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From time to time, the venture capital industry goes under the public microscope. The huge dotcom-driven profits that VC funds have achieved over the past few years have led to a spate of articles and news commentaries about how VCs operate, the ratio of reward to added value, future opportunities, and emerging business models. Those outside the industry might want to know how these folks assess their public image. Not of a shy breed, each of three prominent VCs describes, in his own words, what he thinks is a big myth about venture capital.
The Money is Easy
Tim Draper, founder and managing director of Draper Fisher Jurvetson:
Venture capital goes out to one in every 100 entrepreneurs. It is not easy to get that first $5 million from a venture capitalist, and it is not easy to build a billion-dollar market cap company once you have the startup money. The people who do are heroes.
Most entrepreneurs who get funding from us have worked out their business model with customers, competitors, consumers, vendors, and other relevant parties. They have scratched and clawed for the angel money to get them started. They have often pitched as many as 20 (or even 100) other venture capitalists, advisors, and friends, testing it, improving it, brainstorming it, and beating it up until it is ready for prime time. They are more likely to get funding if they are in business rather than dreaming about a concept (“When we get funding, we will…” rather than, “If we were to get funding, we would…”).
Luck, of course, is a major factor in every enterprise, but the more I see the more I believe that these successful entrepreneurs make their own luck. They do everything in their power to create the future they envision. They adapt well, anticipating market changes and acting accordingly. Bill Gates and all those like him are heroes.
All Venture Capitalists Are the Same
Bill Davidow, founder of Mohr, Davidow Ventures:
Outsiders appear to think that all venture capitalists are the same. Nothing could be further from the truth…even among firms that use similar words to describe themselves. In the first place, most firms are focused on industries or segments within industries. For example, at Mohr, Davidow Ventures we focus on information technology, networking, and semiconductors. Within the IT space most of our investing is done in companies related to the Internet, but…our Internet investments are concentrated in the business-to-business space and services related to it.
Some venture firms differentiate themselves by the stage at which they invest. The most common classifications are seed, early stage, expansion, later stage, and mezzanine. Most later-stage and mezzanine investors are passive as are many of the ones in earlier stages…. We happen to be very active and provide a great deal of operating support. We can do this because most of our partners have operating backgrounds. Others who are active investors but who lack operating experience usually can’t provide the same type of help.
There are many other ways venture firms differ, but the key point is that few venture firms are really very similar when you scratch the surface. That is why boutique firms do quite well competing with the giants.
You Must Sell to a Venture Capitalist
Lucio Lanza, general partner of U.S. Venture Partners:
When you deal with a venture capitalist, you are not a seller. You are a buyer. What you are looking to buy is intelligence—that’s the added value. At first blush, money might look like what the fuss should be about, but it isn’t really. An entrepreneur can get money in lots of places. It’s fungible. And it isn’t necessarily contacts, access, and having someone open doors. After all, it is likely that the people who will be important tomorrow aren’t the people who are important today.
So you should really be a discriminating shopper, trying to decide who has the business understanding that should be the foundation of the relationship. In practical terms, that means you should spend a lot more time listening than talking. You should listen to the kinds of questions the VC asks — they will tell you how this individual reads the world. You should also note the questions the VC doesn’t ask — for the same reason. You will want to know who can help animate your business model. You will have to decide who can best appreciate the dynamics of your opportunity and which partner in the firm would be the best fit for the board. Ultimately, you will have to answer affirmatively whether, if this person were not on your board and did not invest in your company, you would still seek his or her advice.
Nicholas Imparato (imparato@hoover.stanford.edu) is a professor of marketing at the University of San Francisco, the author of the forthcoming Public Policy and the Internet (Hoover Institution Press) and chairman of PrimeWave Solutions.
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