Making the VC cut

“ You are not VC ready “ – Startup founders often get this baffling censure from VCs ( or worse, none at all ) after they submit their Business Plan. At times, it gets on founders’ nerves and infuriates them no end. Founders like to say “ hey, now what…? We’ve developed a bug-free prototype, been thro an extensive beta,  got a brilliant team of people to work, a tried and tested mentor,  set of high quality advisers and what the hell, we’re  into year two with a good set of paying customers too…what more do you expect from us …a Microsoft rolled back in time ? ” 

Where the hell does it suck…?

I am letting you in on some inside metrics.  Too bad if you’ve tried this already.  

Uptight with strap :  Burn less capital to finance overhead before generating revenues. In other words, suck cash only if it makes revenues grow.  Stick with Top Ramen noodles for lunch, Sushi can wait. 

Burn rate is usually quoted in terms of cash spent per month.  It’s bad if the burn rate begins to exceed forecasts or revenue fails to meet expectations. The usual recourse is to reduce the burn rate by reducing overhead or by looking at ways to improve profit margins.  

Lead earnings : Companies with high operating leverage ( lower cost of incremental sales ) can make more money from each additional sale if they don’t have to increase costs to produce more sales. The minute business picks up, your assets as well as existing workers can do a whole lot more without adding to costs. Profit margins expand and earnings soar faster than revenues. ( imagine Consumer internet like travel portals, online DVD rentals etc.) So get your business to recover its fixed costs early and keep adding to the bottomline with every additional sale. This can be achieved by keeping the initial development costs low by scheduling a faster go-to-market. Secret here is to quick-brand staged product development and serializing it.  Features can be added later  which can be released as V 2.0 followed by V 3.0 etc. Take a leaf from Google and Microsoft who are masters at it. 

Strong tailwinds :  VCs have a commitment to the investors ( limited partners ) in their funds for realizing a rate of return well in excess of the market average. VCs rankings go up if they could achieve their ROI targets fast and return the money to the investors early enough.  As such, VCs prefer to lock-in $$ for as short a duration as possible. Closer your venture is to a liquidity event ( like IPO, buyout, M&A ),  more attractive it is to the VCs.  You stand a better chance of getting noticed by acquirers ( or lapped up by investors ) if your venture is highly scalable with the momentum provided by the VC money. Sooner you position yourself in the eye of the acquisition storm to get swept by it, the better.  Approach the VCs with a clear roadmap for them to exit quickly thro such events and get invited to dance. 

Be the current flavor : VCs are paranoid by nature and fear to tread alone. They prefer to move in herds.  If your venture belongs to a sector which is currently funded by some VC, you stand a fair chance unless you screw it up hopelessly. So belong to the sector which is the current flavor. Conversely, time your approach to VCs as soon as your competitor got funded. Technology / Internet / Semiconductor wave of the 90’s, followed by Biotech and Clean Energy wave are all examples you can relate here.   

Suck up to a dud : This is sure to work. Just be a bit charitable. If you know of any dud among the VC portfolio that could be useful to your early development efforts, it’s a great favor that you’re doing to him.  There are quite a few in almost every VC portfolio. Seeing an opportunity to recoup his dead investment in the dud, VC will make the dud offer everything it has including its IP for a song. So while you zoom in on a VC to pitch, remember to scan its portfolio for complementary duds. Better still, find a dud to build your idea upon. VCs are quick on the uptake,  just tell him the story nicely.  He wouldn’t miss it.  If he’s desperate enough,  you might even escape from draconian  multi-x liquidity preferences or anti dilution clauses in the term sheet.


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