The bluffers’ guide to venture capitalism

By - Wednesday 24th June, 2015

As Croydon Tech City jump-starts more and more start-ups in the borough, Robert Ward has some advice for Croydonians keen for a piece of the action

Sometimes, you get lucky. But it doesn’t always seem that way at the time.

So it was when my boss told me he had a great idea. “Of course, oh great one”, said I. Less attractive was that the costs were on my budget, and I had to do all the work. So began my career as a part time venture capitalist.

My knowledge was minimal but fortunately we had excellent advisors, one of whom shared with me his bluffers’ guide. It has stood me in good stead, even I hope managing to bluff a few people at Croydon Tech City. It’s simple: ask these questions, and if asked a question yourself, say “what do you think?” with a smile and a judicious silence.

The questions

Question one to your budding entrepreneur is simple. What is your idea? Lots of good advice can be found in the presentation by Nathan Gold to CTC on how to pitch, but at its most basic you need two or three sentences that express your idea. A word of advice – don’t start with “create an app to…”. An app is how you might deliver your idea, but it is not your idea.

Question two may seem obvious – how are you going to make money? The options are many and various. Sell a service, sell licences, sell software? Who to? One-off payment or a monthly fee? What about ongoing support, product development or upgrades?

Question three – why should it be you, rather than someone else, that makes the money? The wrong answer is that your app will be the best app. That’s what they all say, often someone with no knowledge of the technology. Slightly less shaky is that you will be the first so will corner the market, the so-called first mover advantage. In reality the first mover has an advantage, but no more than that. Intellectual property rights are important here, if you have them.

You will be surprised how many applicants will have been weeded out by just these three questions. Those that have made it this far are worth considering for a second meeting. That’s when you get into more detail so you may need some help. Start there with question four – what is your business plan?

There is lots of good advice out there on what a good business plan looks like. There will be numbers, for sure, but you are looking for the thought behind the numbers. What options did you look at, what choices did you make and why, which options did you reject? How will you handle delays, poor sales, or strong sales or staffing issues? In short, what is your contingency plan?

Question five, more for yourself but use this to probe the weaknesses – do I believe your business plan? Most business plans are wildly optimistic. Revenue growth is forecast to be rapid, sometimes faster than the most successful start-ups have ever achieved whilst costs remain low. Beware the kind of top-down projection which starts from the number of people in the world and breathlessly exclaims “if we only attract .0001% of them …”.

Question six – do you have the skills to execute that plan? Usually a venture capital fund will want to ensure you have a finance man somewhere who will look after the cash. There may be other skills you lack – marketing or who will build your App, for example? I’ll just contract that out or bring someone in doesn’t cut it. Such people aren’t easy to find, especially just when you want them, and do you know how to specify what you want?

Lastly, what is the exit strategy? How are we as investors going to get our money out, but also you the entrepreneur? Will it be a trade sale to a bigger company, a stock market flotation or what?

The risks

Venture capitalists fear your start-up might become a ‘lifestyle’ company. The company grows big enough for the founders to earn themselves a living, everyone gets comfortable so they lose the will to grow the business any further. Money going out creeps up close to money coming in and that is pretty much it until everyone gets bored or a downturn takes the company down.

There are companies like this who have traded for a long time, businesses that eventually employ sons and daughters and everyone lives happily ever after driving their company cars and drawing Directors’ salaries – everyone except the venture capitalists who are stuck with shares they can’t sell. You may swear that this will never happen to you, but it so easily can.

More than a dozen years on and my part time career is history. It had its moments, largely because we started around the time of the .com boom. Although our investments in internet related companies all went rapidly bust some in more traditional technology did pretty well.

Would I put any of my own money into a start-up? Unlikely, but if you’re interested in wooing me, I have a few questions for you. Firstly, what’s your idea?

Robert Ward

Robert Ward

Engineer and project manager specialised in helping businesses make better strategic decisions and improve safety, quality and effectiveness. Conservative Party Councillor representing Selsdon and Addington Village on Croydon Council. He tweets as @moguloilman.

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