Q: “I just read about a business that has been funded by a venture capital firm. What type of businesses do they invest in and how can I find one locally?”
A: Like angel investors, venture capital firms invest in businesses that have high growth potential. They are also similar to angel investors as they provide equity financing and don’t recoup their investment until the company is sold or there is some other sort of exit opportunity such as an IPO or a merger. Venture capital firms tend to make larger investments and often come in after angel financing. This isn’t a hard and fast rule but it is a fairly common scenario.
NH Division of Economic Development Seacoast Business Services Specialist Christine J. Davis
I spoke with Jesse Devitte of Borealis Ventures which has an office in Portsmouth and will be celebrating 10 years of investing in entrepreneurs in February. Jesse originally sat on the other side of the table when he sought venture capital when creating what was at the time Soft Desk which was later acquired and is now known as Auto Desk. Along with his two partners, Jesse sees himself as a business builder and not simply someone who writes a check to a promising company. During our conversation, very little was said about numbers and much was said about relationships. Venture capitalists are investing in a person or team of people and there needs to be a solid relationship for the partnership to work. He put it quite succinctly when he said, “Imagine your absolute worst week in business. Would you want those people (the VC’s) to be in the room with you?” You also want your investors to really understand your business as they will most likely have an active role in your company and you want your “thought partner” to provide advice that is based on relevant industry expertise.
Venture capitalists take on more risk than other types of financing so the reward for them will be higher than for a traditional bank loan. The terms vary and it is critically important that the entrepreneur spends some time going over the details. Hire a lawyer who has experience with equity investing and not simply general business law. Jesse also recommended that the entrepreneur get familiar with the financing documents which can be found at the National Venture Capital Association website, www.nvca.org.
It isn’t easy to get VC funding so be prepared to get a lot of rejections and don’t take it personally. The average yield (percentage of applicants that get funded) is a mere 2%. So, for every 100 proposals, just two of them will get the green light. That doesn’t guarantee that those two will succeed either. The hardest business to get funded is the one that has never been funded. To improve your odds, make sure you are talking with firms that are interested in your industry. Avoid cold calling the firm and find someone who can make an introduction for you. Know your industry inside and out and don’t think for a minute that there aren’t any competitors. There are. Are your financial projections conservative? Perhaps in your eyes, but it is doubtful others will see it that way so I would recommend you restrain yourself from telling them that.
Newforma, a Manchester company, was one of the companies that Borealis Ventures funded around seven years ago. What started out as a team of six founders now boasts over 80 employees with about half of them working in Manchester. Ian Howell, the CEO, agreed with Jesse that the relationship with the VC firm is incredibly important as they will be taking an active role in your company. He agreed that getting funded is much easier if you have been previously funded. Even having past successes it took Newforma five months to secure their series A funding. They based their successful fundraising on having done their due diligence which included in depth client interviews and approaching the right investors.
I was amazed to learn that an entrepreneur is given 45 minutes to make their pitch and convince the VC to fund their business. Even if you possess a great business plan, solid team and real commitment, you still could get rejected. Timing and fit are incredibly important. When meeting with one particular investor, the gentleman pushed back from the table, crossed his arms and told Ian he wasn’t interested. Ian hadn’t even begun his pitch. However, thanks to a strong business plan and thorough “storyboards” the investor completely changed his mind and offered the funding at the end of the meeting. You never know.
When asked about his thoughts on current funding opportunities, Ian responded, “There is a lot of money looking for a good home.” The bar may be set higher these days but if you have the right plan, team and strategy you just might find yourself sharing your success story with tomorrow’s entrepreneurs.
Whether you have been in business for 20 years or just getting started, we have the resources and the expertise to answer your questions. You can e-mail me at Christine.Davis@dred.state.nh.us. I look forward to hearing from you.
Christine J. Davis works for the N.H. Division of Economic Development as a resource specialist serving businesses in Rockingham and Strafford counties. Her role is to provide the support needed for businesses so that they may remain viable and growing entities in the community. Ms. Davis lives in Exeter with her two daughters. When not performing her work or parenting duties she can be found volunteering with her girls for the Chamber Children’s Fund, “hitting the gym,” or spending time with friends and family.