How the Venture Game Is Played

If you want to build a substantial company, you will have to jump these venture capital hurdles.
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For the past 20 years, I have been raising capital either for my own ventures or for my clients. I have run more than 20 start-ups, and I can tell you without question that the worst part of starting any company is raising capital. You have to be a masochist to want to go through the process.

Unfortunately, if you are looking to build a substantial company that you hope to sell for millions, either by being acquired or by going public, you will have to navigate the shark-infested waters of venture capital. Right now, the hair on the back of your neck is starting to stand up, but you are taking a few deep breaths and are thinking your blockbuster idea will make you millions.

OK, as they say at the amusement park before strapping you into the roller coaster, make sure you are physically fit and have no heart aliments, because when you get on this ride, your guts will be in more knots than a Philly soft pretzel. Here is the first set of hurdles you will have to manage:

  • Even in the booming market that we are experiencing right now, you have only a 0.6% chance of getting capital, according to the National Venture Capital Association.
  • You have to write a bulletproof business plan featuring a business model that has a significant competitive advantage, has the potential for patenting a process or technology and can scale quickly with few employees.
  • You need an experienced president whose name or resume causes people to become so giddy that they can't write the check fast enough. He or she should look as if they just stepped out of central casting for the part of company chief. He or she also should have 20 or more years of experience and the suaveness of the original James Bond.
  • Your blue-chip president needs to be surrounded by a great supporting cast that rivals his or her stature.
  • The head of sales should be a distant relative to Attila the Hun who wouldn't think twice about sacking any village. This person should have a contact database and access to clients that make closing a sale a layup.
  • The vice president of marketing should have developed and implemented strategies at household names such as Home Depot (HD) - Get Report or Coca-Cola (KO) - Get Report but should preferably have spent his or her formative years at Procter & Gamble (PG) - Get Report.
  • The head of technology should be a functioning idiot savant. She should have multiple degrees, should have worked for Microsoft (MSFT) - Get Report, Oracle (ORCL) - Get Report and Google (GOOG) - Get Report and should be able to build anything. This person should also have the charisma to get people to abandon their families to work 60 to 80 hours a week until the company is profitable.
  • The chief financial officer should look like George Clooney or Uma Thurman and have the financial skills of Warren Buffett. The CFO has to be able to convince investors that the numbers he has developed working with management are attainable and that he or she knows how to contain costs.
  • The advisory board typically comprises about five people, who should have white hair and look like they stepped down from Mount Olympus. They should have experience and contacts that reduce the chances of failure by a factor of 10.
  • You either have to know the guys who write the checks or know the guys who know the guys. This means hiring $500-an-hour lawyers from the best white-shoe firms in town, as well as partners of international accounting firms that have the venture boys on speed dial.

Now you strap on your armor and go into battle. Somehow, someway, you have finagled your way into the office of one of the high priests of venture capital. Wear your custom-made suit and tie, and make sure your shoes are shined so bright that you need sunglasses to look at them.

The first person you will meet is some geek who is a year or two out of one of the prestigious MBA programs, such as Wharton, Harvard or Stanford. He will be dressed in khakis with an open-collared shirt and holding a copy of your business plan. The geek is the first sentry you have to get by to have a shot at the emperor's gold.

The geek will ask you to tell him a story, and then the games begin.

My next column will walk you through what to say, the land mines to avoid and the magic incantations that your presentation should contain.

Marc Kramer is the author of five business books on topics related to venture capital, management and consulting. He is a faculty member at the Wharton School of Business at the University of Pennsylvania and the veteran of over 20 startups and four turnarounds.