Thursday, May 22, 2008

TEXCHANGE - "The New Venture Capital Math: Does Less Equal More? "

The May meeting of the Austin Chapter of TEXCHANGE featured a panel discussion of experts who had a very informative dialog about the new rules for entrepreneurs and venture capital investors. TEXCHANGE's round table chat format also produced many spirited talks as each table then explored the topic.

The panel included:

Bill Wood, founder - Silverton Partners
Brett Hurt, founder and CEO - Bazaarvoice
Mike Maples Jr, managing partner - Maples Investments

The shared wisdom included important observations and advice that the panel has experienced first hand over their many years of experience:

Everyone knows the bubble VC model is dead and "back to basics" is the word of the day. Many only remember the crazy venture capital lending practices of 1996 - 2000, but those days were nutty. We are now back to the fundamentals of how the venture industry operated for decades before the boom of the late 90's. The best entrepreneurs also do not want to raise money unnecessarily and bootstrap their companies for as long as possible.

The costs of starting a technology oriented business have come way down over the past decade. It is now easy for an entrepreneur to prove concept before needing to take millions. "Sell first, build later" allows the business to have customers and revenues before needing the investment.

The raise of VC money is then used to accelerate into a proven market, and today's savvy professionals treat every dollar they spend as if it was their last. The opulent spending on non-necessities are long gone for the entrepreneur and the venture capitalist. Smaller dollar investments are becoming more common.

The new VC math does not work in all verticals as hardware system plays still require huge amounts of money to get up and running, and there are many exceptions where companies are still successfully raising large rounds, but the trends are toward lean and creativity with capital efficiency is what many VC's look for in today's companies.

Entrepreneurs do not benefit from diluting ownership if they are not right on their assumptions. This is why being smart and testing models first and making sure to get it right before welcoming investors into their organizations is the goal of the savvy.

Mike Mapels added from the VC perspective that "it takes more money to fund a crummy company than it does to fund a great one", sighting examples that Cisco, Microsoft and others took very little venture money. A true test of a disruptive idea is if the company can create disruption with limited cash from outside investors.

Entrepreneurs and investors agreed that in addition to the money an investor does bring other value to a portfolio company. Their connections and experience are a valuable asset, and a good VC knows how to be helpful to the companies in whom they invest, and thus helping them achieve more. However, the relationship can be much like a marriage and thus both need to be conscious of the long term interactions that come along with the investment.

Knowledge of the marketplace is paramount for a growth company and experimenting is more important than ever. Test all theories and focus on fundamentals to accelerate the company was the thread of the discussion.

After hearing this panel I feel strong about the future, as there seems to be no limit to innovation out there in the world. There are still ideas and people willing to fund the entrepreneurs. New math or old math, there will be successes for startup companies!

Have A Great Day.


No comments: