Mining Venture Capital

To gain financing today, use the right tools or get the shaft

And according to a number of early stage financiers, there are still sweet spots for seed capital: biotechnology, security, and material science. There will be opportunities for nontech companies as well — especially those looking for strategic buyouts. For example, former Procter & Gamble advertising executive Ross Love was able to obtain as much as $60 million over the past five years from such firms as Quetzal/J.P. Morgan Partners to build Blue Chip Broadcasting into an impressive 20-station broadcasting conglomerate. His focus: target urban radio stations in Midwest markets. Last year, Radio One (No. 17 on the 2001, BE INDUSTRIAL/SERVICE 100 list with $177.2 million in gross sales) acquired the capital stock of Blue Chip for $190 million in cash, stock, and the assumption of outstanding debt. Ross’ payout: His initial $375,000 investment became worth $40 million overnight.

Develop a realistic business model. Charles E. Ross, vice president of the $50 million Telecommunications Development Fund in Washington, D.C., says, “During the recent overheated period of venture investing, valuations were inflated. For the market to return to a more disciplined approach is good for everyone, including entrepreneurs.” So even if you’ve developed a better mousetrap, expect to get considerably less funding and, unlike the go-go ’90s, give up a heftier chunk of equity. Therefore, business operators need to create strategic plans that demonstrate profitability, as well as display financial discipline, when developing products and services.

“For companies seeking additional rounds of funding, the toughest challenge will be establishing and achieving significant milestones, while involved in an extended fundraising cycle,” Ross explains. “Changes in the capital market have lengthened the time between series A and series B rounds of financing. As a result, venture backed companies must be conscious of maintaining a much lower burn rate.” Also, be prepared to wait longer to execute the exit strategy — five to seven years, instead of three — such as a strategic divestiture or initial public offering.

Build a solid business team. There’s one critical factor that will seal or rip apart any deal — people. “You need an outstanding team with a solid track record of executing a strategy,” says Michael Fields, a managing member, of Palo Alto, California-based New Vista Capital. “Develop a must-win culture for your company. Everybody must have a sales attitude, and always have someone in place who owns sales, and that can’t be the CEO, because the CEO has to look at all aspects of the business.”

When making a clear-eyed evaluation of the strengths and weaknesses of the management team, determine whether key individuals are playing appropriate roles within the company. And, by the way, don’t even think of excluding yourself from this process. Maintains Fields: “You may discover that you have to fire yourself in order to grow your company.” He knows of what he speaks: During the years it took to eventually merge Open Vision, his Pleasanton, California-based company with mammoth Veritas Software, he removed himself from the CEO’s chair.

Reposition your company — when necessary. You can’t become tied to one formula. As

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