Here is a surefire bet: Gather together a bunch of entrepreneurs to talk about venture capitalists, and before long the conversation will turn to the issue of control. Here's the common refrain: "If we take VC money, the next thing you know, they'll be in control, and we'll be out on our ear."

 

Now, try the reverse. Gather a bunch of VCs, and before long you'll hear something like this: "If we invest in them and we don't have the ability to take control, these young hotshots may run right over the edge of the cliff and take all our money with them."

Significant evidence across any one of these categories should be enough to awaken a board to the potential for trouble. Two or more should cause a responsible board to act.
 

Venture capital boards are like normal boards, only more so! They have little time to spend developing management in the face of fierce competition and dynamically moving markets. They are much more ready to fix something that is broken or keep a rocket ship from coming off the rails.

 

So--avoid The Seven Deadly Sins for CEOs.

You'll find your venture capitalists supporting you every step of the way!

We've seen all sorts of presentations from startups over the years.  But none as succinct, yet as effective as one we saw a few days ago. 

 

The Seattle company in question is one that pitched us a few years ago.  At the time, we loved the team, but thought they seemed to be remarkably unfocused.  So, rather than have our money burned in a "bumping into trees" exercise, we passed.  Now they were back - with laser focus - and it showed.

 

Before the presentation started, the CEO told us he only brought seven slides.  And oh, by the way, they were all in 30 point type!  My immediate reaction was, "This guy must have his stuff together!"  Rather than death by PowerPoint, he was planning to subject us to a real discussion, where the knowledge of the management team was the foundation, not the slides. And the goal was interaction with potential investors, not to baffle us with BS.

 

They did not disappoint.  Picture this:

That was it. We talked for an hour, and had to end the session with all of us still fully engaged.

How different that is than the standard pitch where we see slide after wordy slide while the CEO or other members drone on, and by the end of the hour half the room has mentally checked out.

 

Now, to be fair, besides a crisp presentation, this team also had a powerful one.  Having bumped into trees as we expected them to, they had their eyes open. So when a customer started pulling them in a direction they hadn't initially expected, they were ready to engage, understand, and generalize that opportunity to a broad market. 

 

We've still got work to do to find out more here. But as an initial meeting, it doesn't get much better than this.  In fact, I dropped a quick email to our lead partner on the deal that simply said, "Nike (company name)" - or in other words "Just Do It!". 

 

Next time you think about pitching a potential investor, see if you can condense your pitch down to something under 10 slides, using something north of 24 point type.  If you can, you'll stand out.  If you can't - maybe you need more focus.

 

 

OK, so I have a case of alliteration envy!

 

Anyway, this post is a reflection of a recent conversation with the CFO of a potential new investment for OVP, as we are getting our arms around their business.  Having started the diligence process outside-in (if they build it, will customers come), now I've flipped over and am looking inside-out (if the customers come, will it matter).

 

One of the first things that needed doing was to take the firm's incredibly detailed financial documents and make them consumable by mortals (or at least this mortal).  As a word of advice, great detail is great, and usually necessary - but please, please start with a simple summary income statement and balance sheet that matches the way the world looks at documents such as those.  The company in question chose to break out salaries & benefits by functional area from other operating expenses by functional area, and then offered an "adjustment" category that rendered any analysis of the previous categories moot.  One phone call and one email delivered the fix, but it shouldn't have been needed.

 

On the balance sheet, there was an unusual entry of negative value for previously purchased preferred stock.  I've been looking at balance sheets for 30 years and never saw that before.  Again, not a big deal, and easily fixed - but a little less detail in the multiple tabs of Excel, and a little more attention to detail on the basic summary pages would have avoided confusion.

 

Next, this happens to be a company that already has a few years of operating history and a revenue stream. That's a bit unusual for OVP as lead or co-lead Series A investors, where we usually invest pre-revenue. But it does make for more interesting reading of financials, since in this case they are not all purely speculative.  In looking at the historical financials, we're trying to find trends and patterns.  For example, how are revenues growing over time?  Here, all the historicals were monthly which made that analysis very difficult.  I found myself doing the quick math to add groups of three months (quarters) to see what was happening.  Interestingly, the last year or so of quarters was essentially flat.  Now, maybe this is fully explainable (lack of financial strength to expand the sales force before this venture round gets raised), but it would have been far better for the company to provide that perspective than for me to ferret it out.  The last thing you want is for VC's to think they've found bad news that was being covered up.

