Friday, November 30, 2012

Want Venture Capital Funding? Here's How

Winning venture capital funding is increasingly difficult for entrepreneurs. As Professor David Brophy of the University of Michigan’s Ross School of Business told me in a recent Forbes interview, the number of venture capital funds has shrunk by half since the recession. With heightened competition, founders are increasingly required to demonstrate actual results before a VC will commit. “There’s a much higher burden, a winnowing process with companies,” says Jeffrey Bussgang of Flybridge Capital Partners, who is the author of Mastering the VC Game: A Venture Capital Insider Reveals How to Get From Start-up to IPO on Your Terms.

But there’s also an upside to that higher bar: “If you can come out of this clutter, there’s an incredible lift for those companies that do distinguish themselves,” he says. Citing recent industry success stories like Dropbox and Airbnb, Bussgang says it’s “a classic network effect dynamic…distinguishing yourself is so unique that when you do it, so much value aggregates to the winner.” Those companies are more likely to be rewarded with major funding that enables them to rapidly grow. “What we’re doing differently,” Bussgang says of his firm and the industry in general, “is putting out less money in initial checks, but you see bigger money in scaled companies. Once a company hits and starts scaling, they’re raising $30 million, $50 million, $100 million, and that never would have happened [in the past] in a pre-IPO setting. It’s a big new trend in the last five years.”

Less funding for early stage ventures isn’t simply risk aversion on the part of VCs, says Bussgang; on the contrary, he says, it’s a smarter way to do business, aided by today’s lower technology costs (startups can often get by without expensive infrastructure) and the Lean Startup ethos of launching fast, getting data, and pivoting quickly where necessary. “If a great entrepreneur is pursuing something that’s a bad idea, you don’t want to tie up $10 million and three years of their life,” says Bussgang. “Instead, try it out for a year, spend $2 million, and if it doesn’t work, free up the capital and free up the entrepreneur, and let them go do something better. I think it’s a very positive phenomenon.”

So what makes for a successful entrepreneur in today’s high-stakes environment?