Breaking Through The Broken:
The Transparent Guide To Overcoming
The Inefficiencies In Early Stage Venture Capital.
So you’ve done the work, assembled the team, of plans in front of them. Say what? That’s right,
written the business plan...Now what? For most most investors don’t read business plans. They
entrepreneurs, successfully raising capital is a simply don’t have the time or resources to read
daunting task. After spending countless hours at thousands of highly subjective business plans
networking events and collecting a shoebox full that all say pretty much the same thing. If that’s
of business cards from people who can’t really seem the case, how do investors find, filter, and fund
to offer any help or guidance, what is one to do? the most promising new venture opportunities in a
You start blasting out your business plan to anyone deep ocean of possibilities? The truth is, they can’t.
with a working email address or a “submit a plan”
link on their website. But after hearing nothing but This current process for fostering early stage
crickets from all your proactive efforts, you may innovation is broken, and it needs to be fixed.
even begin to second-guess your big idea, your The problem isn’t with the number of opportunities
entrepreneurial abilities, and your chosen career investors are presented with, but is rather a lack
path. How can an entrepreneur break through and of an efficient means of filtering the options. The
get venture funding when most investors don’t innovation system is constrained by throughput,
even read business plans? not supply, but how can we solve this problem to
make the process of creating new companies more
It’s true. Most VCs and Angel investment groups are efficient and generate the returns investors,
completely buried in submissions from entrepreneurs entrepreneurs, and ultimately the global economy
who have “remarkable products, stellar financials, need so desperately?
and a world-class management team,” or at least
that is what their business plan would say if they
actually had the resources to read the thousands
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Cont’d Breaking Through The Broken: Introduction
Early stage investing will always be considered of the century, with the ability to create new jobs
a high risk, high reward game. But what if there and even spawn entire new industries, where else
were smarter, more efficient tools that enabled both could we turn for game changing growth?
investors and entrepreneurs to optimize the process
by making the investment process “less gut” and But as promising as American innovation sounds,
“more guided”? Could we eliminate some of the fear if we don’t step up now and collectively address
and confusion surrounding early stage investing the inefficiencies in how new companies are being
and begin to truly optimize entrepreneurship? created, our economic and social futures could be
at serious risk…
In case you’ve been living under a rock for the last
six months, you know that our economy isn’t doing
so hot. The system’s flaws have unfortunately come
to a head in recent times, leading to the near peril
of once esteemed industries (goodbye Lehman
Brothers and Merrill Lynch), a staggering
unemployment rate not felt since the 1970s, and
a socialistic-like bailout of our cherished laissez-
faire markets. With crumbling credit markets and
an over-hyped housing bubble sparking the recent
Wall and Main Street economic meltdowns,
American innovation is now being trumpeted as
the last best chance to lead the impending economic
recovery. With Financial Markets in turmoil, and
real estate in a downward spiral, innovation is
logically the economic game plan for the comeback
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Change We Can Must Believe In
Fortunately, the timing for fixing this problem couldn’t contrary to popular belief, more money is not the
be more ideal. With the new administration comes a only answer.
promise of support in the creation of small businesses.
Change will come with policies like President Obama’s The central issue is not with the quantity of ideas or
“Innovation Agenda” which “leverages technology number of willing investors, but rather in properly
to grow the economy, create jobs, and solves our pairing the two. There are plenty of investors willing
country’s most pressing problems.” to provide the capital needed by the entrepreneurs
working to change the world, but there is often a
“Right now, somewhere in America,” believes Obama, communication breakdown between the two parties.
“a small business is at work with the next big idea… On one side there are the mysterious “deal mak-
an entrepreneur is sketching plans for the start-up ers” who might seem easy to reach with the click
that will revolutionize an industry.” What Obama of a mouse, but in reality are incredibly difficult to
forgot to mention, though, is that one garage down engage with meaningful dialogue. On the flip side,
from the next Facebook, an entrepreneur is working there are the passionate entrepreneurs who are eager
on the next big flop. Along with the many brilliant to find out what an experienced investor thinks of
and world-changing ideas seeking capital, there are their “big idea,” but usually hear back nothing at all
also plenty of terrible ones. How can an investor after submitting their materials for consideration.
possibly know the difference between the two at such
an early stage? How is an entrepreneur to know So what’s the rub?
that the time (and capital) they are spending taking
their project down a certain path may be much better Well, there are a number of problems that are
spent directing it in an entirely different direction? holding us back. For one thing, the process for
With today’s one in ten success rate for creating new raising venture capital is shrouded in secrecy. Isn’t
ventures, we don’t have time to just “bet more”; it strange that in an industry hell-bent on building
we need to bet smarter because what matters most new companies and “inspiring innovation”, most
is the output that these invested dollars return. investors aren’t even willing to take the time to give
entrepreneurs some valuable feedback; specifically
This all raises the question; what is the early stage telling what they’re looking for, and guiding
investor community currently doing to optimize entrepreneurs to focus on certain areas of a business
entrepreneurship and increase the success rate of if they want a legitimate shot at raising investment
their investments? capital? Don’t you think if entrepreneurs built their
businesses around the actual criteria they were
being evaluated on, they’d have a much better shot
Support Beyond Dollar Signs at connecting with investors? Of course both
parties have to be judicious with time and energy,
Let’s not forget that entrepreneurs, and the investors
but the complete lack of communication is beneficial
that support them, need all the help they can get to
to no one.
turn these ideas into world-changing realities, and
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Cont’d Support Beyond Dollar Signs
What is so frustrating is that both parties really need an era of collaboration and transparency isn’t just
each other; the future of the world (seriously people) a nice idea; right now it’s an imperative.
can be very positively affected if this communication
gap is bridged. Bottom line, while investment capital
injected into a handful of new ventures is great, most
early stage companies need much more than money.
Raising Capital: Pick Your Path
To an entrepreneur, fundraising is scary stuff,
The benefits of transparency, guidance, and mentor-
and rightfully so. Make no mistake about it;
ing that an experienced investor can provide can
FUNDRAISING IS HARD, and even harder during
ultimately prove to be the difference between success
leaner times. However, those working on the next
and failure. If an investor has wisdom to share, they
big idea shouldn’t lose their faith. They should keep
should be generous with it, not hold it so close to
plugging away, stay inspired, and conduct careful
their vest. As Ronald Reagan might say, “Tear down
research on the options available to them.
this black box and start to educate entrepreneurs and
other investors about what works and what doesn’t.”
