October 8, 2015
The world of venture capital saw the bucking of trends in 2014. Geographically, companies across 47 states and D.C. received funding, which is one less than the all-time record. The average deal was much larger than in previous years, but the number of deals remained around the same.
2014 saw Uber raise $2.4 billion, which was basically unheard of in venture capital. It showed a new trend emerging where companies raise more money and over a longer period of time before going public. Another new(ish) trend, was in biotech. The majority of venture-backed companies going to IPO in 2014 were in biotech.
Back in April 14, 2015, the Deloitte Technology Venture Center (TVC) hosted a Venture Capital Panel. The panel was moderated by John Taylor of National Venture Capital Association. The panel consisted of experienced VCs Jonathan Perl of Boulder Ventures, Julia Taxin of Grotech Ventures, and Jason Tagler of Camden Partners. The panelists were able to impart combined decades of wisdom on the audience who had come to hear all about what makes a VC tick, and most importantly, what makes a VC invest.
Taylor started out by asking the hard-hitting questions such as, what technological devices the panelists personally use (the panel was exclusively Apple users) and what devices they see themselves carrying around in 18 months (answer: the same Apple products, with the possible addition of an Apple Watch). He also asked them what kinds of publications they read on a regular basis. The answers varied–Washington Post, Wired, TechCrunch, PE Hub, PitchBook.
But the questions the audience came to hear were the ones about how to get a VC’s ear, what kinds of companies are they most interested in, and, since there are so many ways to get funded these days, is there a correct progression of financing?
VCs are more interested in the team than the product.
All of the panelists agreed that the people behind the company, particularly the managerial team, were more important than what the company actually did. Taxin mentioned that deals were most often made with teams whom they had followed for years and gotten to know and trust. Perl quoted an older member at his firm who was known for saying ” “If we’re right about the management and right about the market, we’re going to make money.”
However, Tagler added, that aside from the team, if he were to look at the most recent deals in his portfolio, and what set them apart from the companies that didn’t get deals, it would be the companies that offered the easiest to use software. Those that had disruptive platforms and easier end user products.
Is it realistic for two people with a dog and an idea to go to a VC firm and get funded?
What this question is really asking is: What does it take? Can an entrepreneur walk into a VC firm with as little as an idea in her brain and a boatload of charm and walk out with an investment? In short, the answer is no. For the most part, the panelists agreed that venture capital should not be an entrepreneur’s first, last, and only source of funding. There should be a progression of financing that starts with bootstrapping and friends and family money, then maybe an angel or two gets involved, before a founder even considers going the VC route.
“At Grotech we do see a lot of companies that are pretty early when they come to us. And a lot of the times too early.” Said Taxin, “So what we like to do is build that relationship, give them advice–as much advice as we possibly can at that stage–and introduce them to local angels here in the local DC, Virginia, Maryland area and encourage them to either raise friends and family money, raise from Angels, then we like to stay in touch with them along the way to track their progress.”
Tagler encourages young startups to be creative when it comes to funding. “I would encourage people, just in general to bootstrap, use other resources, use those economic development companies who are quasi-investing, but they’re not investing in the way that equity investors are which is a very expensive form of capital.”
Crowdfunding is really only smart for certain kinds of businesses.
The panelists agreed that only certain kinds of businesses seem to have success with crowdfunding platforms like Kickstarter. Perl noted that there are several examples of very successful companies who started out crowdfunding, most notably Oculus VR, the virtual reality company that ran a successful Kickstarter campaign in 2012 and was acquired by Facebook for $2 billion just two years later. But Perl also says that “the bulk of the bell curve on crowdfunded deals won’t work out.”
Taxin has a similar opinion in that crowdfunding really only makes sense for B-to-C companies. It allows them to discover trends, test the market, and determine the popularity of their product. It’s not a funding model that really applies to B-to-B companies.
What’s the absolute best way to get in your door?
The panel was in consensus on this one. The best way to get a VC’s uninterrupted attention is to have a personal introduction or recommendation. Tagler says the new companies he takes the most seriously are those that are introduced to him by companies already in his portfolio. It means they have already been vetted. Getting an introduction by someone the VC already respects and trusts is the best way to get a meeting.
What about the role of advisors in helping a company get funding? Taxin remarked that she’ll take a second look at a company if an advisor is also an investor. So often advisors are in name only, and don’t have much of an advisory role at all.
The key take aways from the VC panel
- Get an introduction to a VC if you want to be taken seriously.
- Find creative ways of financing your venture. VC shouldn’t be the be all and end all of your funding strategy.
- The people in the company are more important than the product. A great team can get you far.
This article has been brought to you in partnership with Deloitte Technology Venture Center.
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