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Entrepreneurs misreading VCs

Entrepreneurs are missing the mark when it comes to sizing up the way VCs find potential deals and how they determine a company's value, a recent survey suggests.

Entrepreneurs are largely missing the mark when it comes to sizing up the way venture capitalists find potential deals and how they determine a company's value, a recent survey suggests.

Of more than 100 entrepreneurs surveyed, 64 percent said they believed venture capitalists learned of new deals from consultants paid by companies to put their business plans forward, said Dee Power, co-author of "Inside Secrets to Venture Capital" and coordinator of the survey released this week.

"Entrepreneurs are constantly told you need a referral to have a VC look at your plan," Power said. "And when they think of referral, a paid intermediary comes to mind.

"There are some VCs who won't look at deals unless they are referred," she said, "but that usually means from people they know like other VCs, entrepreneurs, attorneys or tax advisers."

Of the more than 250 venture firms surveyed, 34 percent said the main way they learned of deals was through other venture firms that asked them to participate in a funding round.

Thirty percent of venture capitalists surveyed listed making direct contact with the entrepreneur as a close second. That is a stark contrast to the perception held by entrepreneurs. Only 20 percent listed direct contact as a viable way to get deals in front of VCs.

Power stressed that entrepreneurs need to network, saying that someone who heard their business idea could one day refer it to a VC during a casual conversation.

And although entrepreneurs and venture capitalists both ranked "quality of management" as the top criteria in setting a value for a company, the two groups are on different sides of the fence when ranking the other important issues.

Growth potential and barriers to entry tied for second by entrepreneurs, while venture capitalists ranked market size and a product's uniqueness as a second and third criteria, respectively.

"I was surprised by the product ranking," Power said. "Entrepreneurs are usually so enthusiastic about their products that I thought they'd give it a higher ranking than the VCs."