 

Finally, we dove into a round of "cap-table 101."  Again, this is a firm with some years of history and multiple rounds of angel investment, so it wasn't as simple as if it were a new startup.  I found myself trying to tease out of the numbers a couple of things that matter a lot to us: who owns what percentage? how much of an option pool is authorized and still available for future employees should we choose to invest?  It turned out the numbers here were actually comforting, but it took more work than needed to peel back that onion.

 

In the end, all these issues are essentially minor irritants in the diligence process.  If the company's business is exciting, the management team strong and the upside large, we get past the financials.  I've often noted that the only thing we know for certain about financial projections is that they are wrong.  (historicals...that's another story)

 

But, in a game where you are competing against other well-managed teams with promising business prospects, the last thing you want to do is introduce friction into the due diligence process.  So, when you put together your numbers, think about your customer (in this case the VC) and make their life easy.  It can't hurt, and might just help!

 

 

 

 

 

Not every call goes like that, of course.  Usually, we start with potential or actual customers of the start-up, who have all been pre-screened to tell us exactly what the start-up wants us to hear.  And they usually do.  But even then, some carefully worded questions can lead to remarkable insight.  On a different diligence quest recently, I called one of those pre-selected end users, and after some initial questions to understand her business, and how she was using the software from the start-up, I started down a different path.  It was clear she was an enthusiast. So, I asked her how many other people in her organization used or were planning to use the product.  "No one," was the response.  Probing some more uncovered a couple of real concerns that a core piece of the functionality of the product, while attractive to this individual, was just not comfortable for most people to embrace.  So, a key piece of the startup's differentiation just got vaporized as a value point. 

Of course, one data point does not make a curve (unless you are the CEO), so I made some other calls and discovered this issue was indeed a universal one.  So, this really cool company with the really slick product isn't going to get our money - at least not now.  Maybe down the road this "uncomfortable" part of the functionality will become comfortable to people.  But, if there is one thing we've learned the hard way: do not ever expect to drive, much less time, change in human behavior as a venture investor.

This brings me to an interesting point about the startup in the first paragraph:  How do we as venture investors react to a negative due diligence call?  While the Advisory executive above was very positive about the need for the product, later that week I had a call with a former CEO of ours, who essentially dismissed the entire premise for the startup.  He didn't see the need, didn't see the company's connections to major industry players as important (and in one case a negative), and certainly would never spend his company's money on a product like that! 

Again, here it's good to remember some basics.  With very few exceptions, most startups plan their success around market share percentage numbers in the high single or low double digits.  So, it's absolutely OK to find prospective customers who either don't see the need, or have had that need met elsewhere.  The overarching question is, "Why do they feel that way?"  This gets to the core of good market segmentation and good sales account targeting.  If you can figure out, in advance, who is likely to buy, and who isn't, on some dimension that falls into customer business dynamics rather than the simplistic segmentations that keep consulting firms in business, you are onto something.  Ideally, it's far better for the startup to have figured this out before we do.  But in any event, it is crucial we jointly figure it out before throwing money at marketing and sales campaigns.  So, even before we invest, we poke around with customers trying to ascertain what separates a hot one from a cold one.  In this case, my call right after the recalcitrant CEO was to his former VP of Marketing & Sales (now with a different company).  He lit up like the proverbial Christmas tree.  Since then, the startup has had a demo with him, and is planning a price/value conversation this week.  Now, I also have a picture of why he's hot, and the other is not.

My comment to the CEO of the startup went something like this, "We are always uncomfortable until we get a negative diligence call.  No product is perfect for everyone.  Once I get some negatives to go with the positives, we can start to figure out exactly where you fit and where you don't.  That's better for us to understand before you start spending our cash."

The absence of that we call "bumping into trees."  And we again know from painful experience that bumping into trees burns cash at rates that bring tears to our eyes.

 
Here's an off-the-wall suggestion.  The next time you approach a venture capitalist, have teed up not only a list of prospects or customers you think will say wonderful things about you and your products, but a couple you know are not likely to buy as well.  If you can use that approach to demonstrate to us how well you understand your market, and show that the segment that is accessible is still very large and attractive, you'll be miles ahead of your competitors vying for our cash.

I'm in the middle of due diligence on a Portland software start-up (Prolifiq) that did a very nice, crisp job when they presented to my partnership in describing their value proposition.  With their permission, I thought I'd pass along a framework they used in case it is helpful to any of you.

