Are You Venture Capital Fundable?

October 4, 2011

1:00 pm

Are you ready to take your company to the next level? Is it time to go get some of that easy flowing venture capital cash?

Most of the time the answer is a simple “nope.”  A company must be the right type of company at the right stage of their development at the right time in the market to be VC fundable.

5 Business Traits That Make It Difficult To Get Funded

1. Leverage-bility – The business has very little margin leverage due to high variable costs and/or high cost of goods (COGs), resulting in low gross margins that don’t ramp up with volume. VCs love leverage-able financials.  COGs that represent single digit percentage of the average selling price are very attractive.  Single digit gross margins aren’t.

2. High Ticket, Long Sales Cycles, Highly Regulated – VCs would like to wind down and distribute their funds in 7 – 10 year cycles.  If you have a highly regulated and/or long sales cycle of very expensive products, your business is going to be difficult for VCs with a 7 year time horizon to fund.  For instance, a construction business with a long, regulated permit process and long sales cycles and delivery times can be a great business…just not a VC-fundable business.

3. Small Market – To quote Justin Timberlake playing Sean Parker in the movie The Social Network, “A million dollars isn’t cool. You know what’s cool? A billion dollars.”  To VCs a $100 million dollar market isn’t cool.

4. Little to No Secret Sauce – Secret sauce does not have to be about patents – Starbucks was venture funded.  While anyone can – and many have tried – to compete in the coffeehouse space, no one has successfully duplicated Starbucks’ secret sauce culture.  Starbucks employees, customers, unpaid actors decorating the stores, and passion for excellence in product all combine to create a barrier to entry that even Peet’s Coffee can’t beat with their better coffee.  Anyone want to go to McDonald’s to read their Kindle or surf the web?  You get the idea.

5. You and Your Team – You don’t necessarily have to have done it before, but if you haven’t, you need to have some of the following traits: a) the right education from Harvard, MIT, Stanford, et al., b) experience with the right companies at an early stage of their development (Apple, Oracle, Microsoft, Google, Facebook, etc.), c)  intelligence displayed in a well thought out plan, d) uniquely unequaled subject matter expertise, e) gravitas – how well you speak, present, fill a space, convey your vision.  In other words, are you Steve Jobs?

Here’s the thing: when you look at that list and critically assess your position, are you truly able to address these traits?

There are many great businesses that weren’t venture funded, and there are many entrepreneurs who have carved out meaningful, lucrative careers as sole proprietors.  I envy many of my clients who have built large, profitable, and revenue-producing businesses without the need to seek outside funding.  Many of them have built great lifestyle businesses that produce substantial, sustainable, growing, and dependable income.  They have businesses that can be passed on to their children, sold to employees, or managed by hired-gun executives while the owners go bonefishing in Bonaire with the VCs who wouldn’t fund them.

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Glen Hellman (@glehel), is an angel investor, serial entrepreneur, and works for venture capitalists as a turn-around specialist. He is the Chief Entrepreneureator at Driven Forward LLC, frequently muses on his blog, Forward Thinking, and works with entrepreneurs to help them figure out what to do and get them to do it.

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