In Search Of A Better Business Plan
Last spring, at a conference in Albany, N.Y., designed to acquaint entrepreneurs with venture capital, Alan J. Patricof, a New York City venture capitalist, was reflecting on his 14 years as a backer of promising young companies. Until a couple of years ago, he recalls, "we could invest in nearly anybody we wanted, and at very attractive prices." But, he observes, as record dollars have flowed into the hands of the nation's venture capitalists and the public equity market has soared, the pendulum has been swinging more in favor of those needing money. "There must be 500 venture capitalists for you to talk to, so it's a darn good environment," says Patricof, whose firm has participated in financing such successful companies as Apple Computer and Childcraft Education. "This is the time to quit your job and do what you want to do."
Lured by the recent performance of venture capital professionals, investors, including a growing number of employee-benefit and college-endowment funds, have been pouring money into risk capital pools like never before. In the past three years, more than $4 billion in new funds have come into the market; the $1.7 billion inflow during 1982 alone was nearly four times the total sum invested from 1970 to 1977, according to Stanley Pratt, president of Capital Publishing Corp. in Wellesley Hills, Mass., which publishes Venture Capital Journal. As the increased supply of venture capital money brings hundreds of entrepreneurs out of the woodwork and helps generate dozens of new investment funds, it is also fueling a proliferation of venture capital conferences in such cities as Albany, Cleveland, and Pittsburgh -- stops many fund managers didn't often make during the days when money was less plentiful.
The venture capitalists, who typically seek returns of 40% to 60% per year, have hardly given up looking for attractive investments in California's Silicon Valley and Massachusetts's Route 128, where they have been ubiquitous and mostly successful. But the growing competition among fund managers, together with the sheer amount of new capital available, is prompting many of the managers to spend more time sniffing out early-stage investment prospects in other parts of the country. It is a process which at least some venture capitalists believe is being enhanced by the increased number of regional conferences. "Contrary to popular perception," says Stevan Birnbaum, a Los Angeles -- based general partner with Oxford Partner, "we have to market our money and our abilities to help companies succeed, just as entrepreneurs have to sell us on what they're trying to do."
The conferences, most of which art jointly organized by universities and accounting firms, are providing venture capitalists with opportunities to make initial contacts with a number of companies at once and to establish early impressions about products and management talent -- judgments that may be hard to make from a stack of business plans. At a seminar last May in Albany, sponsored by Rensselaer Polytechnic Institute and Venture Capital Journal, for example, around 20 professional venture capitalists, among them Patricof and Birnbaum, spent two days listening to company presentations and mixing informally with entrepreneurs from more than 60 businesses based in upstate New York and in New England, as well as with Big Eight and local accountants and attorneys. The companies attending the RPI conference, mostly early-stage concerns involved in applications of proven technologies, represented everything from robotics to biotechnology and solar energy.
In a field where time can be the most limiting factor, "it's usually hard to justify hopping on a plane to see one company in a region you're not familiar with," says Birnbaum, whose four-man partnership gets about 500 proposals annually before selecting perhaps 10 investments. By necessity, he says, most of his traveling is thus associated with deals that have been qualified by the firm's analyses or by other venture capitalists looking for co-investors. "But if I can get a feel for 10 or 12 companies at a two-day conference," says Birnbaum, a former principal with Xerox Corp.'s venture capital subsidiary, "that's a fairly productive use of my time."
Venture capitalists, though, aren't attending conferences solely for the purpose of harvesting the current crop of investment candidates. "By going into an area," says G. Felda Hardymon, a partner with Bessemer Venture Partners of New York, "we can learn an awful lot about what's happening there and begin to develop some strong local contacts with accountants and attorneys." Particularly in a climate where attractive prospects are being pursued by several competing fund managers at once, he notes, "it's important for people to know who we are and be aware of our track record."
For entrepreneurs, the regional conferences are providing insights into how venture capitalists evaluate investment prospects and what it takes to rise above the sea of companies looking for backing. Four-year-old Power Kinetics Inc., a $2 million company in Troy, N.Y., involved in research and development and the manufacture of renewable energy products, for example, presented its business plan at the Albany conference as a prelude to "a serious approach to venture capitalists late this year or in early 1984," says president Mark P. Rice. "We used it as a learning opportunity and a way to make our next proposals better." Among the things Rice learned was that he and his associates would have to do a much more detailed market analysis in order to be taken seriously by investors.
In a similar spirit, Thomas J. Gregory, president of one-year-old Ovation Technologies Inc. of Canton, Mass., spent his time in Albany talking with fund managers and studying the formal presentations of other companies in an effort to find ways to sharpen his sales pitch when his fund-raising efforts get under way. During the fall, Ovation (formerly named Spectrum Group Inc.), a microcomputer software developer, hopes to raise $5 million to market and promote its first product targeted at first-time executive users. Based on discussions with venture capitalists, Gregory was planning to revamp his business plan extensively before pursuing further contacts. "Positioning a product in the market will be the critical thing," he says. "Once we're ready to go, I've got a handful of business cards and I'm hoping we'll be able to raise the money we're looking for more efficiently."
For other businesses, however, the conferences have become opportunities to pursue fund-raising efforts already in progress. One example is Athenaeum Technology Inc., a Braintree, Mass., start-up company developing a 5 1/4-inch, hard-disk computer-storage system. Athenaeum presented its business plan, which calls for $2.5 million of equity to meet current working capital needs, at a conference sponsored by the American Electronics Association last March in Monterey, Calif. In May, three of the company's top executives traveled to Albany to renew relationships with venture capitalists they had previously met and to make initial contacts with others.
It's all part of our systematic attempt to market the company," notes Jean-Paul Garodel, co-founder and marketing vice-president. "We're trying to build awareness among investors about who we are. To get what it is looking for -- $2.5 million for about 25% of the company's equity -- Garodel figures Athenaeum may have to spend at least six months meticulously following up its leads with potential investors. Yet no matter how aggressively the company promotes itself, he notes, it won't be a substitute for the basic requirements any venture capitalist expects from a deal. Says Garodel: "Whoever puts money in the company will be taking a hard look at the management and the products."
With so many attractive companies trying to get a piece of the new money, venture capitalists say the standards for the deals they do are as high as ever. While some lucky entrepreneurs are receiving more favorable prices for their start-up businesses than any time before, "there will always be a lot of losers," observes Pratt of Capital Publishing. But as venture capitalists devote part of their time to the seminar circuit, some companies may find ways to break through the filter. "If I were trying to build a company, I'd use the conferences and the entire process to build a better business plan," says Alan patricof. In 1982, he and five associates looked at nearly 400 plans, met with about 100 entrepreneurs, and financed just 12. "We'll do about the same this year," Patricof says. Even so, there are plenty of others looking for deals, he says "So one of the most important things is to get your idea listened to."
STALKING THE CONFERENCES
Before committing the time (usually a day or two) and the $250 that is the typical registration fee for regional conferences, entrepreneurs should check out the sponsors and find out which venture capitalists will be attending. The following is a list of some of the conferences on the calendar this fall. Inquiries about them, except where noted, should be directed to Venture Capital Journal, (617) 431-8100.
September 12-13*: Dallas
September 22: Fort Lauderdale, Fla.
September 28: Atlanta
September 29-30: Salt Lake City
October 4: Washington, D.C.
October 6: Phoenix
October 11: Chicago
October 13-14**: Atlanta
* For information, call Arthur Young & Co., (214) 969-8666.
** For information, call Georgia Institute of Technology, (404) 894-2408.
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