At a recent event designed to give local “geeks” their five minutes of fame (Ignite Tulsa. Maybe you’ve heard of it?), folks stood on stage, microphone in hand, and offered interesting, creative advice on a broad plane of expertise.
William Paiva, a partner with lead venture capital firm Sevin Rosen Funds, spilled the beans with a talk titled “Top Ten Venture Capital Lies.” Using 20 slides, tongue-in-cheek humor and personal experience, Paiva offered some meaningful advice to entrepreneurs seeking outside investment.
He expounded that advice in a recent interview with Tulsa Business Journal.
1. “Find a quality lead venture capital firm, and we will invest.”
Paiva said entrepreneurs will often run into venture capitalists who like their idea but aren’t willing to “hold their nose and jump in the deep end.” By instructing the entrepreneur to find a lead investment firm interested in his opportunity, the VC is telling him to find someone “bigger, better and smarter” to validate the investment.
2. “None of our portfolio companies compete with each other.”
Essentially, this is true, said Paiva.
“Venture capital guys are usually sensitive about having competing companies in their portfolio,” he said.
During the pitching stage, however, it’s not unusual for a VC firm to set up multiple appointments with similar companies. Paiva suggested keeping this in mind when scheduling meetings with VC firms. Also, research beforehand what companies are already in the VC’s portfolio. If you find one similar to yours, you might be headed to an appointment with a VC who’s just mining for information. If you’re really smart, Paiva said, you’ll use such an opportunity to do some digging of your own.
3. “Submit your business plan through our Web site.”
If you happen to meet a VC and he tells you to submit your business plan through his company’s Web site, he’s basically telling you to throw it in the trash. Plans submitted online usually end up nowhere. The best way to get an appointment with a VC, Paiva said, is through a referral. Make the acquaintance of a CEO he’s invested with or a lawyer he’s worked with. Having a referral from a trusted source almost guarantees you an appointment.
4. “We are hands-on investors.”
“We take a decent piece of your company for what we put into it,” Paiva said. “My advice is, if you’re going to give up that much of your company, make sure you’re getting value out of it.”
Make sure you’re not only getting money, but you’re also getting plenty of resources — referrals for suppliers, customers and other relationships.
“The only thing worse than being undercapitalized is being capitalized with an investor who’s not a good investor,” Paiva said.
5. “We have lots of experience in your industry.”
Paiva reiterated thoroughly researching the VC firm you want to work with and ensuring it does have the experience required to add value to your opportunity.
Ask for referrals for CEOs the VC has worked with in the past — CEOs of companies that succeeded and ones that failed. Paiva said if a company isn’t willing to give you those referrals, you should be concerned.
6. “All of our partners have built many successful businesses.”
Paiva said there’s a perception that success comes automatically with a brand-name VC firm. But, he said, not every individual working within the firm is a good investor. In addition to researching the firm, research the capitalist handling your deal. Make sure his or her past experiences are relevant to your current one.
7. “Without the founder, there is no company.”
A VC will sometimes say this to the founder of a venture to secure the deal. But, in some cases, the company is better off without its founder, and it’s not always the VC’s decision to let him or her go.
Paiva said the fear of losing his job can sometimes prevent a company’s founder from building the best team possible. Hire the best management team possible.
8. “It’s not me; it’s the rest of the investor syndicate.”
VCs aren’t always good at telling people “no,” Paiva said. They want to maintain good relationships with entrepreneurs because, while they may not like this opportunity, they might like the next one. So, when they don’t want to invest in your venture, they’ll sometimes push the blame onto the rest of the firm. It’s more likely that he just didn’t like the deal. Don’t let that prevent you from going back to him for the next one.
9. “We invest all over the U.S.”
Paiva pointed out three emotional issues that every entrepreneur must deal with if he wants outside investment: dilution, control and geography. You’ll own less of your company, you’ll have less control, and you might have to move, if doing so will be advantageous to your business.
10. “We use proven methods to determine the value of your company.”
Paiva said it’s difficult to determine the value of a start-up business. Late-stage valuation is easier to determine, as more objective data is available.
“Early stage valuation is more of an art than a science,” Paiva said.
Depending on how much money has been raised, start-up valuation is usually set at $1, $3 or $5 million. The biggest determinant of the three is the team you’ve assembled, not your idea, he said. ?