 

They laid out the possible reasons customers might buy a product such as theirs as "vitamin, aspirin, or vaccine."  Is it something to help you do better (a vitamin), something to take away current pain (an aspirin), or something to avoid serious pain later (a vaccine)?  In many ways, this mirrors the way we think about how compelling a start-up may be on the "nice to have - have to have" continuum, but with more specific descriptions.

 

While they didn't make the point explicitly, it is clear that most of the time people will pay more for aspirin than for vitamins, and that if the risk of future pain is high enough, may pay the most for vaccines.  I must admit, our bias has always been to invest in companies more on the aspirin dimension, since corporate budgets seem to flow better to current pain, than potential pain or potential gain. However, in business segments where regulatory risk rears its head, a vaccine may be just as powerful to dislodge budget dollars.

 

Now, given how clever the Prolifiq team is, they managed to make the case (still to be verified during my diligence calls) that they are essentially all three, depending on the customer's need set. Nice work if you can get it!  "Less Filling.  Tastes Great! Gives a Great Buzz!"

 

For most start-ups, your products probably hit just one of the dimensions.  But, as long as you understand which one is your primary value, you can focus on how that flavor of budget dollars gets released, and how you get to stand at the head of the line when they do.  Then, if you can articulate that to your friendly local VC, you'll have a much better chance of convincing us you are in the "have to have" category - regardless of vitamin, aspirin or vaccine.

 

 

A couple of weeks ago, I was a guest lecturer at an entrepreneurship class at one of our major state universities.  I covered the usual topics (the four risks of a startup and how VCs evaluate against those criteria), etc.  But at the end of class, a student came up to me and asked an unusual question.  He said, "So, now I know more about how you decide on which startups to back.  But, more generally, what do you do?  What does a typical day or week look like?"

 

It struck me that he probably isn't the only person with that question, as VC-land is a foggy land to many folks.  In addition, I think those that love to bash VCs (OK, sometimes we deserve it) or minimize the value of taking VC money, might curb their enthusiasm if they knew what we actually did all day.  Or maybe not, but I'll let you make the call.

 

So, let's run through the first couple days of this week:

 

Monday:

We start every Monday with a partners meeting.  Over the course of three to five hours we go through our existing portfolio of companies, review new potential deals, and take care of other internal business.  What might be interesting to you is exactly what we discuss during that period.

 

We review the existing portfolio in reverse order of "time to cash hitting zero", starting with those in the red zone (weeks left to six months), then the yellow zone (6-12 months) and then the green zone (more than a year).  For each one, but particularly those approaching the cash-out wall at high speed, the lead partner / board member talks about what the issues are at the company where we might have an impact.  Help with finding new outside investors?  Introduction to potential key partners and/or customers?  Key personnel hires? If no new investor shows up, are we ready to write a check by ourselves? Given the level of the discussion, and the fact that we have about 30 companies to discuss, this usually takes a few hours.

 

This week, our partners meeting happened to fall directly after our annual Technology Summit, the gathering of our OVP Technology Advisory Group (OTAG), so a number of times we agreed that an introduction to one of those folks would be useful to some portfolio company.  In addition, we reviewed the folks who comprise our OTAG and decided we were delighted with the IT and Biotech folks, but needed to beef up the Cleantech representation a bit.  As the cleantech lead for the partnership, I came away with the action item to go make that happen.

 

Then, we spent an hour or so looking over the list of startups on our "potential deal" log, with discussions about which ones looked most promising, which ones we wanted to follow closely, which ones we could dispense with easily, which few we wanted to invite in to present in the near term.

 

After lunch, we had a presentation from a potential new investment where I would be the lead partner - so I was listening to them - but as importantly listening to the questions my partners raised, as a guide to where I should focus my attention - assuming I got the green light to proceed with due diligence.  (I did, so the work begins....).  Here endeth the partners meeting.

 

Now it's 2PM, and it was onto a call for one portfolio company where I am the Board member shepherding the process of hiring a CEO (with the founder's full support) - and we spent some time with the executive search firm trying to figure out how to land the big fish we think we've hooked.

 

Now, about 3PM I've moved into a temporary unofficial role as "VP Marketing" for one of my companies as they are about to look for an outside VC for their Series B round.  I spent about an hour roughing out my suggestions for the pitch deck, and sent them off to the CEO of the company.

