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
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.
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
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.