Friday, April 29, 2011
Lesson #27: How VC's Define a Backable Management Team
Having a great, defensible business idea in a scalable market is only half of the puzzle to attracting venture capital. The other half is having a backable management team. Today we are going to define exactly what that means, in the eyes of a venture capitalist.
The first thing a VC is looking for is domain expertise in the industry you are targeting. How many years of experience do you have in that industry? In what roles did you operate that were relevant to your new business? Or, for tactical positions like CMO or CTO, what other marketing or technology roles have you had in the past, and were they relevant for a startup in this industry (e.g., a Fortune 500 CMO will not understand how to market a startup on a shoestring budget). While in these positions, what successes can you share, and what failures did you learn from? And, frankly, they care a lot more about your failures to see how resilient you were and how battle tested you are at getting your business through the bad times (which will always happen at some point).
The second thing they look for is credibility. Is your business plan well thought out and are your revenues assumptions believable in relation to your industry size and marketing budgets. So, be sure to re-read Lesson #7 on How to Write a Business Plan. And, never come across as overly-pushy or too salesy. The last thing a VC wants to back is a "used car salesman" trying to sell him the Brooklyn Bridge.
The third thing a VC looks for is passion and energy. Do you have the fire in the belly to wake up every morning and bust your ass to execute the business plan. I think it is safe to assume most good entrepreneurs are not lacking in this area, but you would be surprised how many startups come in with unenthusiastic or boring presentations that doesn't get anybody excited, regardless of how great the idea may be. And, if you cannot get your VC's excited, it is unlikely you will get potential business customers excited in driving revenues and hitting the VC's ROI expectations.
The fourth thing VC's look for are your listening and communications skills. The biggest mistake an entrepreneur can make is to assume they are the only smart person in the room, and nobody else knows what they are talking about. Hence digging in an entrenched viewpoints. Let's not forget a good VC sees around 200 business plans a year, 2,000 plans a decade. And, most likely, many very similar to your own, in one form or another. So, they bring a ton of market intelligence to the table, to help you avoid known pitfalls. It is critical they think you are flexible and will listen to input as needed. And be prepared, at some point, a VC may make a recommendation to put in a new CEO with more skills than yourself. So, listen with open ears, as protecting your 65% equity value is a lot more important than protecting your job title. But, hopefully, you will never give them that opportunity by knocking the cover off the ball the entire way up.
The days of the dot com boom in the 1990's are long behind us. No longer can a 21 year old with a high level idea on a piece of paper (without even a revenue model) walk into Silicon Valley and collect a $10MM check. You are much better served with at least 5-10 years of real life work experience, and the relevant lessons therefrom. And, frankly, a second time CEO, is a much better venture bet than a first time CEO, since that entrepreneur has already learned how to avoid many startup pitfalls and can point to a proven track record.
That basically narrows the attractive pool of entrepreneurs down to a very small list. But, there are ways to offset your own lack of past executive history, by surrounding yourself with a smart team of people that are proven experts in their field. If you are launching a new search engine, and you have a Google engineer on your staff, that will get a VC's attention. If your startup is dependent on Facebook for successful social marketing, and your CMO is an old Facebook executive, with a lot of relationships there, that will get a VC's attention. Not to mention, the VC's will be impressed by your hiring skills (finding the best talent) and your sales skills (getting these proven winners to buy into your vision). This deep team around the management table is exactly what the VC's want, to make sure your business is more than a "one man show".
Entrepreneurs are an eccentric bunch, often flying by the seats of their pants. Living on the edge between reality and pipe dream the entire way up. These trailblazers and visionaries are what makes startups so exciting, and potentially, a lucrative investment opportunity for VC's. But, at the end of the day, a VC is looking for an experienced, credible, passionate, energetic and flexible team more than anything else. Management teams make or break businesses, and they know good teams when they see them.
As I have said before, and worth reiterating, VC's would much rather invest in an A+ team with a B+ idea, than an A+ idea with a B+ team. So, keep that in mind.
For future posts, please follow me at: www.twitter.com/georgedeeb