Besides the current recession, most of the fear
After all, neither investors nor entrepreneurs (or
around raising money comes simply from a lack
our economic recovery) are well served by spending
of understanding. The world of start-up capital is a
weeks or months to move a venture forward if it’s
foreign one to most entrepreneurs, partly because
fundamentally flawed in its infancy.
investors are so unlike them (deal makers vs.
creators), and partly because they don’t have an
With the number of new small businesses expected
intimate understanding of how the world of capital
to rise in 2009 (with job losses high and traditional
operates. Well, let’s try to straighten out some of
employment options limited), many will take the
the confusion.
opportunity to test their entrepreneurial chops.
Start-ups are now cheaper to launch than ever before,
There are two main types of investors: Angels and
as $500K has become the new $5 million. Primar-
Venture Capitalists. Angels invest their own money
ily because basic software that was once absurdly
and VCs invest other people’s. The other main
expensive is now free (open source), and astonish-
options for funding are to solicit your friends and
ingly good hardware (or virtual processing power) is
family, or to just do it yourself. Given our current
now very affordable. But before an entrepreneur will
economic climate, and the fact that innovation by
be able to transform an innovative idea into a real
entrepreneurs is essential to right this economic ship
operating company, they’ll most likely need to seek
and restore the confidence in our global economy,
a credible outside source of capital (and counsel-
all options are on the table. So read up, welcome to
ing). While the choices are abundant, the routes for
business financing 101.
depositing a round of funding in your bank account
still remain challenging to navigate. The benefits of
The VC Route
secrecy are far too one sided. To change our future
Venture capital is the most highly regarded form
we need to re-think the past. Moving forward into
of funding, but it’s also the most misunderstood.
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Cont’d The VC Route
Venture Capital (VC) is funding that comes from returns on their investment over a set period of time.
professionally managed funds that have roughly The fastest and biggest way to do this is for their
$25 million to $1 billon to invest in promising new portfolio companies to either get bought out or go
businesses. Because there are so few of them, and public, so you can expect them to push for unnatural
they have control of the money, VCs are extremely things to happen. $5M to break the space-time
choosy on who they decide to fund. continuum usually looks better on paper than it
turns out in practice.
VC funding is certainly not for every company,
and timing is critical, but if you’re a high-growth In addition, VCs almost never look at a business plan
company capable of generating significant revenue or listen to a pitch if a trusted individual didn’t refer
in the short term (or already have a nice revenue you. While this practice certainly limits the amount
growth curve), funding from an institutional of junk plans (i.e. cubic zirconia?) on their desks, it
venture fund provides a fantastic opportunity for also leaves out the possibility of discovering a true
accelerated growth. Such acceleration, however, gem. Yes, the old boys networks is a great thing if
does not come cheap. you are part of the in-crowd, but both parties could
benefit from a more open and efficient approach to
Most VC firms offer a few other undesirable finding and filtering investment opportunities.
“benefits” in addition to their money. In many
cases they will require the addition of a few senior “VCs do initiate on their own when they see
management roles (of their choosing) to your team. a bright startup. But it’s so rare that you seldom
Remember, VCs are usually bankers at heart, so don’t
hear such stories. And when it does happen,
expect them to be able to help with or understand
your technology or target consumer’s emotional it becomes legend.” - Vikas Rana, entrepreneur
needs. Go to them when money is all you need.
A big name VC will look to own AT LEAST 25% of As funding becomes tighter and tighter (until the
the company to cover their time and energy for a economy begins to bounce back) the rate of innova-
particular investment. Venture capital is by far the tion will likely speed up; out of necessity to find new
most expensive money you will ever raise both in ways to make portfolio companies profitable quickly.
terms of equity and sanity. And, just as people always say it will be hard to get
VC funding, the large VCs will have money to invest.
The existing VC model centers around a short-term For those fortunate enough to stand out and make a
focus on a big payout. VC firms do not typically favorable impression, funding will still be available,
invest in businesses that have a promising long-term as it was after the dot com bubble; but it will just
future but rather in ones that will likely see a take a little more work to get that cash in hand.
liquidity event in 3-5 years. Because these investors
aren’t putting up their own cash, they feel substan- It is important to have your priorities straight and
tial pressure (it’s their job after all) to see significant your feet planted in reality. If you’re new to the game
and have a very early stage venture that hasn’t yet
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Cont’d The VC Route
figured out how to make the cash register ring, you Angels thrive in a space that VCs and banks often
are probably better off working out the kinks and fear to tread (very early stage, pre-revenue ventures)
creating value than you are putting on a silicon in hopes of generating impressive long-term returns.
valley road show. Don’t fret, there are other options. One study cites a rate of return of about 127%, on
average, or 2.6 times the investment in 3.5 years.
These Angels Have Money…and Wings The risks, of course, are steep. Still, 258,200 angels
Angel investors carry the heavenly name for a pumped $26 billion into 57,120 ventures last year,
reason; most can (and are willing to) offer much according to the University of New Hampshire’s
more to your venture than just money. They can Center for Venture Research. Combined with the
provide experience and mentorship to carry your potential “financial returns” an Angel gets from
business to the Promised Land. Angels are usually playing a role in building a successful business, the
entrepreneurs themselves, successful ones who are “emotional returns” one gets from a playing a role
looking to offer up help to the next generation of in building a successful business makes Angel
fresh-thinkers. But don’t be fooled, just because investing that much more rewarding.
these guys aren’t bankers, doesn’t mean that they
don’t have serious skills. Traditionally, the problem with Angels was finding
them. However, there’s recently been a proliferation
Angels usually invest in spaces that they themselves of formal Angel investor groups and websites that
have experience, a trend that can prove to be very screen investments and pool money on a local and
helpful to an early stage company, especially one regional level (read more here in North Mindmeld
whose founders lack experience. An Angel usually section). According to the Angel Capital Association,
has the time to provide guidance, as many of them there are now over 330 Angel Groups in the U.S. and
are no longer working full time and enjoy becoming Canada. Like most high net worth individuals,
advisors to those companies in which they invest. Angels don’t walk around with a sign on their back
Remember, Angels are entrepreneurs first, so of- that says “investor” so use your Google hunting skills
fering them a hands-on investment provides them to track them down (psst…if you haven’t already
with the opportunity to live vicariously through the mastered this craft, should you really be starting a
founders and keep their skills sharp, without having company in the first place?). What this expansion of
to take the heat. formal groups and Internet enabled “pitch farms” has
created is a familiar problem to VCs, a deep ocean of
“You make money in Angel investing by killing potential investments where quality yield is far more
off your losses early, as quickly as possible. important than quantity of submissions.
