May 1999

Dialing Up Venture Capital Money

BY DAVID LINCOLN AND SCOTT UNGERER, ENERTECH CAPITAL PARTNERS

Lining up venture capital (VC) is a challenging task for most entrepreneurs, but even more so if your company is selling into the utility industry. A lot of traditional venture capitalists are wary of investing in companies whose primary market is the utility industry. The reason is very simple. Selling goods and services to the utility market requires a special knowledge base that most VC firms just don't have. And even though the industry is going through dynamic change, the utility decision process can still be very difficult and slow moving. Many broad based VC firms find the utility market a very scary place and stay away.

But even in this environment, the capital raising process doesn't have to lead to wrong numbers and busy signals if you remember 10 basic principles.

1. VC Firms Specialize

If you plan on selling into the electric, natural gas, oil, water or telephone utility markets, find a VC with domain expertise. They'll be more likely to understand the utility decision process and can guide you through the difficult times. In addition, their contacts may help to open the right doors.

2. Different VCs Fund Different Stages - Understand Where You Are In Your Development.

Do you only have a concept and need the money to create a business plan?

Is your company a start up? Start-ups have a business plan but are developing their product and their management team.

Perhaps you're an early stage firm. You have a business plan, the greater portion of a management team, and you have completed beta or pilot testing of the product.

Then there's first round venture financing. You're looking to finish product development and take your new product out into the world.

Companies requiring second round venture financing are already showing their product in the marketplace. The next step is to expand either marketshare, product or both. They generally need expansion capital.

And finally there's late stage. You're getting hot. Ready for mezzanine financing, the final round before an Initial Public Offering.

3. Financing Different Stages Of Growth

Not all VC firms do all kinds of financing. It may seem obvious, but if you're at the seed stage, make sure the firms you talk to actually do seed financing. Know what type of companies they usually finance and how successful they have been. This will help to tell you what their strengths are. All of this is complicated by the fact that the better firms are flexible. For example, although EnerTech doesn't usually handle "seed" financing, we're not prevented from providing seed money if the company and the people are a good fit. You can find more information on VC firms at www.nvca.org.

4. Understand Your Customers

Who will be your customers?. What are the problems that they're facing today? What vertical market or markets will you sell into? Utilities are vertical markets. Is your dream to connect with the telephone, electric or water industries? Are you targeting oil and gas companies? Or will you be stirring things up in the chemical industry? You need to understand both your customers and your competition.

5. Provide A Solution, Not Just Technology

Many companies develop a product or service without solving a problem for their potential customers. Often they're very technical, so they have a tendency to think that if they just put their product up on a pedestal, everyone will want to come and buy it.

They haven't done fundamental market research because that costs money and in the minds of most of these entrepreneurs, market research is not the first place to spend money.

The greatest weakness is not understanding what business problem your product is solving and the value it gives the customer in dollars and cents. Do an old fashioned cost-benefit analysis and present a compelling proposition to your customers.

6. Have A Total Solution

Are you only providing a piece of a solution? Then figure out how to solve the entire problem. Find an investor partner that can help you identify the other components of a total solution and who you can work with to provide the complete package.

7. Get A Flexible VC

Find a VC firm with the flexibility, maturity and self-confidence to bring in partners who can offer a unique brand of expertise that complements their own strengths. Typically it's very difficult for an entrepreneur to bring these pieces together. Pick a creative firm that you trust and let them be your partner - bringing in other firms and expertise to make you successful.

8. Ask For Enough Money

Remember, it takes the same amount of time and effort to put together a $500,000 investment as it does for $2.5 million deal. Your most important asset is time. Time is also your venture capitalist's most important investment.

9. Get Real

Entrepreneurs need to have a realistic understanding of the value of their company. The amount of equity you give up depends on the economic value of what you've built, and nothing else. What is the CEO's track record? Has he or she done this before? What is the size of the marketplace and the growth path of the company? If you're inexperienced, go out and test the marketplace. Find out your value today.

And don't be misled by bankers whose only interest is a fee. Unrealistic expectations slow down the fund-raising process and can jeopardize your company. A good investor will want to give you a price that's fair. They want a partnership and that means having you feel good about the relationship.

10. Be Prepared

When that big day comes and you finally get in front of a private equity investor, be ready. Present a concise vision of your business plan and strategy. Answer the questions that you can and admit when you don't know an answer. You may not have thought of everything. It's as important for the management team to know what it does know, as what it doesn't. We'd rather hear somebody say "I don't know," than pretend they do. It's more obvious than you think. Investors look at how well you're prepared as one indication of how good you are at managing your business. It's a test. Don't expect to fast-talk your way through it.

Conclusion
Once you believe you have a well developed proposition, a cohesive management team, a vision for sales and distribution, a marketing strategy, and a realistic understanding of your company's economic value, then pick up the phone. Your investors are waiting for the call.

David Lincoln and Scott Ungerer are Managing Directors of EnerTech Capital Partners, a venture capital firm based in Wayne, Pennsylvania that provides financing and strategic guidance to promising entrepreneurial companies focused on the deregulation and resulting convergence of the utility markets.