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March 8, 2000 Event
Money, Money Everywhere: Entrepreneurs Learn to Look Behind the Cash Curtain Today's entrepreneurs are flooded with financing options as angels, incubators, venture capitalists, investment banks, consulting firms and service organizations jostle to get a piece of the Gold Rush pie. Venture capitalists allocated a whopping $30.6B to aspiring entrepreneurs during 4Q99 - with $16.1B invested in Northern California alone. At the same time, everyone from McKinsey to IBM to UPS are forming incubators to support young companies - backed by an arsenal of cash, organizational resources, and years of management experience. With so many options on the funding horizon, entrepreneurs must carefully consider the strategic implications of equity partners. New partners bring new benefits to the financing table. Deep-pocketed angel investors often enable an entrepreneur to "buy time" as she refines her business plan and assembles the right team. The incubator model, on the other hand, aspires to combine financial resources, management talent, and industry know-how to "accelerate" the development of a new business. The model has yet to be proven. And, of course, almost all new ventures would benefit from the brand name, network and open doors that accompany funding from a top-tier VC. >From KP to CMGI to Bell Labs, each of these players bring a different set of resources to the table. Which metrics are the most appropriate in evaluating the options? How might this vary across industry types and business models? Even a year ago, finding company financing was a largely tactical decision. In today's cash-heavy marketplace, a firm's funding partners can make - or break - the business. Choosing the right funding partner has become crucial to a new venture's strategic vision and long-term success.
Key Learnings
THE CHANGING FACE OF VENTURE CAPITAL INVESTING
Entrepreneurs today face a financing landscape vastly different than in years past. The definition of venture capital funding has expanded to include funding from aggressive corporate venture branches, incubator models (idealab!), public keiretsus (CMGI), hands-on angel investors and international partners. These new faces in the venture capital realm bring new areas of expertise to the table, introducing new variables into the venture capital equation.
VC CASH OR VC CACHET?
The number of financing options for entrepreneurs is increasing, making the playing field for traditional financiers more competitive than it has ever been. Top tier VCs with established brand names are not threatened in this environment - the allure of their cachet, rather than the allure of cash, makes them a timeless option. Lower tier VCs will be threatened as they must differentiate their services without the benefit of playing the name game. Still, these VCs attempt to establish their brand, many via means unorthodox to the VC institution, such as billboard and radio advertising.
INCUBATORS IN THE REAL WORLD
As financiers embrace new offerings to differentiate themselves, their areas of differentiation become increasingly utopian in their design. The "full service incubator" model, for one, is not fit for the fast paced Internet industry as incubation takes time -- a valuable resource many startups can't afford. Many incubators promise a fully enabled facility, business advice, service provider connections, funding and more to wide-eyed entrepreneurs. However, such incubators fall tragically short of their reputation as they are managed by inexperienced second generation entrepreneurs. In an era where entrepreneurs seek every advantage, such shops can simply take more equity from an unsuspecting entrepreneur who wants in but lacks perspective of what the incubator can ultimately deliver.
ENTERING THE AGE OF THE FULL SERVICE VC
It is clear that entrepreneurs need full service partners more today than they did yesteryear. With a fiercely competitive landscape and scarce resources, support and direction from a VC partner can give invaluable confidence to struggling entrepreneurs. While the VC rolodex has to date sufficed to put portfolio companies in touch with business partners, the day when VC firms add real estate and headhunter branches to their services list may not be far off. A scarcity of critical startup resources is forcing entrepreneurs to turn to their VC partners for more than financing or occasional handholding needs.
QUOTES OF THE NIGHT
"It's not 'Show me the money' anymore. Instead it's, 'Show me the SMART money.'"
"Everyone’s playing the name game -- if you have no name, you have no game."