The entrepreneur really believes that success
Friends & Family First?
is just around the corner, and you’ll quickly go If you can’t finance your venture out of your own
broke investing for ‘just-around-the-corner’.” pocket, you’ll most likely turn to those in your close
- Houston-based Angel, Richard Holdren. personal circle. However, if you do go this route, you
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Cont’d Friends & Family First?
better be damn sure you aren’t going to fail, because In addition, debt may be better than equity. If
there’s nothing like the feeling of going back to your someone lends you money, you only have to pay
Dad, Uncle Larry, or longtime family friend and it back with interest. If they insist on buying stock
asking them for more money (or worse, telling them in your company, consider making it nonvoting stock
that you just blew the $50,000 they just gave you). (so they can’t tell you how to run your company).
Lastly, after you’ve taken their money, make it a
When raising money from friends and family, it’s priority to fulfill their expectations by giving them
important to understand that it can often create per- a maturity date for their invested money and do
sonal and emotional issues that go well beyond your everything possible to pay them back in a timely
business judgment. If you borrow and subsequently manner (with hopefully a solid ROI). Don’t discount
burn through the thousands from Uncle Larry for constant communication either. Keeping all investors
your innovative start-up, don’t kid yourself; he’s go- highly informed is very important, and it helps
ing to want to see something besides your pretty face prevent angry phone calls and awkward moments
at Thanksgiving dinner. Can you say awkward? Con- when things aren’t going exactly to plan.
versely, if you have an informal agreement with him
or someone else and you strike it rich, this could lead Kick-starting your dream by taking money from
to some uncomfortable legal drama down the road. those who you trust can save a lot of time and
energy looking for external investors. It can also
“What’s money for anyway? It’s to make things be just the right motivation to keep your eye on the
happen,” once said Auntie Joyce, maverick en- grand prize, because nothing feels better than being
able to write your Dad (or Uncle Larry) a check for
trepreneur Richard Branson’s aunt. In 1972, she
ten times what he gave you to follow your dreams.
lent $10,000 to Sir Richard so he could build a Besides, getting rich with your friends and family
recording studio, which eventually became Virgin makes it that much better, because who are you
Records, and decades later, a $20 billion empire. going to go on vacation with if you’re the only
one who can pay for it?
When picking this path, it’s important to exercise
the same discipline as you would in dealing with a Take It To The Bank
professional investor. Firstly, treat family and friends There is a common misconception that start-ups
as if they were strangers, insist on some sort of can’t get traditional bank loans. Not true. Banks,
official agreement between you and them. Secondly, do, however, require some sort of collateral. So
you should only borrow from those who have a if you’re fresh out of college and your personal
disposable amount to lend. Sounds like a duh, but balance sheet is the title to a beat up 1998 Honda
many people don’t know how to say “no” to a loved Civic and no significant credit history, than you
one and wind up leveraging their futures on your have very little chance of squeezing any kind of
new “can’t fail” concept. money out of a bank. And in today’s market, forget
it, financing is going to be tough to come by unless
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Cont’d Take It To The Bank
you have a stellar credit rating and something that Time will tell whether the Obama administration
the bank can use to offset the risk of the loan. is indeed going to be able to walk their talk. Accord-
ing to all early indicators though, bank/loan capital
Even if you do have some assets you should still be should start to become more available cheaper and
realistic, don’t just expect a bank to fork over their easier than it has been in years. But with a credit
cash unless you can prove to them that there is a crunchy market, this option still may prove to be
high potential of generating enough revenue to repay just as challenging as the others. Is next year going
that loan. If you can’t, you better be prepared for the to be the Year of Small Business Loan? Stay tuned.
bank to take something of value if you default. (p.s.
hiding from a repo man sucks, so think long and Bootstrapping: Plastic or Paper?
hard before you get in deep with the banks). Ahh…credit cards. They can be very useful if you
In this down economy, it’s become harder and harder are responsible and know how to work the system,
for banks to lend out money. The Federal Reserve but if you’re a rookie, they’re like playing with
recently reported that 75 percent of domestic banks matches and gasoline. You can easily rack up tre-
have tightened lending standards to small firms, mendous debt, and with extremely high interest rates
and about 95 percent (up from 70 percent just a few you may never catch up if your business stumbles
months earlier) say they are charging more interest even once... You know those commercials with the
for loans to small businesses. guy in the pirate hat singing a jingle in some sea-
food restaurant because his credit score sucks and
But there is some good news at the end of the dark he couldn’t get a loan? That’s based on a true story,
tunnel. President Obama’s nominee of Karen Gordon so don’t be that guy who was naïve about the conse-
Mills to lead the Small Business Administration is quences of over leveraging yourself with plastic cash.
a positive step (btw – the SBA’s budget was cut in
half over the past eight years of the Bush). Mills, a The term “bootstrapping” refers to much more than
venture capitalist and successful entrepreneur from financing a venture through credit cards, though.
Maine has promised to take some aggressive strides Working two jobs, doing consulting work, anything
to foster economic development and the growth of you can do to alternatively finance a new business
small businesses. Let’s all hope so. falls into this category. Consulting work is an
interesting source of income, but be careful not
“The small business sector in this country is the to let that “moonlighting” become your full time
engine of economic growth, and we need to keep business (investors are weary of throwing money at
the night shift entrepreneur who just turns out only
the engine running during this financial crisis. The
to be practicing for a full time consulting gig).
best way to do that is through expedient, targeted Be prepared though, when you decide to bootstrap,
and effective lending through the SBA.” you, the founder and a limited number of early
Senator Chuck Schumer (D-N.Y.) employees will probably forgo steady paychecks and
a good nights sleep for quite some time to make your
dream a reality.
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Cont’d Bootstrapping: Plastic or Paper?
