Marc Andreessen – One kind of VC. (Photo by Paul Chinn/The San Francisco Chronicle via Getty Images) … [+]
About 20 VCs would earn approx 95% of VC profits. Choose the right one and your chances of success are higher. Choose the wrong one and your venture could be doomed. Who is the ideal match for you?
There are many types and sources of equity – and almost all of them are difficult to tap. The most used source, besides your own savings, is money from friends and family. Michael Dell started with money from his family. So did Jeff Bezos. Two happy families.
Then you switch to investors who do not know you or you. These sources include angels and multitudes. Angels can be wealthy angels, i.e. accredited, and/or non-wealthy angels. The best way to get angels is to get a bell cow that is well known, has a good reputation and has made money. Can you find a lead investor who knows you, knows your industry, is willing to invest and can lead you to other investors who want to invest? The latest wrinkle in finding angels is called crowdfunding, which means you get your money in small amounts from many different investors who find you through a medium such as a website or through intermediaries. Often these investors like your product (or proposal) and are willing to take a small risk with you. Oculus Rift started out this way and was sold to Facebook for approx $2 billionmaking it one of the most profitable crowdfunding ventures ever.
After angels and crowds, you can approach large, organized venture capitalists (VCs), of which there are 3 main types (and some do all three):
#1. Tech VCs. Tech VCs specialize in emerging technologies and invest in the research and development phase to bring promising technologies to market in the form of workable and government-approved products, when such approval is required. Many tech VCs are investors in companies related to medical devices, biotech, and pharmaceuticals. These companies translate proven scientific discoveries into federally approved drugs and devices, which often require significant time, capital, and risk. Once the product is approved and ready for sale, the business is often sold to a strategic buyer who can leverage existing business infrastructure for rapid commercialization. Examples of medical companies include Johnson & Johnson for which Abiomed was purchased $16.6 billion.
#2. Trend VCs. Trend VCs are the most common type of venture capitalists. They invest in companies that respond to emerging trends. Unlike Tech VCs, Trend VCs typically do not invest in research stage companies. Instead, they typically look for companies that have achieved significant milestones, such as:
· Strategy Aha where the business strategy potential on an emerging trend is evident. Examples of entrepreneurs who get VC after strategy Aha are Earl Bakken (Medtronic), Pierre Omidyar (eBay), and Steve Jobs (Apple). Of the $85 billion entrepreneurs analyzed, 5% received venture capital funding after the Strategy Aha phase and were eventually replaced by a professional CEO. In Apple’s case, this replacement was a big mistake.
· Leadership Aha: Enterprises where the potential of both the company and the skills of the entrepreneur are clear. This approach has been successfully adopted by renowned entrepreneurs such as Bill Gates, Jeff Bezos and Brian Chesky. About 18% of the $85 billion entrepreneurs surveyed received VC funding after Leadership Aha, and 76% avoided VC.
#3. Mission VCs. Mission VCs are a diverse bunch that will willingly, and sometimes unknowingly, accept lower target returns in exchange for investing in companies that meet their criteria. Mission VCs include:
· Corporate VCs: Corporate VCs can be very beneficial to entrepreneurs when used effectively. Richard Burke used corporate alliances to build UnitedHealthcare, one of the world’s largest companies. Likewise, Mike Bloomberg leveraged his alliance with Merrill Lynch to found Bloomberg and amass one of the world’s largest fortunes. Done right, this form of financing can be extremely attractive.
· VCs targeting specific entrepreneurial groups, such as minorities or women.
· VCs that invest in companies that create businesses and jobs in targeted areas.
It is interesting to note that 94% of billion dollar entrepreneurs used advanced financing strategies to get off the ground without venture capital, which allowed them to maintain control of their ventures and keep more of the wealth they created.
MY TAKE: When considering the best VC source for your business, it is important to evaluate several criteria, including the amount of funding available, the time frame for obtaining it, and the associated costs in terms of both money and control. My recommendation is to consider the sophisticated financial strategies used by 94% of US billion dollar entrepreneurs to avoid or delay VC. They sought funding to maintain control over their venture and the wealth it generated. This may require more skill, but entrepreneurs who remained in control retained 2x – 7x the share of wealth created than those who took the easy route. And by staying in control, they also reduced their risk.
