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by Lawrence C.
Grumer, © 1999
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As we near the end of 2000 we must look back upon the magnificent
record-breaking year it was for starting a business, raising capital and taking
a company public. The prospect for similar "out of the block" successes
unfortunately has dimmed. This is due, in part to the earlier successes in the
IPO market and the inability of the capital market to sustain those successes
across the board. Some of these companies have already failed and others have
seen precipitous drops in their market value. The frenzy of company buyouts,
encouraged by pooling of interest accounting laws are changing to likely hamper
these kinds of corporate acquisitions in the future.
The availability
of large amounts of venture capital and investment dollars sometimes flooded
into the entrepreneur beyond their identified needs. Two million dollar VC
deals become $20 million deals in short order. The hot business plan "on the
back of an envelope" was an exaggeration, but was an indication of the frenzy
in capital markets. In many instances, those early stage companies have yet to
turn a profit, or achieve any significant revenue, or had yet to complete
product development. Though the risks taken by investors were sometimes truly
rewarded, they set a new high water mark of comparison in expectations of
returns for the next deal. The venture capitalists' premise of "investing for
value" has not been altered, but the testimony from the market on
rates-of-return and the timing of those returns can't be ignored when
considering new investments.
Of course this impacts today's
start-ups. Valuations are now being set at more sane levels. Investments are
looked at with an even greater scrutiny of the business / revenue models and
marketing plans of the start-up, forcing well-developed business plans and an
"A" management team. Strategic alliances are becoming crucial. Business
scalability and sustainability must be even more pronounced with profitability
explicitly identified. |
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Entire investment sectors like Business to Consumers (B2C) have
fallen out of investment favor. The gloss is off Business to Business (B2B)
investments as well. Business plans need to even more clearly demonstrate the
company's ability to quickly satisfy a strong market need within a large and
growing market and with unquestionable competitive advantage to get the
attention of investors. The extreme tightness of the selection criteria from
the VC community is evidenced from one of the IEEE Entrepreneurs' Network
venture capitalist speakers. He noted that business plans pour into his firm at
the rate of 15,000 business plans a year, but they only invest in about 10
companies.
The good news for the entrepreneurs; there is still lots of
money out there. Maybe even more than before, when the "new found money" of
successful start-up entrepreneurs and employees (read angels, advisors and team
members here) are factored in, along with the roll out of new and larger VC
funds, uninvested dollars from prior funds, added capital from returns not
distributed, and strong corporate investment interests. Though the size of the
investment in seed/early stage rounds had increased the "venture capital gap"
from $2 million to beyond $5 million, this has created additional VC and angel
investor sources to address that gap.
Good deals are still good deals
though not every one is going to be a billion dollar one! The entrepreneur, now
more than before, needs to prepare their capitalization plans appropriately and
their capitalization strategy even more diligently and creatively to get the
investor audience. The care and effort taken by the entrepreneur to identify
competition and positioning strategy in their business plans, needs to be
similarly applied. They need to understand investor requirements, their past
investments, key points of contact and referrals, to develop a capitalization
strategy to reach and promote to those investors. |
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Lawrence C. Grumer is principal of Technology Associates
& Alliances, a management consulting firm focused on growing companies
through exploring emerging markets and commercilaizing technology.
Tel: 617-325-9852
 Fax: 617-325-9853
E-mail: [email protected]
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All material copyright ©1999 by the author and may not be
used for reproduction without permission of the author. |
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