 

The rest of the day was mostly catching up on calls and emails - with one notable one where a portfolio company (I am the backup to my partner Mark Ashida) has just landed a new VP of Sales after a long search.  I sent off a sassy email to the CEO congratulating her, but also asking if this meant the forecast for the year is going up.  She responded in kind, with words not appropriate for this blog.  Those who think we don't have some fun amongst the serious tasks at hand are misguided.

 

Tuesday:

The day started with an email from another portfolio CEO with a draft business update for a potential strategic investor that I recently introduced to the company.  Said CEO wanted my input on the draft, particularly because I know the potential new investor and have at least some clues about her "care abouts."  The goal is to get a relatively non-dilutive chunk of cash to fund R&D on some exciting areas we just can't support out of operating cash flow right now.  The draft got some editing from me, and was on its way back to the CEO.  We set up a meeting for early on Thursday to review it, and also deal with some major people issues on his plate.  It wasn't the first time I've had a CEO say as he did, very directly, "It's lonely at the top, and I appreciate you being willing to be a sounding board on this."

 

At 10AM, I'm visited by someone representing a local university.  They are trying to figure out how to align their curriculum to better serve the community by preparing graduates to create or join start-up companies.  We have an active discussion about what we think they can do better, and what models there are for doing this well.  I mention that UW does a very nice job, in our estimation, and encourage them to tap that group - particularly our partner Rick LeFaivre who now works half-time at the U.

 

Then it was off to lunch with an entrepreneur who we had turned down six months ago.  He had reached back out to us to indicate he had made significant progress along some dimensions that troubled us back then - and wanted to see if we would be open a fresh look.  Our answer was, "Of course!" He indeed has made good progress, and so he's back on the deal log list.  So, all you entrepreneurs who hear "no" from a VC, do not despair.  We do react to new data. In addition, it became clear that this startup, and the one I'm just starting diligence on up above, have some good reasons to work together.  So, I engineered a mutual introduction and got out of the way.

 

Then, back to the office to meet with two investment bankers from one of the three largest financial services firms in the US.  They wanted to learn more about our portfolio, with this particular team focused on software and digital media.  While they were pumping me for info, I returned the favor and probed on their quarterly session at which they expose relevant startups to their IT department (with a budget that ends in $B).  We're now on that list to tee up the companies we have, when they are ready.  In addition, this firm has an annual beauty show with a private company track that could be ideal for late venture / mezzanine rounds for our firms.  We'll now get the chance to propose a select company or two this fall.

 

During a quick review of the email that had piled up I found one portfolio company who had been trying to work out a deal with another one, had gotten at loggerheads with that other firm.  I tried an ego-diffusing "let's all play nicely" request to the CEO where I'm on the Board.

 

Finally, I was part of an ad hoc portfolio Board call late in the day where the CEO asked us to wrestle with the issue of a customer who is very late in payment. We have to decide how hard to push, and whether to actually cut off that customer from product delivery and maybe lose them forever.  Trying to do this firmly but carefully, and maybe retain the relationship, demanded all our collective experience.  Time will tell whether we got it right. 

 

So - that's two days in the life of a VC.  They are typical in the degree of variability and the number of events that are ad hoc, time sensitive, and yet fairly business critical. Some deal with the immediate term, some long term. Some are portfolio specific, some are community service, some are OVP internal.  You can see all the business risks and challenges on display.

 

For those who aspire (if that is the right term) to be a VC someday, decide if this kind of life sounds fun.  It can be certainly stressful.  For those who think all VCs bring to the table is money, I'd offer this up as counter evidence.  Whether my counsel across these various scenarios was useful is another topic, of course.  But there is no question that as an active VC, we are called early and often to be supportive and to contribute well beyond the dollars invested.

 

 

The data below point to how hard and fast the fall was in the second half of 2008, and it appears a sustainable upslope forming now.

 

 

So far, we've covered the "big four" risks in a start-up that are front of mind for every VC when you walk through the door (People, Product, Market, Financing).  But there are some other issues, irritants and obstacles you can inadvertently toss in your path that don't fit nicely into those categories.  While not as important as the big four, they can still direct an otherwise positive impression in the wrong direction.  So, beware of:

The ill-advised adviser:   This is a tough one, because once I describe the issue, you'll ask for specifics that we're not comfortable giving out. But here's the situation....you come to visit and either bring along with you, or mention that you have a key relationship with someone who we know is either a pain in the rear, or worse a charlatan who doesn't know what they are doing.  The former adds a level of friction to a process where we already have many more interesting new companies to look at than we can invest in - risking us taking a path of lesser resistance.  The latter reflects badly on your process of selection of key people (and puts up a big red flag on the People risk domain). 

