After decades of venture capital investment, growth and
exit, the traditional focus areas of venture capital (such as IT, web and
software) have developed strong entrepreneurial ecosystems. A high percentage
of start-ups in these traditional areas come to market with one or more
experienced entrepreneurs, or with a strong and active network of
investors/advisors who have “been there, done that.” They
know what it takes to raise capital and to build a great fast-growing
business. Cleantech companies, however,
are much more likely to be led by first-time entrepreneurs who often struggle to
create an ecosystem of experienced people around them.
As a venture capitalist, I review hundreds of business plans
each year and physically meet with roughly a hundred entrepreneurs seeking
capital. I have the advantage of doing
this through the eyes of someone who has been on the other side of the table,
having raised venture capital for my own start-up before becoming a VC. And while there are certainly numerous
exceptions, there are themes I see across cleantech start-ups that are not
specific to their technology or market but which nonetheless impede their
ability to raise capital. Here is the
top five…
Technology is necessary, but not sufficient.
Many cleantech entrepreneurs are engineers or
scientists. Although not the result of a
formal survey, my perception is that many more have PhDs than what you find in
internet start-ups. I don’t know if it’s
a symptom of having achieved such a lofty degree, but many seem to believe that
their phenomenal technology and their outstanding technical skills alone should
justify an investment in their company. It
isn’t. Weak entrepreneurs can take the most game changing technology in the world and drive it
into the ground. Conversely, outstanding
ones can take a good, but not great, technology and make a world-class business
out of it (anyone heard of Microsoft?).
So… in scientific terms, having compelling technology is a necessary but
not sufficient condition for entrepreneurial success. Human
capital must always precede venture capital.
Your 50-page business plan is a waste of time.
Will someone please tell all the college business professors
that the traditional business plan is a dinosaur! No VC has time to read such a tome. Nothing ever turns out completely as expected,
so writing a long document as if it will prescribe the future is silly. And by the time you finish investing the time
to create such a detailed document it is most assuredly out of date.
Conversely, too little time is invested into building a
robust spreadsheet financial model. Not
a static five-year P&L – that is almost useless. Rather, what an early stage company needs is
a financial model that can be used to run “what-if” scenarios, e.g. “What if
our margins are less?” “What if it takes
us a year longer to get to market?” A tool like this accepts that the future is
uncertain and that entrepreneurship is about taking risk. As an entrepreneur, which would you rather
have, a 50-page wish or a model of your potential risks?
The thought process that goes into fleshing out the basic
elements of a business plan (e.g, market, competitive advantage, go-to-market
strategy, financial model, etc.) is what is paramount. Entrepreneurs that recognize this look at
their business strategy and financial model as planning tools more than as fund-raising
tools. And they realize that
communicating the results of that thinking must be done concisely.
Eisenhower
once said, “In preparing for battle I
have always found that plans are useless, but planning is indispensable.”
Start-up businesses are no different.
A real advisory board isn’t just a list of cool names.
Some cleantech entrepreneurs get advice along the way that
they should form an advisory board: Get
some people with cool experience and ask them if you can slap their names in
your business plan. That’s not an
advisory board – it’s just a list of cool names.
A real advisory board not only has relevant
experience and business contacts but also is actively engaged in the business,
albeit on a very limited basis. They
meet regularly with company leaders, have provided concrete material assistance
to the company and they have a specific personal interest in the
company. Such personal interest can take
many forms, such as a stock option, a direct investment, a future executive
role, prior significant personal relationship with a founder or clear strategic
interest for their current employer.
Volunteer
advisors who have no economic, business or personal connection to the company
are cute. They are like the parsley on
your breakfast plate – they make it look nice, but add little substance and… at
least for this VC… leave a bad taste in my mouth!
25% gross margins and growth to $20M in seven years aren’t
exciting
At the highest level, there are three types of start-up
companies. There are high-growth
businesses with venture potential. There
are downright bad businesses. And there
are steady growth businesses, which are not “bad” businesses – they just aren’t
great venture investments.
Venture
capital funds are mostly 10-year partnerships.
We need to target businesses that we believe can generate huge multiples
(typically 10x or more) on our investment in less than that timeframe so we get
both liquidity and sufficient returns to make up for those investments that aren’t
as successful. That means companies that
can use our capital to drive extraordinary growth, unfair competitive
advantages and healthy margins yielding an exit return far beyond a simple discounted
cash flow analysis on the business.
My second cousins are billionaires. They built one of the first mail-order office
supply companies to a dominant leader in its industry over 40 years (you can
read their story in
this book). They never raised a
penny of equity capital. It was a great
steady growth business that made them extraordinarily wealthy. Steady growth
businesses can lead to phenomenal personal wealth, but that doesn’t make them
good venture capital investments.
Last, but by no means least…raising capital is a social
sport.
Quick quiz: What is
the single most important element of raising venture capital? Your pitch deck? Your technology? No, no… your management team’s experience,
right? Wrong… it’s your relationships
with potential investors. Who you know
is often more important than what you know in business.
The classic fund-raising mode for most cleantech
entrepreneurs is to send their business plan to lots of funds, pitch at various
cleantech business plan events and then wait to see who pursues them. They let the VCs drive the process. Few look at this as the sales process that it
is. Don’t spam slews of potential
investors. Rather, identify the funds
that should be your top targets based on the investment interest they describe
on their website. Pursue them like you
should a prospective customer: qualify them, identify their hot buttons and
always be closing on a time-bounded next step with them. And, as all great sales people know, getting
an introduction is infinitely better than a cold call.
So, does that mean that only entrepreneurs who already have
VC relationships can get funded? No, but
that sure as heck helps a lot! And in
this day and age, if you can’t get an introduction to me or another VC, you
then you aren’t a very good entrepreneur.
There are almost 500,000 people who know somebody who knows me on
LinkedIn and can get you an introduction.
Many VCs are equally well-connected – it’s part of what we do. So, which business summary do you think I
take more seriously -- the one that comes in from our website without an
introduction or the one referred to me by someone I know?
And with that, you now have as a perk for reading my blog, a
free roadmap for increasing your odds of raising capital from me!