“People need to look back at bootstrapping, at a trade show booth. Just because you shake hands
the way the vast majority of businesses in the US with an investor doesn’t mean he’s ready to give you
a giant check. This traditional process of finding
are started, as a viable means to incubate during
entrepreneurs needed to evolve, and in some senses
slow times. I’m excited to see what comes out of it has. Thanks in large part to the Internet, investors
this time as it is the ideas that were being planted are buried in new business plan submissions. As of
during the last bust that have truly changed our this writing, there are over 37,000 business plans on
world today. The bust made people reflect, be AngelSoft.net, over 100,000 plans on FundingPost.
deliberate, and grow prudently.” com, and over 6,000 plans on FundingUniverse.com.
Sounds great for investors, right? But let’s take a
– Michael, entrepreneur & blogger
closer look at the math:
If you’re bootstrapping, you’re going to need
If an investor tried to review all these plans for
evaluate every expense of your start-up down to the
30 minutes each it would take over 34 years reading
ballpoint pens. The trick is to come up with creative
non stop for 8 hours a day, 5 days a week, for
and inexpensive ways to get the job done. Remember,
52 weeks a year.
especially in your early stages, the pennies you save
are sometimes more important than the pennies you
Where’s the Brita water filter for business plans when
make. Start-up with what you need, not with what
you need it? Out of those 143,000 plans described
you want, or you could soon find yourself starring
above, how many are actually high quality, better to
in that aforementioned jingle after all.
digest, “investor-ready” ideas? Investors are thirsty
for exciting opportunities, but they’re not quite ready
to wrap their mouths around a fire hose. As for the
Investor Side: What’s Broken? entrepreneur looking for a leg up, blasting your
Before the Internet, entire industries emerged that business plan out to several thousand investors with
helped investors find “good” entrepreneurs; trade the click of a button is about as strategic as buying
shows, print publications, and an army of investment a Powerball ticket.
banking connectors who helped investors and entre-
preneurs find each other (for a chunky fee of course). The Internet has created a massive pool of invest-
You can spend half your career (and life savings) at ment opportunities, which has shifted the real
trade shows and more often than not all you would problem from an issue of quantity to throughput and
have to show for it would be extra airline miles and yield. Adding another 140,000 business plans to the
a desk drawer full of name badges. un-harvested fields of internet “pitch farms” will not
increase yield any more than it already has. Angel
Today’s investors rely more than ever on their investors are already using this huge pool of business
personal filter of trusted referrals and connections plans and their throughput has likely increased by
with friends. Tip: trust is not earned swapping cards an additional 10 or more deals per month at most.
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Cont’d Investor Side: What’s Broken?
But while this increase in reviewed applicants should member of a small Angel group that exposes you to
lead to slightly stronger funding candidates, the “quality” investments usually costs money (annual
overall problem is still NOT being solved. In fact, dues), and more often than not, you end up doing all
the minimal gains from reading a few more plans the deal review work anyway. So, what are you really
each month doesn’t actually increase the number paying for? If you’re going to pay to join a social
of deals that an Angel group can seriously club, join the country version, at least you’re
evaluate or fund. That number (based on their in guaranteed a good tee time and some exercise.
house resources) remains constant no matter how
many ventures are knocking on the door. Speed Pitching Produces Few Hits
Nearly every major funding website boasts that in
The cold fact is that most investors still won’t even addition to their “connecting” services, they also host
glance at a business plan unless it’s gotten a refer- entrepreneur speed pitching events. Speed pitching?
ral from a credible third party. It’s not only about It doesn’t work for finding a soul mate, so why would
who you know, it’s also about how you know them. it work for finding a high quality venture invest-
Entrepreneurs and business plans referred by others ment? Let’s face it, true understanding of a venture,
who have proven to be good filters for garbage ideas, the management team, and the target market doesn’t
often float to the top of the pile. How else do you happen during a frenetic 20 minute pitch over a
expect investors to filter through 34 years of reading cheese danish. Investors need to make confident and
material? Everything else usually gets dumped into educated decisions based on data, not just rely on
the circular filing cabinet. Today most investment their intuition or how the entrepreneur dresses that
deals come down to personal TRUST, which is pretty day. Listening to eager, money-hungry entrepreneurs
hard to create in a virtual world. dial in their elevator pitch is exhausting. Seasoned
investors are looking for thoroughbreds, not an inbox
Websites like Linkedin are useful tools for examin- clogged with also-rans.
ing a person’s work history and experience, but they
are not a substitute for one on one interviews and Funding Universe has recently made a lot of noise
the ability to make an objective investment decision. with their Live Pitch concept, which they outline as:
Characteristics like work ethic, ability to “Businesses are allowed four uninterrupted minutes
handle risk, verbal skills, and attention to detail to present their venture. They then have three min-
are learned through personal interviews, not back utes to answer questions and bing bam boom they
and forth emails. are done. Four minutes is not a lot of time to explain
an entire business, so the pitches have to be precise,
It does, after all, take the same amount of time to thorough and engaging.” Are you kidding? Four min-
read a bad business plan as it does a good one, and utes is how much time it takes to ask a stranger for
even on the top funding websites (though they’d directions, not convince them to forge a committed,
probably dispute it) there’s still not an effective way long-term relationship.
to filter out all the junk. As an investor, becoming a
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Cont’d Speed Pitching Produces Few Hits
investors to be able to discover and fund fresh
The chance that a good investment will surface opportunities based upon the actual strength of
and ultimately be made in one of these speed pitch the venture, rather than the bells and whistles
events is very low. For a Web 2.0 company to go of a rushed or expensive presentation.
pitch alongside a clothing company and a biotech
company to a roomful of investors with varying Following The Roar Not The Reasonable
interests is inefficient for everyone. As an investor, Unfortunately, today’s early stage venture investing
why would you want to hear four minute, spin-filled, market is a little bit like following Tiger Woods on
“sunny sky” pitches from entrepreneurs focusing on the golf course. This trend makes it extremely
a space in which you have no interest or knowledge? difficult for new innovative ideas to grab the atten-
tion from their desired audience. While there are
Many tech conferences today (like well-known hundreds of world-class golfers playing on any given
DEMO) allow startups to pitch and demo their weekend (who are plenty entertaining to watch),
products to their attendees, almost always for a once the crowd following Tiger roars, everyone turns
hefty fee (up to $18,000!). their eyeballs to Mr. Woods (even when he’s 6 strokes
back). Because of the inherent high risks involved,
“While conferences like DEMO are extremely the investing community is so susceptible to this
lucrative for the organizers, I’m not sure the herd mentality; when a top tier firm or individual
invests in a space, it seems that everyone follows.
startups or attendees attending get much out of
it other than a great networking event. There are These “me too” investments lead to businesses,
too many start-ups for press to give even passing which often are inferior to other start-up ventures,
coverage to many of them, and attendees are lost receiving full funding simply because they operate
in a sea of pitches that all begin to blur together.” in a space that has garnered some interest from the
recognized big boys (i.e. Sequoia, Kleiner Perkins,
- Michael Arrington. TechCrunch.
