Thursday, April 23, 2009

The Smarmy Side of Venture Capital

Keywords: business plans for venture capital

Every so often I go off on a tangent on those yucky "introduction services" that promise to introduce you to 10 great venture capitalists, if only you will pay them $10,000 for their services, plus, of course, a commission on all monies raised. Well, there isn't ever a commission because there isn't any money raised. These guys are true ripoffs.

But, for goodness sake, be wary of the smarms. "References" don't really count unless it is the direct reference of established venture capital firms. It is just not that hard for these "consultants" to claim to be connected to venture capital firms. When in doubt, make a direct call to the venture firm and ask. If the guy is legit, there is no reason for them to hide it. If he is not, well, they just won't know him.

The consultants, or matchmatkers, as they are often called, do perform real services. They can polish a business plan for venture capital, polish a presentation, help set up your advisory board, and do a lot of preliminary work that will make your company a truly viable venture capital candidate. Just be sure to check them out.

In all honesty, I have the same reservations about the online services that provide "angel investor introductions". Typically you pay to "post" your business plan, and "qualified" angel investors review it. Trust me, any Tom, Dick or Mathilda can become a "qualified" angel investor as far as these online companies are concerned. So strangers look through your business plan. Someone may even "call" you (yeah, it is probably a phony caller). Do yourself a favor and just avoid them.

Business plans for venture capital are not easy to develop. Because you are looking for more unsecured money, it is going to be harder. Accept that. If you opt to hire a business plan writer, do that. But don't expect any miracle introductions -- it just doesn't happen.
Posted by MaryAnn Shank at 10:13 AM

1 comments:

  1. A Serial EntrepreneurApr 23, 2009 09:41 PM
    This post about the online sites that promise to find you money was published on TheFunded a few months ago. Seems like it's on target:

    Finding Money Online Through Financing Web SitesNo web site site can promise to find you money. Period. In fact, perhaps the best way to figure out whether a site is legitimate is the extent to which it DOESN'T promise to find you money!

    Of the various possibilities out there, there are realistically four categories, in pretty much the following order:

    1) Angelsoft: doesn't promise anything, is primarily a site that investors use themselves, doesn't expose any of your information publicly, has by far the best free search engine for legitimate early stage funding sources, and lets you prepare and send applications and videos for free directly to a limited number of screened, legitimate investment groups. If you want to pay $250 extra, you can promote your offering by posting it in a pool that 15,000+ accredited investors (and ONLY accredited investors) can browse through. They publish their stats online, and they show that between 1.3% and 5% of posted deals get funded. So your odds are between 20:1 and 75:1 against. (As Winston Churchill said about democracy: "It's the worst form of government there is...except for all the others.")

    2) Vator.tv: the biggest public pitch site, legitimate, but wide open. Good news is that it's free, and that you'll likely get a lot of views of your video. On the other hand, very few of them (if any) will be from legitimate investors. Instead, you'll probably be approached by more than a few service providers, which may (or may not) be what you want, and scammers. But it's good for general exposure, and they are adding a bunch of neat new features, including micro-blogging for company updates so that interested parties can follow your corporate news. So if you're not concerned about the public nature of the site (or if you think that's a good thing), it makes sense. (Just be very, VERY wary of any "funding" leads that result from your posting.)

    3) The legitimate attempts at investor matching: there are VERY few of these out there (and virtually all are not in compliance with SEC regulations) including for-profit ones (such as FundingUniverse) and not-for-profits (such as ActiveCapital (the only truly SEC-approved, legit one) and TheFunded's sponsor, IdeaCrossing). They mean well, but have few investors (usually starting from a local group or area: Utah in the case of FundingUniverse, Cleveland, Ohio for IdeaCrossing), and the for-profit ones are not cheap.

    4) Everyone else: there are several dozen of these (perhaps even a hundred or more), ranging from out-and-out scams (any one in which you get an instantaneous response promising money, asking for money, or asking for financial information), to sites that function primarily as lead-generators for service providers. I don't personally know of a single company that has had a good experience with FindThatMoney, FundFinder, GoBigNetwork, RaiseCapital, Go4Funding, etc. etc. etc.

    The bottom line is that raising capital is very, very (did I say VERY?) tough, particularly in this economy, and only a teeny, tiny fraction of companies will EVER get outside equity financing. The stats suggest that's something like 0.25% for venture money, and 1-2% for angel money.

    So anyone who promises you quick and easy money is either well-meaning-but-delusional (the rare exception) or a scumbag-with-a-hand-heading-to-your-pocket (the vast majority.) As a first pass heuristic, if an "angel group" is not listed on either the Angel Capital Association web site or the Angelsoft Investor Search Engine you should be extremely wary of any claims they make...but then, of course, you would be anyway. Right? Right??

    Remember the immortal words of Robert A. Heinlein: "There ain't no such thing as a free lunch."
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