Photonics Spectra - March 2009

technologies. And consumers are ready to adapt to new behaviors, new products.

“It’s a perfect storm of innovation in these areas. And that’s what venture capitalists do: take innovation and bring it to market.”

But where do venture capitalists get the capital to bring innovation to market? Whose money are they using?

“A lot of people get this wrong,” Mendell noted. “Venture capitalists invest money from large institutional players like pension funds, endowments and so on. They take some individual money, but only

“The most direct impact that the recession has had on venture capital is what we call the exit market.”

on a large scale. A mom-and-pop operation, or you or me – we can’t put our money in.” But, she added, it’s possible for the regular Joe to invest in venture capitalism through a pension fund, for example.

There are various ways for fledgling companies to find venture capitalists to fund their projects, she said: “The Internet is a very powerful tool. You can find venture capital firms and submit business plans online today. Google ‘venture capital,’ Google your industry.” The NVCA even has an online directory of venture capitalists at www.nvca.org.

“It’s good to talk to other entrepreneurs in your region – people working in innovative areas tend to know each other,” Mendell said. Word of mouth helps direct the search, and references from other entrepreneurs in your region or your industry can narrow down a list of potential investors.

At Battery Ventures, new companies are found in all kinds of ways. “Anything from someone looking us up on a Web site to a friend of a friend,” Dauber said. “We also go to trade shows, meet with entrepreneurs – you talk to friends of yours, and you find out who’s looking for funding, who’s starting companies. “It’s interesting how, once you enter the VC (venture capitalism) community, people tend to find you.”

He cautioned that venture capital firms need entrepreneurs to do their homework before pitching their ideas. “You always want to understand someone’s business model,” he said. “Often you get the business plan, and you walk through: Here’s

the team, here’s the technology, here’s the market we’re going after, here’s how we differentiate ourselves.”

But Battery has been known to help people start companies from the very beginning, too, helping them to fine-tune their ideas. With Redwood Systems of Fremont, Calif., “we were working side-by-side with the CEO – pre-ground floor,” Dauber said. Redwood makes energy-control systems for green buildings.

And if you’re just starting out, there’s good news: The “Money Tree” report pointed out that seed-stage investments grew to $1.5 billion into 440 companies in 2008, a 19 percent jump from the $1.3 billion funneled into 450 companies in 2007. “Seed stage” refers to a company’s starting point, when founders create a business plan and work on prototype development and testing. The $1.5 billion amount is the largest investment in seed-stage companies since 2000. Later-stage and expan-sion-stage investments saw declines.

“The stability of seed- and early-stage deals as a percentage of total deal volume suggests that venture capitalists are continuing to fund very young companies,” said Mark Heesen, president of NVCA, “giving credence to the philosophy that an economic downturn is a time ripe with opportunity.”

Mendell expects the coming year to be challenging, but she isn’t pessimistic. “I think it’s going to be tough on everyone,” she said, adding that a number of venture capital firms could go out of business this year.

Dauber’s advice for new entrepreneurs is to keep a level perspective. “You certainly have to have the stomach for it,” he said. “I think for any entrepreneur, you have to be prepared for a certain level of rejection. You can’t take it personally; people are being very, very cautious.

“As you’re constructing your business plan, it’s also important to think about how the investors are going to make money. This will help you both in your interactions with VCs and in determining how much money you can raise. ”

And enthusiasm doesn’t hurt. “You need to have an idea and market it so people are excited about it,” Dauber said. “If the entrepreneur isn’t excited about the project, they can’t expect the VC to be.