Thursday, April 30, 2015

Sweet Venture Capital

"When everything seems to be going against you, remember that the airplane takes off against the wind, not with it."

-Henry Ford, founder of Ford Motor Company.

Welcome to The Golden Sense! In the 1970's and 80's there were TV commercials for Reese’s peanut butter cups featuring two individuals who somehow collided, accidentally mixing together their chocolate and peanut butter (only to discover that the combination was delicious). The famed candy traces its roots to 1928, when Harry Burnett Reese (a former shipping foreman and dairy farmer for Milton S. Hershey), decided to start his own candy business. Reese purchased chocolate from his former employer and peanut butter cups rapidly became the Reese Candy Co.’s most popular item. In 1956 after Reese’s death, his sons merged the Harry Burnett Reese Candy Co. with the Hershey Chocolate Corp. through a stock-for-stock merger. Those shares today are worth well over $1B. The combination of chocolate and peanut butter is unarguably one of the best discoveries ever.

Today, Venture Capital firms are looking for a sweet success similar to Reese's Peanut Butter. These firms are mixing their money with revolutionary startup companies in attempt to create big profits. Companies are springing up all over Silicon Valley and northern California with wild ambitions. Large amounts of money are being invested into small companies with game changing ideas. These startups have a chance to make millions or maybe even billions of dollars. A few will make it big, but many will fail.

Startup companies generally have a great business model but don't have the cash to build their idea into a success. The founders of these companies need capital invested into their company so they can grow them into fully functioning businesses. This is where Venture Capital (VC) comes into play. A VC investment in your company does not guarantee success but it does mean you have someone in your corner. The VC's are all about capturing the value between the startup phase and the public company phase.

Venture Capital is so hot today there are literally waiting lists to pitch ideas at these big firms. The top firms are all located in the San Francisco Bay area. Visit Sand Hill Road in Menlo Park and you’ll find offices for four of the Top 5 firms. For example, New Enterprise Associates has 105 deals and $739 million invested in 2012, while Kleiner Perkins Caufield and Byers has 105 deals and $546 million invested. These firms invest a little in many different companies and expect to make huge gains when one or two of them go public or get acquired.

VC firms have deep pockets and expertise every entrepreneur wishes they had access to. Startup companies need to have the right ingredients to get that all important investment. The VC guys are very picky about the companies in which they invest. There are five aspects VC firms look for in every potential investment.

First off, VC firms are looking to make investments in companies that offer a unique product or service. You need to be able to differentiate your company from the competition. Unique tech products or products that create a new market always have a better shot of getting investment capital.

Secondly, VC firms are looking for a product or service that is in a large enough market where substantial profits can be made. Niche products with small demand generally are not on the receiving end of VC investments.

Third, VC firms only invest in companies that have teams who can deliver. This means the founders of these companies need to gather key employees that cover key aspects of the business. The team needs to be a group of people that has the experience to build the company into its full potential. Also, a complete team is one that can drive the company to the public offering phase or through a successful merger.

Fourth, VC firms like products with scalability. Companies that can start off dominating small markets and scale upward are much more enticing than companies trying to compete in global or national market straight out of the blocks. For example, Facebook dominated the Harvard social media scene before expanding to other universities. They then expanded outside the university scene. This natural progression allowed the company to grow appropriately.

Fifth, VC firms look for companies they can add value to. They know that investing in a startup is a multi-year relationship with many hurdles involved. VC firms have connections and resources. If these firms know they can help a company in a certain sector, this will be more enticing for the VC's to provide an investment.

If you understand what Venture Capital firms look for, you are more likely to get an investment. The business world is changing rapidly with the growth of technology. The production of ideas and revolutionary businesses is alive and well despite the struggles of corporate America.

If you are founder of a unique business, or simply have an amazing idea, form your company so venture capital will take a chance and invest with you. Securing a VC investment may not be as amazing as peanut butter and chocolate, but it might be the next best thing.


T. Norman