Sunday, March 2, 2008

What Do VCs Read

What do VCs read? That is a question that comes up now and then when I am meeting with enterpreneurs. What they are really asking, I think, is "where do VCs get their inspiration about a deal or market space". In my opinion, most of what inspires a VC to get excited about a market comes from rumor, hear say and general media publications. I really don't know a lot of VCs who scour market research reports to confirm growth rates in a new industry or peruse 10Ks to confirm the gross margins of a market leading company. This is one of the reasons so many venture backed deals are flawed from the start. They get funded by VCs who have little more than a superficial understanding of the underlying trends in the industry.

I mentioned that VCs tend to read a lot of general media publications (WSJ, NYT, Forbes, Fortune, ect). In fact, I am amazed at how well read most VCs are about what is gaining traction in popular culture. Getting a mention in one of these periodicals is an excellent way to stoke demand in your business from the investment community.

There is a flip side to all of this, however. When a narrative starts building about an industry being troubled, VCs get skittish, even when that narrative is based on specious arguments. I believe this is one of the reasons the dot com tech crash was so immediate and severe. In late 2000, every mainstream publication in America was breathlessly reporting how the Internet sector was essentially one great big fraud. When Paypal came to Clearstone in 2000 looking for funding, many other VCs simply could not get past the fact that it was a 'dot com'. If it was an Internet company, it couldn't be valuable. The funny thing was that Paypal was actually showing great adoption patterns. But in the end, most VCs were too busy reading Forbes about the stupidity of Internet business models to stop and assess the attractive financials of that business.

Let me offer this observation. If you are starting a company in an industry that is not well understood - 'below the radar' - in venture capital venacular, then you have an uphill battle on your hands. Getting a VC educated about your market space is no easy task. What can you do to improve your odds of getting funded? For starters, provide the VC with as much market data as possible about the trends unfolding in your market. This sounds obvious, but a lot of entrepreneurs believe that VCs are either already well versed about their particular market or that they have the internal resources to quickly find out. The truth is, most VCs have a long list of things they need to get educated about - given the variety of deals that they look at - and the easier you can make it for him or her to get up to speed, the better your chances of getting funded.

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