But, you say, "How do I know these advisers are going to be a negative?  I'm new to the start-up scene and have no way of knowing who to trust."  Well, this is one of your first tests.  We can't get comfortable revealing the names of these folks (and there are only a few) who raise the hair on the back of our necks, because you never know when they'll hook up with the next killer deal and we do not want to be black-balled by those advisers.  But, you can look around, ask around and see who we and others prefer to deal with. 

Start with the law firms who guide most start-ups around town.  There are a handful of these, and they are all quite professional.  Use them as your introduction source to us, if you feel you need one.  This is not to say those firms can't be appropriately tough with us when they represent you.  But it says they know the rules of the game, and we know they know.  So everyone tends to operate in good faith, while representing their respective positions.  A secondary message here, you don't need to pay anyone to introduce you to us.  A quality service provider (lawyer, bank, accountant) will do so at no charge.  Better yet, they tend to know what we have funded and have not, and can point you towards the most likely VC match.

Another thing you can do is ask us (or folks like us), "We're looking for someone to advise us in area X. Can you recommend anyone?"  What may be most interesting to you are not the folks we mention, but those we don't mention.  Sometimes, that can just be a momentary oversight.  But if you ask a couple of VC firms that same question, and there is a consistent name or two missing of someone you were considering using, then you have your answer.

Control and dilution, not optimizing for success: One of the obvious questions we'll ask you is how much money you need.  There are many possible right answers, but a couple of wrong answers, too. 

If you respond with, "It depends on valuation," you just told us you are optimizing for dilution rather than for success.  The company needs a certain amount of money.  In fact, it probably needs more than you think to allow for likely slippage somewhere in product development or customer traction.  But if you skinny down the raise to optimize for dilution, you have dramatically raised the risk of running out of money at an inconvenient time.  (BTW - there is no convenient time) 

If you respond with, "I don't want to give up control," you've just hit two negative points.  First, as I've said in earlier posts, when you take institutional money it is no longer about you, or about us.  It's about optimizing the value of the enterprise for all stakeholders.  So "you" and "in control" are off the table as primary issues.  Second, someone once gave me a very cogent piece of advice.  He said, "When you are running a company, there is only one way you are in control.  That is by executing.  If you own 100% of the stock, but don't execute, someone else is in control (the bank, your customers, your suppliers...).  On the other hand, if you own 20% but execute, you have all the control you'll ever want.  No one will do anything other than sit in the back of the bus and cheer for you."  It's true.

With too many angels, you're in hell. Angel investors can be enormously helpful.  Sometimes, they may invest prior to VCs being willing to. (But DO NOT accept the notion that this is always true.  We have backed MANY companies that came to us with a business plan, and nothing else.  Angels love to try to position VCs downstream from them, to make sure they get their bite at the apple.  As with all things, the truth is fuzzier than that.)  But angels, if selected carefully, can provide business and industry guidance and connections along with their cash.   We often invest in rounds where angels provided the initial seed money, and have good, long standing relations with them afterward.

However, there are two potential problems with angels.  First, they often are good for the first check, but have trouble with follow-on financing rounds.  And, if the terms include a "pay to play," which means an investor who does not participate in later rounds gets crushed, those glowing halos can turn dark in a hurry.

In addition, unless you really fancy yourself as a cat-herder, the more angels you add to your cap table, the more cats will need to be herded.  And some of these cats will keep you up at night with yowling if you aren't right on plan, or right on the phone when they have a question.

I have a good friend who has raised an enormous sum from angels for his company (>$30M).  While he must now be ranked as an expert cat-herder, he's also on the cusp of becoming a public company by default.  That threshold is at 500 shareholders, and he's very, very close.  When he started, you can be sure he never dreamed it would take so much money, so many investors, and so much of his time.  He eschewed VCs early on, but suddenly has found religion as he approaches the 500 investor mark.  One $10M check is a whole lot easier than two hundred $50,000 checks!

"We're selling stock at $0.50 a share."  Your price per share is meaningless to us.  What matters is the implied company valuation (price per share times number of shares).  In addition, I hate to be this blunt, but the price paid will be what we offer, not what you ask.  Now, that's not to say there won't be some back and forth negotiations.  But the surest way to scare off a VC is to put a valuation on the table that we know is crazy.  Rather than try to educate you to how the world works in private equity, we're likely just to move on.  When someone asks you what valuation you are expecting, answer simply, "The market will determine that."  Your job is to get an offer.  With an offer in hand, the games can begin.

