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June 1999


Need Venture Capital? Ten Ways To Get It

BY DAVID LINCOLN AND SCOTT UNGERER, ENERTECH CAPITAL PARTNERS

Lining up venture capital (VC) is a challenging task for most entrepreneurs, but the capital-raising process need not lead to wrong numbers and busy signals if you remember 10 basic principles.

1) VC Firms Specialize
If you plan to sell into the electric, natural gas, oil, water or telephone utility markets, find a VC with domain expertise. They will 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 have only 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 are 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 is first-round venture financing. You are 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 market share, product or both. These firms generally need expansion capital.

Finally, there is the late stage. You're getting hot, ready for mezzanine financing, the final round before an initial public offering (IPO).

3) Financing Different Stages Of Growth
Not all VC firms do all kinds of financing. It may seem obvious, but if you are 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 are 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 they are facing today? What vertical market or markets will you sell into? 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 these companies are very technical, so they have a tendency to think that merely putting their product up on a pedestal will induce customers to want to come and buy it.

Often, these companies have not conducted 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 a lack of understanding regarding 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? If so, you must figure out how to solve the entire problem. Find an investor partner who can help you identify the other components of a total solution and who you can work with you 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. For instance, as EnerTech pursues e-commerce transactions, we look to bring in someone else with e-commerce expertise. Typically, it is 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 ensure your success.

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 have 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 are inexperienced, go out and test the marketplace. Find out your value.

Do not 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 fair price. 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 are unsure of an answer. You may not have thought of everything. It is just as important for the management team to know what it doesn't know, as what it does. We would rather hear somebody say, "I don't know," then pretend he or she does. It's more obvious than you think. Investors look at how well you have 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.








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