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Cover Story Venture Capital Primer: Peeking Behind the Funding Curtain By Don Hamilton (
wiz@wwwiz.com) The World Wide Web is full of people who need money and people who are desperate to provide it. Funding these days can happen within four or five days even from a Venture Capital firm. The process seems easy for some and hard for others. Many of the VC firms are racing to put money into play before someone else gets the company that's the target of their interest. They have funds they want to invest–sitting on the money will not increase its value. Say you are the entrepreneur who wants them to invest. You must convince investors to pick your project over hundreds if not thousands of other choices. How do you stand out? Many firms don't even have time to call back and say they are not interested. Think about it; if you were a VC and you had a hundred ideas on your desk, how long would you take to go through them? Many times it's only a quick glance and then it gets tossed in the dead on arrival pile. The art of selling your project is no different
than putting together a resume. It has to grab the person within the first few lines or it'll be in the discard heap and your intended target investor will not have even glanced at it. How do you
connect to the Venture Capital firm or the company that might invest? A lot of deals are made the old fashioned way: someone knows someone. But if you don't know someone connected, you are not automatically out in the cold. There
are law firms, banks and others who deal with VC firms on a regular basis; they have contact and you can take advantage of that if you use their firm. You may be doing business with a company that has interest in your success. If
it could benefit from your success, it might be your connection to Venture money and be willing to put funds into your company. Yong Su Kim of Oracle Corporation handles Oracle's investments. He said Oracle will not generally
invest unless a VC firm takes the lead. If a company such as Oracle is interested in your company, it might help you get a VC firm to the table. You will need to find out what kind of investments the company you approach makes and
what rules it follows that might not allow it to invest in your company. For example Oracle will not invest in some opportunities because it doesn't want other customers to think that Oracle is competing with them. Oracle is not
the only company that invests in projects and companies that they did not invent. At the end of this article is a list of contacts with companies you can look to as possible partners. They generally don't want to own a very big
piece of your business but might be willing to put up a significant amount of money. More Venture Capital money was invested in 1999 than ever before. The In 1994 VC firms
invested approximately $5 billion. By 1996 that number had more than doubled and by 1998 it was running close to double again. In 1999, a single year, it jumped from about $20 billion to almost $50 billion. That doesn't make it
easy to get investment money. But it does mean is that you can find money if you work hard, are lucky and/or know the right people. Venture Capital firms are actually pools of capital organized as limited
partnerships and they invest in companies with one motivation: a high rate of return to the investors in the pool within five to seven years of the initial investment. They are not just passive investors. They often get involved
in the management and marketing of the company. Generally their involvement is on the strategic side. In the early 1970s when the first Venture Capitalists were starting to invest, the firms were often merely a single wealthy
individual. Today teams of partners–from seven, eight or as many as 100–dominate the field. A single investor is generally referred to as an angel investor and gives a small amount of money early in a company's life cycle. (see
PricewaterhouseCoopers VCs sometimes specialize in certain types of investments such as Internet related, software or medical. Some are early-stage investors and others will
invest at any phase of a company's life cycle. The length of time will depend on the liquidity required to meet their goals, which will also drive the timing of the life cycle investment. Some companies work with other companies
for shared risk and supporting synergies. Most firms invest their capital through a limited partnership. Some are subsidiaries of corporations that are making investments on behalf of the parent itself. Corporate
Venture can come in the form of an office within the company that looks at opportunities to invest in technologies that support overall growth and investments or with companies that the company does business with already. Sometimes
it is with a company that will help spread or grow the requirement for the company's main product. At the end of this report is a list of some of the companies and contacts that do this sort of investing. Most VC
firms do not have or offer opportunities for small investors because they are long term, high risk and have no liquidity (or very little). They generally require large investments, which come The VC firm gets out of the company
and collects its money when one of several things happens. Either the firm does an IPO, is acquired or merges with another company. IPO is not the most common exit. If you are the founder or part of the management of
