are tons of qualified people out there looking for projects. The bad news is that there are a lot of sub-par people kicking around as well. Go for quality, be harsh and scrutinize candidates. Build a rock-star team, because in this market, nothing less will get VC funding.

Q: Sending a business plan to a VC is fine, but I communicate my ideas better in person. What is the best way to talk to a VC personally about these ideas?

A: Don't even bother. Unless you know a VC personally, the chance of getting them on the phone and pitching them, before they have had a chance to look over some kind of summary, is zero. Despite the fact that most VCs have this pseudo "open-door policy," realize the levels of defense around investors are quite deep. This makes sense when you think about how many people are going after them for money, especially in this market. Pushing for "just a few minutes on the phone" sends a bad sign to an investor that you're not willing to play the game. In the end, don't count on the personal connection until you've gotten an investor's interest by other means.

Your best bet is still hitting the VC with a well-honed executive summary. An entrepreneur should network hard to find someone "on the inside" who can personally introduce the company to investors. You have probably read a million times about what should go into such a summary, but it bears repeating. Here are the big four that I look for: team, what you do and what space you are in (put yourself in a bucket), how you make money, your unfair advantage and your funding plans.

Q: How do we find funds that might want to invest in a company at our stage of development and in our space?

A: On the surface, you would think that the right investor would be easy to find. All venture capitalists (and some angel investors) have Web sites that spell out investment criteria. That said, one of the biggest mistakes entrepreneurs make is not doing their homework. I get a ton of e-mail from people pitching me on a company that clearly does not fit the criteria spelled out on our Web site. Rule No. 1: Read the VC's Web site.

But for all the information that's available, entrepreneurs are still often stopped at the gate by a VC response like "We don't invest in your sector," or "Your company is too early for us." How does an entrepreneur know what a VC wants these days? The dirty secret is that VC requirements change more often than their Web site (for example, many VCs are investing in later stages these days due to greater risk aversion). So the nuances of VC criteria are tricky to determine.

The best way to find out about a firm is to get some "underground" intelligence on them from people who know them. My seed-stage companies always go out for more funding, so, more than anyone, I have to find the right investors to send them to. Before I ever send a deal to a VC, I try to find someone who has done business with them. In the end, when you do find a fund that looks like a fit, you will still need a personal introduction to get in the door. These personal connections are all VCs care about; without them you'll get nowhere.

Q: I have been smitten by the desire to be a successful VC, come hell or high water. Any suggestions on getting into the business?

A: In today's turbulent times, venture capital might appear to be a good alternative to a staid corporate position or a volatile start-up job. VCs, people say, have large amounts of committed capital, a long time frame to demonstrate results, a small company atmosphere and lots of prestige (well, maybe a little less these days). Sounds like a sweet gig, right?

Well, maybe. First, a few questions: Do you like switching hats multiple times per day and dealing with different companies, or do you want to devote yourself to one project? Are you OK letting an entrepreneur run their business, or would that frustrate you? Can you tolerate an environment that requires consensus among a small group of ego-driven partners, or would you function better in a system with a little more of a decision-making process and hierarchy? The real question is "How do you want to spend your day?"

But being a VC is a lot more than "king making" companies with money. It's really hard work that requires a deep understanding of financial markets, product technology and a broad business network. This is why so many wannabes are being flushed out of the industry.

Three-step plan
If, after a bit of navel gazing, you decide you do want to jump into venture capital, here are three paths to take:

1. Get an entry-level associate position, get handed all the grunt work, toil long hours for little pay and claw your way up (difficult to get and still requires you to go get operating experience to make partner).

2. Leverage your many years of experience and connections to the VC community by getting a VC you know to bring you into the firm (few people really have the background and connections to pull this off).

3. Start your own firm or join one that is just getting started (I got in by joining a new firm, but that was in 1996 when there were less firms. Today, it's much harder to start a fund).

But, to be honest, there are very few openings in the business. One of the few things VCs do right is keep their head count to a minimum (mainly to maximize the fees that each partner receives). For example, right now we are not hiring, and I don't know of any openings at firms I do business with.

The bottom line is that venture capital is, for the most part, a very crowded field. Unless you are a total rock star with amazing operating credentials, breaking in these days is tough. I predict the venture capital industry will shrink considerably in the next five years, and VCs who do not perform will most likely be back out on the market competing with you for non-VC jobs.