Greylock, etc.). Is this playing it safe or just playing
it stupid? If innovation is going to solve the problems
In addition, when a large fee is involved, attendees
of tomorrow, do we really need investor dollars
don’t know if they’re really seeing the best start-ups
going to yet another video streaming site with a
or just the best start-ups that were willing to pony
social networking component that’s primary revenue
up the presentation fee.
model revolves around advertising?
While there is a need for young companies to
Another problem with the industry is that it has
showcase their innovative ventures to experienced
become entirely too incestuous, with the top firms
investors, and there is a natural fee based filter that
and individuals pouring larger and larger amounts
weeds out the dreamers, this tactic has been met with
of money into only a very small percentage of the
mixed results. With our economy in dire straights,
companies that actually need it. As VC funds have
the time to accelerate innovation is NOW, It’s time for
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To Overcoming The Inefficiencies In Early Stage Venture Capital dontgosouth.com northangels.com

Cont’d Following The Roar Not The Reasonable NORTH MINDMELD
grown, so has the size of their investments, leading The scarcity of capital for early stage companies in recent
to a “handful of big bets” mentality that leaves a lot years has lead to the creation of literally thousands of
of promising early stage companies standing in the businesses focused on helping entrepreneurs raise money
cold. Although placing large chunks of capital into for their start-ups. At North, this subject is close to our
ventures with established traction is valuable (and hearts, as we’ve made it our mission to make the entire
lower risk), it also means true innovation is being process for fostering, filtering, and funding entrepreneurial
left on the sidelines when it should be cultivated in innovation more efficient.
an efficient manner. We don’t need seven great new
companies right now; we need seven hundred. Young While some individuals and companies are taking strides
stars who are new to the game are being overlooked to optimize entrepreneurship and inspire innovation,
for individuals with more experience, not necessarily others unfortunately seem to be falling into the all too
because it’s the experience that makes their venture familiar trap of playing “follower,” when today’s economy
better, but simply because they know someone who desperately needs leaders. While there’s certainly value to
can get them money. extract from a few of these businesses, many unfortunately
are coming up short of industry expectations, launching
“The real issue is that getting financing is difficult the exact same set of features and functionality as those
and inefficient for the investor. I’m having to create that came before them.
a whole slew of personal relationships, networking,
“They have taken their cue from the Gold Rush when
etc… - just to get small amounts of money. While
the truly crafty business-people made money not from
I like being social and getting out there, it’s slow.
prospecting but by selling shovels to the prospectors.
We need a Wal-Mart model for “common’ money”
Likewise, today’s money-raising services have found
(i.e. under $500k using a typical business model).
a low risk means to separate the cash-starved
The real issue is that many people could be funded
entrepreneur from any money he or she may have left.”
so much more efficiently, with better returns, if the
- Antiventurecapital.com
industry was more transparent.”
- Adam Nelson, Founder of varud.com In this section, we highlight a few of the emerging ideas,
ventures, and individual brand names that either have
While investor attention is being paid to the or are in the midst of trying to bring much-needed
Tiger-like entrepreneurs and ideas of the world, efficiency to the early stage venture market. Are any
the next great phenom is sitting on a hell of smart the long-awaited silver bullet that is going to help
concept and still waiting to be discovered. How can accelerate economic growth when now we need to c
this talented bunch break through and get some time reate innovation faster than ever before?
on the field?
You be the judge.
12 Breaking Through The Broken: The Transparent Guide © 2009 North Venture Partners, LLC
To Overcoming The Inefficiencies In Early Stage Venture Capital dontgosouth.com northangels.com

Cont’d Following The Roar Not The Reasonable The Rise Of Pitch Farms
Entrepreneur Side: What’s Broken? We’ve already spoken at length about the recent
proliferation of the “Pitch Farms,” those online destinations
Great Players Listen & Practice, A Lot.
that promise to connect start-ups with the investor
There’s no question that success comes through hard
community. If you’re an entrepreneur, you’re probably very
work and persistence. If that’s the case, why does the
familiar with the usual suspects that offer up their virtual
media focus only on those stories of achievement?
cork board for some type of fee (usually a recurring
Flip through the pages of Inc and Entrepreneur, or
monthly one): FundingPost.com, FundingUniverse.com,
watch Donny Deutsch on the Big Idea and you’d
GoBigNetwork.com, Efactor.com to name just a few.
think wild and immediate success is the norm for an
entrepreneur. Well, the fact is, the majority of new
businesses fail, but the learnings from these failures
can be invaluable if an entrepreneur uses the setback
as a chance to dig in and come back stronger.