one of these companies, you can look to others who have had similar experiences such as a story in the December issue of WWWiz called
The truth of course is there is no way to determine which companies will make it big and which won't and VC firms know it. Once they get a few successes behind them they start to think they
know what to look for, but when .com stops being an automatic draw for money some of the VCs will find themselves in the ``not be as good as they thought" category. The recent past and the near future will be seen by historians as
a magic period and ranked with other revolutions. Investing will return to normal levels of expectation. There is a full revolution going on here and VC firms are the conduits that feed fuel to the growth machine of change. To
be fair VCs are overwhelmed with people trying to get to them. Rick Smith, managing director of SunAmerica Ventures, said when referring to sitting on proposals ``just a few month ago I wasn't a bad guy but now I ignore requests
and don't even respond back." Even if you get through and get noticed, there is another level of problems. A lot of deals break down in the negotiation of the valuation. Smith said a lot of people looking for money are too
concerned with valuation. ``If they are offering you money and the valuation is off by 20%," he said, ``just take the money; it's not that important." Smith believes that one of the most important things you can do is work on your
executive summary. He says it should be brief and concise. I got firsthand confirmation of this the other day when I sat in on the funding of a small company. The company had a business plan that had been tested and failed
, but the summary and story were so good and the business owner knew people who knew the investor and had recommended investing in the project. The result was an agreement to fund the company before lunch was over. The only
argument was centered on how much of the company would be exchanged for how much money. The investor in this case was an angel investor. California is the Mecca of VC money. Half of all the money going into VCs is in California.
See this extensive list of Venture Capital W ``I would say as a firm we will collectively do a little work on about 10 to 20 projects per month," he said. ``We do significant work on these and of them we might find two that we will
do. We typically do 25 projects a year." Usually, successful contacts are arranged by a ``trusted intermediary." ``It has to be someone we know and respect that brings the deal to us," Harrison said. ``It could be an angel
investor, one of our portfolio CEO's recommendations or a variety of other possibilities, but someone who knows Crosspoint and understands what we look for in a company. Over the transom deals almost never happen. That's a deal
that is sent in unsolicited and not recommended by someone. They have happened but they are very unlikely." After that first contact, Harrison said he takes a hard look at the management team. ``Do they have a CEO who looks like
they can make it down the track. What is their experience? Are they 25-year-old Internet startups or are they people with significant operating experience. ``If the management team isn't complete we provide help in identifying
what kind of person to recruit and help with the recruiting. We have established relationships with executive search firms and we also have an executive in residence program. ``We hired an in-house recruiter to do nothing but
recruit what we call EIRs (executives in residence), who come in and get to know Crosspoint better and we put them on our payroll. After some period of time, they see a project that they like and we try to be a matchmaker and put
them into the company and if the two hit it off they join the firm. We are trying to recruit a stable of future CEOs for our portfolio of companies because a lot of the companies we fund have interesting management or partially
experienced management but very few come with world-class CEOs." Crosspoint currently has $1.5 billion invested and plans to invest about $600 million more this year, focusing on trillion-dollar markets. The scary part is that's
larger than most nations' economies, yet Crosspoint is finding plenty of prospects at that level. ``Let's face it, there is not much difference between a fast-growing $500 billion market and a trillion-dollar market," he said.
``They are both massive markets. To give you an example, we just did an oil and gas exchange with Chevron. What that oil and gas exchange will do is handle the buying and selling of all inputs that go into and out of big oil."
``My second example is that we have done an e-finance application service provider that provides real-time online mortgage application processing." ``They are private labeling the system to lenders and loan originators and
that's a massive market, in the order of $1.2 trillion. These examples are both untapped markets with no online system in place today and both have characteristics that lend themselves to an Internet-based solution." Below
is a partial list of presenters and people who handle alliances and investments for these various companies. Also see our Business Funding and Resources in the back of this issue.
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