Addressing Investor Concerns

There are three legs to a new venture. Venture capitalists evaluate a firm according to two of the legs: Can they build it? If they build it, will the market buy it? A business manager has to ask the third leg: Can it get funded? To help business managers address this third leg with the affirmative, we should look at new ventures through the eyes of the investor.

Potential investors look at a firm through multiple lenses. The above paradigm is perhaps the bluntest; even so, investors will rephrase these questions using various angles. In arriving at their conclusions, investors will turn to business plans, industry comparisons, personal knowledge, and just as often to one of two new-venture analysis tools.

S. Rich and D. Gumpert, authors of “Business Plans that Win $$$: Lessons Learned from the MIT Enterprise Forum” propose using a simple two dimensional map to analyze companies. On the horizontal axis, new ventures are evaluated by management team strength. On the vertical axis, new ventures are evaluated by marketing strength.

In evaluating the management team, Rich and Gumpert suggest that investors are looking for a well-rounded, capable team. This includes officers such as the operations, marketing, finance, and executive officers as well as key intellectual contributors such as the inventor, delivery team, and support team. The optimal management team score is achieved by having all the key players in place, each having demonstrated their commitment, and all the managers having stellar backgrounds. In evaluating the management team, venture capitalist are evaluating the ability of the entrepreneurial firm to deliver the financial and market potential. Can they build it?

Rich and Gumpert note that in evaluating the market potential, investors look for indications of market demand. Possible indicators include past sales and revenues, but can also be delivered through market research, prospective customer interviews, or stated purchase intent from key clients. For an example of this, recall the requirement for Airbus to receive a minimum number of orders prior to designing a super jumbo jet. The optimal market potential score is achieved by having a completed product and substantiated demand. In evaluating the marketing potential, venture capitalists are answering the question: Can they sell it?

A second analysis tool used by venture capitalist looks at a new venture with a desire to answer the question, “What are the Risks and Rewards?” rather than “Can they deliver on the story they tell?” As with the prior analysis tool, investors generate a two dimensional map. On the new map’s horizontal axis, new ventures are evaluated by financial stability. On the vertical axis, new ventures are evaluated by market commitment.

In financial stability, investors are looking to determine the firm’s potential to stay in business regardless of the economic environment. As before, this will require examining past revenue, but also will include such factors as the potential to deploy the same product, team, or skill set in a second market or the potential to manage multiple lines of business and multiple revenue streams within the same firm. Financial stability is supported by low cost structures, multiple revenue streams, and multiple products.

In examining the market commitment, investors are looking to determine the depth of knowledge, targeting, and drive in serving a particular market. While market commitment might sound like the antithesis of financial stability, many firms with highly targeted markets will serve their target market with multiple products and diverse revenue streams. For instance, Intuit sells three types of QuickBooks, upgrades, and an Application Service Provider version while staying focused on a single market: small businesses.

New ventures scoring well on all the above dimensions are rare, yet so are successful new ventures. Moreover, scoring well on all the above dimensions does not guarantee success. Yet keeping the desires of the investment community in mind will help us managers to accomplish the third leg of making a successful new enterprise: Securing Funding.

The May Report, TECH BUSINESS BRIEFS, June 5, 2002