As published in West Chester County Business Journal,
December 2004
Are you ready to dance with a VC?
By Edwin A. Goodman
In the first of a monthly series of question-and-answer sessions with area venture capitalists, Edwin A. Goodman of Milestone Venture Partners in New York City, discusses when and how early-stage business owners should pursue venture capital, and what that pursuit will likely entail.
Goodman, a general partner with Milestone, co-founded the firm with a partner in 1999, after two years of moonlighting in his own private capital business. He previously spent 17 years as chief executive officer of the U.S. venture capital group of Hambros Bank. During a career spanning more than a quarter-century, Goodman made shrewd early stage investments in Apple Computer Co. and Staples Inc., before both grew into corporate giants. Goodman spoke last week with Business Journal editor in chief Alex Philippidis:
Q: Many entrepreneurs complain about VCs being unwilling to work with them. How true is that?
A: We are eager to make ourselves available to entrepreneurs. That's our life blood, so we promote our firm and try and attract entrepreneurs. We probably look at somewhere between 30 and 40 opportunities every month, and we go to various conferences and forums to find deals. The fact of the matter is, every firm has its criteria, but in the aggregate only 2 percent of firms that seek capital from the venture community actually get it because of the editing process that goes on. Some are not prepared to seek money.
Q: What are the most common reasons for rejection by VCs?
A: They don't have a decent plan. They don't have a large market. They don't have a good management team or hundreds of other reasons. Or in some cases, they may have all the ingredients necessary but they don't approach the right firm who has a strategy that meets their requirements.
Q: What do you mean by the "right" firm?
A: I like to use medicine as an analogy. There are podiatrists, gynecologists, brain surgeons, cardiologists. The same thing has happened in the financial community. So, if you don't do research and you have an early stage information technology company selling software to manufacturing companies and you go to a firm that specializes in biotechnology, early stage anti-cancer drugs, they're not going to even take a look at you. So you have to research to see that your strategy comports with the strategy of the venture firm from which you're seeking financing.
Q: What are some of the mistakes that early stage companies make when they approach a VC that they should avoid?
A: Fundamentally, one should have thought through one's business rather carefully, so that when you're asked questions, you can respond to them. It's always disconcerting to us if we ask an entrepreneur, "Do you have any competition?" and he says "absolutely not, we're the only game in town." It's usually not true. There usually is competition, maybe not a company doing exactly the same thing in the same way, but some company trying to solve the same problem in a somewhat different way, which is competition. It tells us either a) the entrepreneur is not being candid or b) really hasn't thought about their business and the competitive threats.
Another one is size of market. People use all sorts of outlandish numbers, "This is a $4 billion market. This is a $3 billion market." When you do the analysis and you actually break down what portion of the so-called market is actually paying for the kind of software or service or product that we sell each year, it's usually a much smaller number.
Q: How do you spot a phony?
A: I've been doing this a long time, about 30 years. One of my partners has got 33 years. So we've met thousands and thousands and thousands of people seeking capital. Your antennae are sharper. Since we specialize in certain areas, we know something about that market, we know something about who's selling what to whom in that market. And ultimately we perform due diligence. The presentation by the entrepreneur to the venture capitalist is just the first step in an attenuated process, something like a dance with many steps till you get to an actual funding. Somewhere along the way, we usually find out if we've been misled, either intentionally or unintentionally.
Q: Where should you turn to help find the right VC for your business? Venture groups? Other organizations?
A: Most entrepreneurs, if they think about it, too often they don't think about it, should ask themselves, "Who do I know that touches money as part of their daily work?" Accountants, lawyers, bankers, investment bankers, consultants. Those kinds of people are likely to know sources of venture capital, the venture capital professionals, because we cross paths frequently.
And even if you can't get to the perfect firm, if you can get to a firm and you create a favorable impression, a VC is more likely to send you along to someone who might be interested. That individual is getting an introduction. And once you get an introduction, your plan tends to be more thoughtfully received and more thoughtfully assessed. I think that's true in the world, generally. It's certainly true in the venture world.
Q: Once you see a VC, how long does it take to secure financing?
A: The entrepreneur always wants the money yesterday. The apocryphal tale in 1998 and '99, it wasn't always apocryphal, was that the entrepreneur would come into your office, he'd say, look, I'm worth $20 million, I'm raising $3 million, and I need an answer by Friday, cause I've got a lot of people lined up. That actually did go on. It's changed very much now.
A really attractive opportunity which has some competitive pressure on it amongst various firms, from the first meeting might get financed within 90 days. That would be fast. More typically, it's anywhere from six months to nine months. It can take up to a year and a half, with many, many meetings.
Q: What effect does the longer process have on the amount of capital a business owner will ultimately receive?
A: One thing that's true of human nature and it's true of venture capitalists, if we have more time to study a transaction, if our hand isn't forced by competitive pressure, or some other pressure, we'll take more time. Because as we take more time, we tend to learn more, and we tend to be able to reduce the risks.
People ask me what the venture business is, and I say it's essentially the business of investing money in companies with too little time and too little information. With a public company, you have all the information. It's all public. You have historical data and you can analyze it. You have various research. That's not true in the private equity market. You try to gain as much time as you can but learn as much as you can, in what is intrinsically an imperfect process.
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