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
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
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.
“All it takes is one great team and one
great idea, and you can make a good company out of it.”