Fund me...please?

Raising venture capital these days is far more different than it was even a couple of years ago. Entrepreneurs are faced with a different reality nowadays as an incredibly large number of venture capital firms are not spending very much money.

	VC secrets: How to get funding Robert von Goeben, managing director, Starter Fluid ="" onclick="window.open('http://www.cnet.com/radio/radio_load.html?showType=ondmd,sid=nws,asset=0408fluid','radioplayer','toolbar=no,location=no,directories=no,status=no,top=no,scrollbars=no,resizable=no,width=295,height=175,left=200,screenX=200,top=100,screenY=100');" rel="follow" target="_self">Play clip

What's more, it seems, every day brings news of some firm announcing a fund reduction, a restructuring or an outright closure.

On top of everything else, the venture capital industry does a particularly bad job communicating its investment criteria to entrepreneurs. As a result, there is now a plethora of funds with almost identical market messages--"early stage, value-added information technology funds."

But in reality, there exists a wide disparity in the structures, economics and expertise of venture capital funds. So faced with a confusing, tight-fisted capital market, what's an entrepreneur to do?

Know thyself
The current economics in the venture capital industry mean that many deals are structured to meet the needs of the VC, not the entrepreneur. That's not a good thing.

I sometimes ask companies to plot out their expected customer and product milestones on a timeline and overlay the chart with the projected burn rate. From this, entrepreneurs should be able to determine how much funding they need before they need to raise more financing, reach profitability, or go public.

Unfortunately, most entrepreneurs get this wrong. I see lots of plans where the companies are destined to run out of money. Know your capital needs intimately before going out to raise money.

The current economics in the venture capital industry mean that many deals are structured to meet the needs of the VC, not the entrepreneur.

Navigating the VC market can be confusing, so finding a firm that fits means you first need to do a lot of homework. What are the last five deals done by the VC? How much did they invest? Are they telling you they want to do your $1 million deal while the last five were $10 million deals? Or is it vice versa?

Carpet-bombing VCs with your plan runs the risk of winding up with a mismatch. Some VC firms are simply better than others at funding different stages of a company's development. Pitching a later-stage VC too early blows valuable political capital and introductions. It also creates the psychological "I've seen that deal" tone. The converse--pitching early-stage players in later rounds--is a waste of time that makes seed VCs wonder, "If this is such a good deal, why am I seeing it?" Remember, VCs gossip about each other.

Due diligence
It may seem silly in this spendthrift environment to suggest that entrepreneurs check up on moneyed venture capital firms. But trust me, this will become more important in coming years as the VC industry shakes out. An entrepreneur's relationship with a VC extends far beyond the initial investment.

Follow-on support (and funding) is also very important. Of course, there will always be a core group of blue-chip firms that need no investigation. As for the rest of the bunch, it never hurts to check out a firm's investors and portfolio companies--and maybe even speak to one or two of them.

It's become common to find entrepreneurs wasting precious time and attention as they spin their wheels trying to raise money.

It's become common to find entrepreneurs wasting precious time and attention as they spin their wheels trying to raise money. Uncertainties about the industry and changes in the relationship between buyers and sellers have combined to create a lack of urgency among VCs. The upshot: Lots of tire kickers are out there these days.

Entrepreneurs wind up making a big mistake by not knowing when their fund-raising is not working. Capital is very efficient. If you operate a company that deserves to get funded, it will. If you've talked to ten VC firms and no one has invested, the chances are slim that firms 11 through 20 will bite.

The bottom line for entrepreneurs is to take control of the process. Get a lot of advice up front, then light out with a super-solid capital plan and a targeted list of prospective investors. Hit the market hard but don't be afraid to retrench if things bog down. The best way for entrepreneurs to mitigate the gyrations of the VC industry is by controlling their own destiny.