"We can't tell you what we're doing until you sign a NDA."  We can make this very short. We aren't going to sign it, so you can decide before you visit whether that is really a criteria or not.  Practically, we see thousands of new start-ups every year.  There is no way for us to be in absolute control of or even remember everything we've seen and heard about.

Now, that said, those of us who do this for a living do operate with enlightened self-interest.  We know that if we EVER violated the confidence entrepreneurs place in us, the word would get out and we would no longer see the best deals.  And that is a prescription for death in our industry.  So, deal with an established VC firm, and your ideas should be safe.  Of course, if the issue is one of disclosure for a potential patent, we'll find a way to make sure your IP is protected.

Let me close with one of my favorite entrepreneur stories that trumps the NDA example.  Years ago, I was approached by an entrepreneur who said he had a technology that was going to revolutionize the world.  In fact, it was so powerful that the company he was starting would reach over one billion dollars in revenue in five years.  There was only one catch:  he couldn't tell me what it was until AFTER we'd invested $10M.  Now that's a powerful position!  :-)  I guess he never found that investor/sucker, because I've never heard of him again.

When is a lemming not a "lemming?"  When it's bath time!

 

I'm not even sure where I was going with that, but there is a point to be made.  Many folks criticize VCs for acting like lemmings, all blindly jumping off the same cliff into the sea, investing in the same sectors, while ignoring interesting projects outside those currently hot spaces.  There is a lot of truth to that complaint.  But there is a rationale for it, too.

 

As I've said in other posts, often the hardest check to get is not the first one but the second (or third!).  When reality interjects itself into the financing process, the sparkle and promise of a Series A investment gives way to hard questions when initial targets have been missed.  It is in times like this that financing risk can become the most important risk facing a start-up.  And this is when being in a "hot space" can help overcome an otherwise cold start. 

 

Most entrepreneurs believe in at least one of two fallacies:

1. Their business plan is correct, or better yet, conservative.  
2. If they need more cash, investors will automatically pony up, regardless of how they've performed on the initial tranche.

The reality is that those business plans are not correct, much less conservative.   As I've stated many times, we're now at over 120 companies backed, and NOT ONE has made their initial business plan metrics.  And we've seen many, many examples of companies that, having missed their initial plan, struggled or failed to raise follow-on capital. Not only do the entrepreneurs pay in that circumstance, we do too.

 

So, when we look at a new start-up opportunity, we are asking ourselves about the financing risk in that deal.  That risk comes in at least three forms:

• What is the capital intensity of the business?  The more money needed to take the company to the promised land, the more chances there are for a stumble to turn into a problem financing, which turns into a down round, or a fire sale.  In addition, the more money needed, the more VCs will be needed to share the load.  And the more VCs you have, the greater the chance of one or more turning negative on the deal and upsetting the syndicate dynamics. (bad syndicate dynamics kill more deals than ever gets reported)
  
• What is the investment popularity of the business?  Here, lemmings rule.  I'd much rather be looking for the Series B round for a company in a hot space than a cold one. The same holds true for the Series A.  We've gone "off popularity" enough to know how hard it can be to get another VC firm to co-invest with us when we are "out-of-step" with current market psychology. (That said, we often like to be temporarily out-of-step, as that is where the big rewards can be found.)  In addition, there is nothing quite as frustrating than to have an investment in a company that is succeeding where others have failed, but be told by our friends in VC-land that they won't look at our firm for the Series B because they lost money in a similar deal years ago.
• What is the time predictability of the business?  This is actually a part of capital intensity, but in an unsuspecting way.  You may have a business that is not capital intense on its face.  But, if it is one where no one can tell exactly when the market will engage (or if appropriate when regulatory hurdles can be jumped), then it may be more capital intense than it appears.  We saw this years ago in wireless location-based services.  We got in early (too early in retrospect) and so those start-ups that really were not very capital intensive by nature became more so as we had to wait around for the market to develop.
  

 

So, previously, we've talked about the first two risks VCs evaluate when looking at a new deal (People & Product). Now, on to risk number three: Market.

 

In many ways, this can be the toughest to figure out, since so often start-ups are targeting markets that don't exist yet, or are bringing products to market that could potentially change the dynamics in existing markets.   In fact, this is the question "lisafernow" asked after my last post.  "What evidence do you have that your prospective consumer really needs and will buy what you're offering?"  This is essentially a test of customer readiness.