Dancing with venture capitalists

Source: Technology Digital

Date :7/27/2007 3:43:38 PM

VC companies have become more fickle on whom they will partner with. National Venture Capital Association President Mark Heeson reveals the best ways to still catch their eye

By David Weldon

When media mogul Rupert Murdock made his recent bid for Dow Jones, and with it The Wall Street Journal, he wasn’t just acting on a whim.

Communications companies are hot properties these days. At least that is the take of the National Venture Capital Association (NVCA), the national group of companies that fund corporate investments.

“Biotech and communications companies are hot commodities right now,” says Mark Heeson, president of the NVCA, head-quartered in Arlington, VA. “There are also good investment opportunities in the life sciences area and in the clean sciences [sciences that use so-called clean rooms].”

Heeson is a good judge of economic opportunities, since his association represents the financial drivers of virtually all corporate sectors.

“The association was founded, and continues to be, a public policy organization,” Heeson says. “We were founded to try to enact legislation that would allow personal investment funds to be invested in venture capital funds.”

The association, now in its 33rd year, represents 475 venture capital firms in the United States, which in turn account for 93 percent of all U.S. investment activity.

To put that into perspective, Heeson says that customers served by members of the association accounted for 17 percent of the entire Gross National Product (GDP) in 2006.

Things are looking pretty good in 2007 as well, Heeson says, which he interprets as meaning in a positive — if only slightly — curve upward on the economic growth chart.

Outside of the biotech and communications sectors, “Venture capital companies continue to invest at a constant pace,” he notes. “For the past 18 months or so, investing has been about the same in each market. We’re not seeing one sector or another getting suddenly hot, but more of a broad steady increase.”

But slow and steady is fine for association members, considering the experiences of the few years just preceding. Following the dot.com bubble burst, many venture capital firms took a royal soaking in the market.

Still, “The dot.com period was an anomaly,” Heeson insists. “Venture capitalists were doing deals much too quickly. Today, they’re much more slow in that regard, and that’s a good thing.”

Venture capital firms are certainly used to pendulum swings in the market, since they are always at the forefront of pumping cash into business ideas or technologies that haven’t yet proven themselves. Heeson refers to it as a continual dance, with venture capital firms seeking out attractive entrepreneur partners, and entrepreneurs seeking out interested venture capitalists. The trick is to know when to lead, and when to sit the dance out.

The fallout from the dot.com period has resulted in more due diligence among venture capital firms over the past couple of years, Heeson says. And that is the most important message to the corporate executive looking for funding today.

In order for a company to receive VC support, they had better be prepared to really demonstrate that they have a unique niche product or service; that their business plan is very realistic; and they have a long-term growth strategy.

An executive should do their homework thoroughly before approaching a VC firm, having a clear picture of the entire market in which they operate, Heeson advises. Not only must they know the key competition, but how they are different from the competitors and how new funding will help further develop that differentiator.

The more conservative approach is certainly understandable. A major factor in the recession five years ago was the feeding frenzy approach of investing in Internet-based companies just to beat the funding competition. There was little due diligence in evaluating many of those business plans, Heeson notes.

Of course, not all of the blame was due VCs at that time. Many of the business proposals lacked clear vision on the part of the company seeking funding. It was a whole new marketplace, but many executives forgot that the same rules of common sense still apply.

That has changed in a hurry. Heeson says an executive approaching a venture capitalist today should be prepared to totally bare their sole.

“You must be brutally honest about what is happening with your company,” he advises. “Venture capitalists can deal with problems; but they definitely do not like surprises.”

Still, there is money to be had, especially for those companies that clearly show how VC funds can take them to the next level in their growth.

That makes a company attractive to a venture capital firm, Heeson says, because there still is competition among the VC players for promising proposals. Many companies actually receive funds from several VC companies in partnership with each other. This lets the venture capital firm spread its resources farther, and reduce its risk on each investment.

Heeson says this also encourages the VC firm to proactively seek out new ventures.

“You want to one of those venture capital firms, so the competition is there, but you want to be able to really work with the customer,” he says.

Venture capital money is especially available in certain key geographic markets this year, Heeson says.

“Boston, San Francisco and the Silicon Valley have been the traditional hot spots,” Heeson notes. Other emerging strong areas for venture funding include the Southern California region overall, the city of Seattle, and North Carolina.

Looking ahead, Heeson says he expects a growing amount of venture funding to go toward offshore expansion, and also toward foreign customers.

“Venture capital has tended to be a very U.S. phenomenon, but that will no longer be the case,” he predicts. “I expect to see particular interest in investing in India and China over the next few years.”