Tech Capital Partners Blog

In a previous post I discussed why most businesses we see should probably be bootstrapped rather than venture funded. I promised to discuss a bit more about venture backed business so here it goes:

While somewhat of a self evident statement, the main reason for seeking venture funding rather than bootstrapping is to obtain capital. The key question for venture investors is why is the capital required? It is not unusual for us to receive an e-mail or call from an entrepreneur stating they have a great idea and need some money for sales and marketing. While not always the case, usually this leads to a quick decline because most often the business is one that will never generate the type of return that makes the investment worth it.

For technology investors like Tech Capital we are usually looking to invest in companies that require the capital in order to fund research and development. So how do we determine which investment opportunities to investigate and perform diligence and which ones we will pass on immediately?

We ask entrepreneurs to send us an executive summary of the business. Initially we are simply looking for information about three things:

1. Technology
2. Market
3. Team

Many people ask us what form this should take. Does it need to be a 40 page business plan? Does it need to look pretty with lots of graphs and visuals? The short answer is: No. It can simply be three paragraphs in an e-mail, as long as it covers the following:

Technology
We want to know what specific technology you are developing and what technological differences exist compared to other solutions. It is best to be as specific as possible. A generic statement such as “we have developed a better search engine” does not really provide any information and is likely to lead to a quick dismissal.

Market
We want to understand who is likely to buy the product once developed. We want to determine if this is a huge market = good or a niche market = bad. The issue is that in order for venture investment to make sense the market needs to be significant. For niche markets see my bootstrapping post. In addition to understanding the overall market, it is helpful if you can identify any early customers who are likely to participate in beta trials.

Team
Technology and Market get you in the door, then it usually comes down to team when we make an investment decision. At this point we are not expecting a company to have a full management team in place, but we do want to know a bit about the founders and any other employees. What roles have you had in the past, how long have you known each other, how long have you worked together etc. Ultimately a venture capital investment starts a partnership, so we want to know as much about our potential partners as possible. It is a bit of a cliché but we are looking to invest in people “who know what they don’t know”.  Founders who know their weaknesses and are prepared to “share the wealth” to fill in the gaps are the folks we love to partner with.

As I mentioned above, people often spend days or weeks pulling together a full business plan before we have even indicated if we want to pursue diligence. While this may have some benefit for you in the long-term the truth is we are not likely to read the full plan up front, rather we will look for the three items above in the executive summary.

The same applies to financial models. We get sent some massive spreadsheets and while we appreciate the hours (or days) that went into detailing the information, it is not something we need to evaluate an opportunity. The reality is, that with the experience we have, we can usually ballpark the financing requirements with a few simple questions. Eg Q - how many people do you plan to hire. A – 10 FTE. Q - How long do you think it will take to get to Beta. A – 12 months. Assuming you hit your plan, we know you will need approximately $1.25 million, so allowing for slippage and capital to fund the period between beta and next fundraising round we will probably assume this will be a $2 million initial investment.

Our goal is to make it easy for people to send us their opportunity so we can quickly let them know if we are interested.

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