In order for innovation to take flight on a grand scale
two things need to happen. First, we need to provide
entrepreneurs with more honest and candid feed-
David Rose, Founder and CEO of AngelSoft.net,
back on what it takes to succeed. Currently, it seems
considered one of the “smarter” pitch farms, outlines both
that most investors still aren’t willing to roll up their
the opportunity and the shortcomings of these destinations
sleeves to help nurture and cultivate new entrepre-
when he said, “…there are many, many web sites out there
neurial talent. Read any entrepreneur blog these days
which purport to connect, or ‘match’, entrepreneurs seeking
and you get the feeling that investors are out to make
funding with potential investors. By our own count,
entrepreneurs feel unworthy of their money. While it’s
there are probably three or four dozen, and that’s without
not true, the best way to stunt innovation is to offer
looking very hard. The reason there are so many is that
no constructive feedback at all (positive or negative).
it’s like shooting fish in a barrel: how many starving
entrepreneurs wouldn’t want to come to a web site that
The second necessary ingredient for innovation to
promises them cash?!”
expand is for entrepreneurs to make the personal
investment it takes to be a success. In Malcolm
Mr. Rose originally marketed Angelsoft to Angel groups
Gladwell’s latest book Outliers, there is a chapter
as a software that enabled submissions, file management,
about what it takes to become a world-class talent.
and group communication tools. It was a lot of the
Gladwell quotes neurologist Daniel Levitin, “The
infrastructure that traditional Angels needed to scale
emerging picture from such studies is that ten
and update their current submission processes, making
thousand hours of practice is required to achieve
them more “new economy ready.” However, Angelsoft has
the level of mastery associated with being a world
since morphed into another massive deal farm for the
class expert - in everything. In study after study,
start-up community. Perhaps pleasing their engineers on
of composers, basketball players, fiction writers,
staff, they now offer up a dizzying array of features and
ice skaters, concert pianists, chess players, master
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To Overcoming The Inefficiencies In Early Stage Venture Capital dontgosouth.com northangels.com

Cont’d Great Players Listen & Practice, A Lot. Cont’d Rise of Pitch Farms
criminals, and what have you, this number comes software updates. So many in fact, it makes an average
up again and again.” Angel investor feel as though they’re playing around
on their kid’s Facebook page.
Entrepreneurs pay attention; success in business or
sports isn’t based on luck or talent, but hard work. Even with the questionable, confusing, and clearly
When asked to sacrifice their time, salary, or per- off-target features, it’s not hard to tell that Mr. Rose has
sonal savings to make a business fly, far too many his sights on consolidating the entire early stage venture
entrepreneurs walk off the practice field, refuse to market. With 442 Angel groups, over 14,000 investors,
hire the high priced coach, or simply cut corners. The and a staggering 2,000 new venture applications per
insight here is that there is no easy path to greatness; month, they now have an Open Deal pitch for $250 a pop
to make it you have to pay your dues and commit that allows an entrepreneur to get their plan in front of
completely. Could you imagine an amateur athlete all 14,000 investors with the click of a mouse (if those
telling the New York Yankees that “after” they pay investors were actually logged on and could even find
him millions of dollars, “then” he’ll go hire a batting their way to the Open Deal room…).
coach and spend 10,000 hours to learn how to hit a
95 mph fast ball?
“The odds aren’t that much different for start-ups.
You are going to be embarrassed, ashamed,
labeled as an idiot, shunned, ridiculed, and
occasionally driven from the village with pitchforks.
On average, YOU ARE GOING TO FAIL.
MULTIPLE TIMES, in NEW & INTERESTING ways.
GET USED TO IT. In fact, the more you are used
to failing -- and failing fast, with data on how you
“The sad reality, however, is that while it is extremely
fail -- the better off you will be.” easy to get hungry entrepreneurs to list their plans, it is
- start-up advisor Dave McClure. well-nigh IMPOSSIBLE to get investors to show up on the
other side of the curtain...for the simple reason that (a)
Remember, most investors are completely buried in the ratio of investors to entrepreneurs is about 1:1000,
business plans and simply can’t dive deep into each and (b) investors are so deluged with opportunities that
one on a personal coaching level. So, just because an they simply don’t go out LOOKING for plans; plans come
individual is not willing to fully commit to funding to them!” says Mr. Rose who in his own words admits
your venture does not mean your idea is a bad one. he’s got an efficiency problem on his hands.
Perhaps it’s just not “investor ready” and what you
really need is a nudge in the right direction. Even
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To Overcoming The Inefficiencies In Early Stage Venture Capital dontgosouth.com northangels.com

Cont’d Great Players Listen & Practice, A Lot. Cont’d Rise of Pitch Farms
if it means no money (yet), an investor’s comments Recently Angelsoft started to actually push deals onto the
and suggestions may prove to be the pivotal moment unsuspecting investors of all the third party Angel groups
in the path to success for a young company. Insight; that use their software. This pushy intrusion comes in the
don’t just make it your mission to get in front of form of a bi-weekly unsolicited email filled with recent
people that will listen, but people that will also venture submissions. Angel groups that signed up for
dole out generous portions of perspective. Angelsoft to help manage their Angel group now find
themselves competing for their own investor members
Make Sure You’re “Clear” For Takeoff attention with the unrequested (and often unwanted) deal
While we’ve been talking about the deep ocean flow being shoveled onto their members by an Angelsoft
of business plans that investors struggle to filter email server that seems to have its dial stuck on “spam.”
through, entrepreneurs rarely do themselves any
favors with their pitch materials. It’s sometimes “With Angelsoft, all of the personal aspects of Angel
difficult for an entrepreneur to sell bleeding tech- investing seem to be removed from the equation. My
nologies or culturally noteworthy ideas to traditional materials are submitted through Angelsoft forms, and
investors. Why? Well, while many of these investors then disappear into some system that encourages a group
were once successful entrepreneurs, technology has of busy angels to evaluate the opportunity in a black box.
made the principles of creating businesses and the Do they like it? Do they hate it? Do they even read it?
pace of the economy much, much faster. I have no idea, since I have never heard anything!”
comments a disappointed entrepreneur.
Instead of wasting time trying to teach the old dogs
new tricks, let’s just be clearer when explaining your For all the aggressive email action and striking numbers
concept to them. Some investors may be older than on this site, one has to wonder, is it really delivering on
you, but that doesn’t mean they’re stupid and out of quality deal flow or just polluting the Internet with more
touch. If you can’t explain your business concept in “not ready for prime time” quantity? As of this writing,
one sentence, how do you seriously expect an inves- Angelsoft reports that just 1.32 percent of start-ups on
tor (or a consumer) to spend money or time with their site have been funded, and that the average number
you? Let’s take this point a few steps further, if your of “views” for each submission is only 5.3 (Which means
presentation materials are confusing, lack clarity, an average submission is viewed by only 1 of every 3,000
compelling content, and look like they were pulled investors that Angelsoft claims to represent). For entrepre-
together on a Commodore 64, why should an investor neurs and investors, the verdict is still out on whether this
think that your company will offer up anything but site is more “soft” than true “Angel.”(angelsoft.net)
a clunky and confusing product?
