I’m a Rookie Venture Capitalist
One of the dreams I have, as my businesses progress is to set up a venture capital fund. For one I love the idea of analyzing a young business to see if it has what it takes to grow into something big. Another very attractive aspect toÂ this idea is that you are in the position of investing as a [legal] insider. The due diligence process includes access to the company principles and information that would rarely be given to the general public.
Other benefits of investing in this manner include the chance to hit a big time home run by getting in a the ground level of a company. And the last major benefit of venture capital investing is the opportunity to exercise some influence into company decisions [the proposal I'm about to discuss included 15% ownership and a seat at the board of directors].
Why I’m writing this is that I was approached recently to be an investor in a start up business project. Now it’s very small scale, it does not have the potential to be the next Google or Microsoft, but it does have the potential to provide a very decent return on investment [ROI]. Certainly a lot better than the average stock will provide.
Most of my previous experience in this realm has been on the side of the one asking for the money and I was always miffed by the hoops that various lenders put me through. But, now being asked to part with my hard earned cash I am getting a valuable glimpse at the other side of the fence.
It’s about confidence. Not confidence in the people so much but confidence in their plan. Good people can fail, in fact most will. The plan just demonstrates that they have given their concept deep contemplation. That they have done a thorough analysis that is based on facts, not on fantasy and hopes. It’s easy to get caught up in the initial rush of the profit potential and leave out all the stuff the doesn’t contribute to that reverie.
Here’s some of the points from the proposal that I received that are keeping my wallet closed:
- The business plan was coming more from a love of money than a love of business.
- They attached a Confidentiality Agreement but didn’t make me sign it.
- There were some obvious math, formatting and charting errors.
- The expense numbers in the financial statements were unrealistically low.
- The plan was done with a template and it was obvious.
- There were statements that indicated they would achieve results through obtaining prime placement in search engines, but didn’t outline exact details of how this is going to happen. Search engine results are highly competitive these days and are not something you wave a magic wand at or take for granted; and leaving out those details doesn’t give me confidence that they know how to do it.
- Again the plan is a little vague on how the money will change hands: what is the exact conversion model of the website? What kind of conversion rates are they aiming for?
- The plan outlines a competitive edge but again lacks detailed analysis. What I want to see is a complete breakdown of every major player in the space and how the competitive edge will lead to more profit than any of the others.
- Â When you make statements like ‘best’ to describe your product or service, then you’d better demonstrate with details, otherwise it sounds like wishful thinking.
In general the plan is functioning at much too high of a level. At the conceptual level it is not that hard to create an idea that sounds like it will succeed. But, in actuality it is a process that requires attention to detail and careful analysis of the strengths and weaknesses of the venture [you won't succeed if you can't be honest about your weaknesses].
The other main thing that I look for is risk analysis because it is a clear indicator of how deep the owners have envisioned their project. What happens if they run out of money before they get to profit? If one of the key players gets killed? If the server is hacked?
A good plan may not have definitive answers to these questions but it will have at least considered them.
Just some rambling thoughts from my first visit to my banker’s side of the table. Overall a very rewarding experience although this particular opportunity is doubtful at best. You can check out Startup Venture Toolbox for a fabulous resource of startup information.