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Raising Venture Capital - Let's Be Realistic

Oct 18, 2007
I do not mean to discourage you entrepreneurs in your quest to launch the next Big Thing. Many of you look at your path as write a compelling business plan, make a few presentations to the well-known venture firms, get $3 million for 5% of your company pre revenue, and launch. Product development progresses without a hitch, you hit all of your milestones, you get a second round at an even more favorable valuation, and you land the big high-profile account. Two years later, you do an IPO with a market cap of $350 million. Fast forward another two years and you are the subject of a bidding war between Microsoft, Google, and Interactive Corp. You finally agree to a buy-out at $3 billion. Life is good.

Wow, that was easy. Unfortunately that is one in 10 million. I was listening to CNBC this morning and they were reporting on a new test developed by a Stanford PHD that would identify people two to six years in advance of developing Alzheimer's Disease. This is an ideal venture play - huge potential market, company founder with great credibility, and a great way to reduce future health care costs. On the surface this would seem like the sure fire bet for the venture guys, but the CNBC reporter said they were having trouble raising venture capital. What a shock.

If this company is having trouble, think about the battle you face. Because no one has a crystal ball, seven out of ten venture investments totally fail. With that backdrop, venture capital investors look to achieve a thirty times return on their investment in three years. Many potentially successful companies fail to achieve the promise of their great idea because they get caught up in the venture trap. They are passionate about their idea and believe that it will become the next big success story. They tend to be very optimistic which is essential for one that takes the kind of risks that a start-up requires. Their biggest flaw is that they focus way too much of their efforts on the venture dance. Endless meetings and presentations followed by delays and more presentations to other members of the same venture teams.

There are other alternatives. How about a strategic alliance with a bigger company in your industry? What about a licensing deal with a big player? Can a value added reseller play a role for you? What about an outsourced sales effort? Should you sell your company? If you do have a great idea and are meeting an important market need, it is likely that there are other companies out there that have the same or very similar solutions. In today's business environment that translates into a very limited window of opportunity to achieve scale. You are on the clock to achieve scale before your funds run out or before a well funded competitor simply captures your market.

Venture is very glamorous, but do not be myopic in your approach to cashing out on your big idea. There are several very important alternatives including building a solid, profitable small company under the radar and then raising venture to achieve scale and take it to the next level.
About the Author
Dave Kauppi is a Merger and Acquisition Advisor and President of MidMarket Capital, representing owners in the sale of privately held businesses. We provide Wall Street style investment banking services to lower mid market companies at a size appropriate fee structure.
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