Don’t pitch your business as the next “Apple” and
then hand over documents that look like you’ve
never opened up an Apple box in your lifetime. The
Competitions For Capital
This section wouldn’t be complete if we didn’t mention
investor’s belief in your ability to brand and market
the plethora of contests and competitions out there for
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To Overcoming The Inefficiencies In Early Stage Venture Capital dontgosouth.com northangels.com

Cont’d Make Sure You’re “Clear” For Takeoff Cont’d Competitions For Capital
a product starts with the first time they look at your entrepreneurs. Most of these are business plan writing
materials. Entrepreneurs could do themselves a world competitions that target upstart entrepreneurs to enter in
of good by investing real time (and capital) into their hopes they are going to get in front of a panel of investors
presentation materials. Yes, Apple has the benefit of who will then choose their venture and write them a big
teams of graphic designers who work on everything fat check.
they bring to market. While these resources aren’t
cheap, they also aren’t too hard to mimic. There are For young entrepreneurs, it seems that every college with
countless resources available on everything from an MBA program is promoting one of these. But again, if
concise presentation structure to graphic design. you happen to enter one, don’t just fall under the spell of
Take the time to do some research into what a dollar signs. Most of the competitions offer entrepreneurs
successful pitch deck looks like and maybe investors the opportunity to: 1) help crystallize their thinking (and
will believe you are the right person to play the making them more investor ready); 2) receive feedback and
leading role. advice from forward-thinking entrepreneurs and investors;
3) network with fellow entrepreneurs and distinguished
Entrepreneurs may also want to take heed from investors; and 4) sharpen their skills in analyzing, writing,
Hollywood. In the late 80s, the Bruce Willis and presenting their business plan. Again, the more value
blockbuster Die Hard became the industry standard one of these contests provides back, the better it makes the
for describing the plot of many of the screenplays entire process for starting and funding a company.
and films that came in its wake. For example, 1994’s
Speed was called Die Hard on a bus, and 1996’s
The Rock was dubbed Die Hard on an island. If an
investor is going to have a hard time understanding
your new school idea, find a successful, well-known
venture to compare it to. You may be proud of and
wildly impressed by the technical details of your
product or service, but instead of explaining it and
risk losing the attention of your audience, instead
focus on the single sentence of your business that
will connect with the audience in a simple and The Rice University Competition has become one of
effective way. the premier collegiate competitions in the world; with
over 35% of its entered teams (since 2001) going on to
Remember, investors (like Hollywood studio execu- successfully launch their business. These impressive
tives) see and hear of thousands of deals a year and numbers can be directly attributed to the counseling
have very little time to spend on them. If your idea and feedback all of these teams received at the
doesn’t fit into their “box of knowledge”, it’s going to competition. Now that’s entrepreneurial education
be quite difficult to break through and earn a second done right.
meeting. If you can’t narrow down your business to a
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Cont’d Make Sure You’re “Clear” For Takeoff Cont’d Competitions For Capital
sticky single sentence, you’re probably not ready “The support of business leaders and successful
to get in front of an investor anyway. Bonus Tip; entrepreneurs ensures that tomorrow’s leaders can
You may want to check out the book Made to Stick,
pursue their dreams by utilizing such an investment to
Why Some Ideas Survive While Others Die by
Chip and Dan Heath. refine their business plan and presentation, potentially
develop a prototype or begin the patent process, and
Funny exercise, but play along; look at the top build the foundations of a viable business - ultimately
start-up company names and logos funded after attracting additional capital and fostering the spirit of
2000 versus those started before 1980. While the entrepreneurship in the US,” explains Steven C. Currall,
color palettes have changed and billion dollar
PhD, and Founding Director of the Rice Alliance
companies can now be started out of garages,
the principles of what makes a sound business for Technology and Entrepreneurship.
have not. When meeting with investors, don’t lose
them by talking about how cool and complex your Alternatively, many VCs and Angel Groups are now
venture is, break it down, simplify, and wow them holding “segment specific” competitions to generate
with “how” and “why” you’re going to make fistfuls quality deal flow in hopes of surfacing the next big thing.
of money. They like that. Entrepreneurs submit their innovative ideas on everything
from gaming to green energy to senior products & services
Working In A Black Box to social media. The winner can usually drive home with as
Okay, we’ve already established that new entrepre- much as $100,000K of start-up capital in their front seat.
neurs have very little visibility into the process of
raising capital. Sure, one can grab some business
plan writing software and piece something together,
but are they filling in that plan with the right data?
What exactly are investors looking for in a venture
investment?
Because of this cloud of mystery that exists over
the venture capital world, entrepreneurial resources
like TheFunded.com and VentureHacks.com have
recently been launched to give entrepreneurs more
of an even (and sometimes upper) hand when it
comes to dealing with investors. Paul Graham, a One interesting newbie on the competition front is Ideablob.
prominent Silicon Valley entrepreneur and Angel com. Run by Advanta, one of the largest credit card com-
investor sums up the feeling of many entrepreneurs panies in the States, Ideablob is a place for entrepreneurs to
when he said, “VCs that suck less are all about post their ideas and get real-time feedback from their peers.
disclosure and transparency.” To truly produce The site was developed around the premise that there are
tens of millions of entrepreneurs and small business owners
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Cont’d Working In A Black Box Cont’d Competitions For Capital
fundamental change and foster innovation it’s in the United States, but no real way for them to network
time for investors to allow entrepreneurs to see and bounce ideas off of each other. Eligible individuals
the world from their side of the table. can submit their business ideas to Ideablob.com, and based
on votes from the Ideablob.com online community; which
Entrepreneurs like to chalk up the lack of transpar- includes other innovators as well as friends, family,
ency in this industry to the arrogance of a typical colleagues, associates, teachers and mentors – one idea
investor, who thinks that simply because they have every month will win $10,000. Here’s to growing the blob
the money they are in some way better. Bear in mind and mentoring entrepreneurs in the process! (ideablob.com)
though, it takes a successful entrepreneur to turn
the money that goes into their venture into a larger
amount on the way out, so the relationship between
investor and entrepreneur is a truly symbiotic one;
without one, the other will not survive. Is it time for
investors to reverse this perception of them? Then
they should actually do something to innovate and
push the industry forward instead of relying on
norms and practices that have begun to stifle the Looking for something a little more unconventional? As of
ease in which innovation is actually nurtured. We this writing there were already 16 announced teams regis-
advocate full disclosure of all investment criteria tered for the Google Lunar X Prize competition. The Google
to level the playing field, strengthen the market, Lunar X Prize will reward the first privately-funded team
improve the quality of submissions, and build trust. to land a rover on the moon (and travel at least 500 meters
across its surface) with the $20 million purse. If no one
A Crime Or Worth Your Time? is able to complete the mission and send video, data, and
Many new gimmicks and stunts marketed at images back to Earth by December 31, 2012, the first prize
entrepreneurs now exist as ways to rise to the top of drops to $15 million. The big challenge for these braniacs
the sea of investment opportunities. While we have will be to do it affordably. Many are already raising money
to admit there is an intoxicating rush from pitching and even turning to corporate sponsorship to help get their
your innovative venture in front of an audience, the idea on the launch pad. Let the countdown to liftoff begin.
