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There is no easy money.
That was the unanimous message from a five-member panel comprised of savvy investors and one entrepreneur at the recent conference. Entrepreneurs have little chance of winning over investors without a customer base, a sound business plan, and a good management team, they agreed.
The technology boom is fading, the investors said, and investors are no longer willing to blindly stake precious capital on an inexperienced management team, or business plans that look good on paper.
"They say it's going back to basics; I'm not sure why we ever left the basics," said Darryl E. Wash, the managing partner of Ascend Venture Group LLC. "It really is about building a business — not about raising money and going public in 18 months."
About 80 Harvard Business School students, alumni, and prospective students crowded into a conference room at the Cambridge Hyatt to hear how recent changes in the economy will affect venture capital. About half of the audience said they were interested in working in the venture capital and private equity fields, while the other half said they are hoping to strike out as entrepreneurs.
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| There are a lot of good companies that aren't getting funded. If you have someone who wants to give you the money, take it and run. | |
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| — Daphne J. Dufresne, of Weston Presidio Capital |
Panelists said neither choice would be an easy road, at least for the next two years. Venture capitalists want to see a viable business, and networking with potential investors is still key, they said.
Risky business
Daphne J. Dufresne (HBS MBA '99), a principal at Weston Presidio Capital, cautioned that investors such as those handling pension funds are becoming wary now that the market has hit a sharp downturn, and are demanding a higher return on their money in exchange for risk. Dufresne said the managers of those funds insist that venture capitalists pay more time and attention to their portfolios, and venture capitalists themselves are again paying more attention to downside protection before agreeing to invest in a new company.
"We were seeing a number of term sheets that were one page" for a while, she said. According to Dufresne, one of her company's riskiest investments currently is not a dot-com, but rather JetBlue, a New York-based start-up airline. Other investments include the Restoration Hardware chain and Zoot's, a dry-cleaning chain, she said.
Other panelists said they see future opportunities for small companies in dealing with logistics — such as shipping or trucking — rather than in starting up a whole new product.
Either way, Dufresne said, Weston Presidio does their best to limit their losses by including favorable clauses in the term sheet, such as one that would allow the company to extract their money before common stockholders or other investors whenever possible.
"This is a very difficult funding environment," she told the group. "There are a lot of good companies that aren't getting funded. If you have someone who wants to give you the money, take it and run."
No free rides
In a rare split between panelists, however, Michael A. Smart, managing director of Investment Banking for the Merrill Lynch Private Equity Group, said entrepreneurs should still be picky.
There is no free ride, Smart said, and entrepreneurs need to be careful and make sure the investors they accept as partners share a common vision for the company.
"At the end of the day, it's your company, and it's our job to make money for our partners," he cautioned.
"You should take capital from someone who is going to add value to the company. There's a lot of capital out there."
Still, Smart said, finding a good private investor isn't as easy under current market conditions. The market adjustment is whittling away at the number of technology companies, much as the one at the turn of the last century eliminated carmakers.
"There just wasn't a need for that many automotive manufacturers, and there just isn't a need for that many start-ups," he said. "What we see is the year 2001 being very similar to 1991, 1992" — years when the economy dragged.
Christopher Young, who cofounded the successful Washington, D.C. start-up Cyveillance, Inc., which provides competitive intelligence and management services over the Internet, said CEO hopefuls who start shopping for capital with only a good idea in hand are bound to be disappointed.
"Understand right now it is a buyer's market," he cautioned. "The business is more important than raising capital, and building credibility is very important."
A business school degree will help with that, he said, as will a customer base — proof that the company is providing a service to a needy market.
"There's no specific formula to raising money, but if you have a business with customers [and] a proprietary product, there are ways," he said.
All the panelists agreed on one point: they look at the management team, albeit to varying degrees, before putting money into a company.
In response to a question from the audience, Reliant Equity Investors founder Thomas Darden said he has seen start-ups succeed or fail based on the strength of the company's management team.
"Do I believe this team is going to be able to hit the targets they say they're going to hit?" he asked. "My test of any good idea is whether you can find people smarter than you to come in it with you. Our strategy is management-centric. You might even call it management first."
In terms of wooing potential investors, Darden said, it helps to convey as much information as possible about your management team, so investors can be comfortable when they write the check.
The best way to get your foot in the door, he added, is to know a venture capitalist, or wangle an introduction to one through a trusted third party.
Still, Young said, any entrepreneur is going to have to learn quickly how to sell him- or herself to investors and clients.
Emphasizing the positive
No management team has the perfect combination of experience, drive, and vision, Young said, and a needed influx of capital may depend on stressing the strong points.
"You've got to be able to sell what you've got. You may want to focus on your strengths. As an entrepreneur, you should be able to make people excited about you and excited about your business," he said.
Young, along with the venture capitalists on the panel, told entrepreneurs to hold out for the best price they can get — but to avoid the trap of an inflated valuation that can kill a deal.
Darden said he would rather see a deal fall through — and has — than increase his risk with a valuation that keeps him up at night.
"If we don't agree, I'm tempted to just walk away rather than try and bridge a valuation gap with some type of structuring," he said. "That says you don't agree, fundamentally, on where the company is."
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