end result usually feels more like a hangover. Inves- (googlelunarxprize.org)
tors leave with more questions than answers, and
entrepreneurs are left wondering if their choice of
wardrobe sealed the fate of their company. Whether
it’s a trade show, mixer, or conference, these events
are usually marketed around the emotional value
New School Number Crunchers
Adeo Ressi, the founder of the TheFunded.com has joined
proposition of “meet real investors.”
a long list of entrepreneurs and investors that say that
the venture capital industry is broken. However, Ressi
Just in case you weren’t paying attention, any
decided to put his (didn’t use outsider funds) money where
investor worth his salt is already plugged in to a
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Cont’d A Crime Or Worth Your Time? Cont’d New School Number Crunchers
complex social network from which he or she plucks his mouth was and built a site that allows entrepreneurs
prospective deals. What makes you think you’ll critique and rate the actual audience that was evaluating
actually find a reputable investor or advisor at one them…the investors.
of these events? Oh, and you think that entry fee is
paying only for the catering service? These events Ressi argues that airing the venture industry’s dirty
are run by businesses looking to make money. They laundry will ultimately improve the efficiency of the
don’t necessarily care if you close a deal while you’re funding process as well as the rocky relationships that
there, only if your registration check clears. And exist between investors and entrepreneurs. TheFunded
this just in, handing a spiral bound PowerPoint to an also allows entrepreneurs to view and share term sheets,
investor in an elevator is about as effective as a guy to assist one another finding good investors, and to discuss
throwing himself at a female bartender in a packed the many facets of operating a business. While many
club on a Friday night. entrepreneurs applaud Ressi for clearing out the cloud
of smoke that surrounds the VC world, many simply
You should also know by now that the Internet is see TheFunded.com as only an arena for disgruntled
full of charlatans, scam artists, spammers and a entrepreneurs to vent.
myriad of other people with questionable morals.
And because there’s not a lot known about the inves-
tor process, entrepreneurs don’t really know whom to
trust when they scour the web looking for funding.
They’re always suspicious of something that’s offered
for free (like a new online business plan farm) and “The problem with sites like TheFunded.com, or any site
are just waiting for the hidden fee to rear its ugly with user reviews is that the reviewed product will always
head. Free usually means you need to put in a credit
be at a disadvantage. For every unhappy customer, they
card and spend the rest of your life trying to cancel a
recurring charge for $19.99 a month. If you’re going tell 9 of their friends, and for every happy one they tell
to invest in outsourcing your capital raising work 3. The odds are against the VC’s here. Of course the
(which is not unreasonable) try to make sure that majority of turned away entrepreneurs will put a negative
the approach is smart, that you are going to get the review - it’s a form of vengeance. But those that did have
feedback you need to improve over time, and try to
a happy experience will have little reason to post any-
save the fantasy of a lottery ticket for the check out
counter at 7-Eleven. thing. They have already researched for information from
the site, got what they were looking for and will not likely
And lastly, if you happen to be sitting on the couch return without proper incentive.” Ian Bell, Entrepreneur
in the early am, with your computer in your lap,
watching TV and one of those “We’ll Pay Money Because of this lack of positive reviews, many entrepre-
For Your Idea” infomercials comes on, you should neurs accuse the VCs of gaming the system where they’ve
probably view it the same way you do a fake ad on asked entrepreneurs they’ve backed to submit a favorable
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Cont’d A Crime Or Worth Your Time? Cont’d New School Number Crunchers
Saturday Night Live. Of course not every “invention” commentary about them and their fundraising experience.
firm has bad intentions, but let’s just say there are a This boosts the firm’s rankings on TheFunded’s leader-
larger number of scam companies than those actu- board, and has resulted in many in the industry to question
ally helping the entrepreneur. So do your homework the sites credibility.
and background checks. If after submitting your
materials for consideration you’re having trouble For example, if a disproportionate number of members
making contact with a live and knowledgeable voice, enter the site to provide a single comment on a given
it’s probably not worth your time. firm’s profile, this sends a red flag to TheFunded’s system.
TheFunded looks for other behavior, too, for example,
unusual semantic characteristics of the written fund
How Do We Fix It? reviews, such as excessive use of exclamation points
and superlatives. It also looks at how many entrepreneurs
Due Diligence: A Brief History
voluntarily admit they were asked by their VC to submit a
Smart, wealthy, and very successful men and women
review (entrepreneurs are asked this when they provide a
lose billions of dollars every year investing in new
comment, and they check a box to say they’ve been asked).
ventures. Why? Recent research shows investors
are often investing without first conducting their
Before this site can truly becomes a quality resource for
own thorough due diligence. Just how powerful is
the start-up community, they’ll need to become more
the connection between due diligence and investor
respected (from both sides) by attracting additional traffic
returns? A recent three-year study of 539 Angel
and even more helpful reviews to their site (Psst…a
led investments conducted by the Angel Capital
new Toyota Prius has over 158 consumer reviews on
Education Foundation and the Kauffman Foundation,
Edmunds.com compared to just 30 entrepreneur reviews
found an extraordinary correlation between
of Kleiner Perkins on TheFunded.com). Unless these
due diligence and significantly greater returns.
numbers pick up, it’s hard to look at this site without
ome real bias. At the end of the day tough, the TheFunded
“Spending time on due diligence is significantly has definitely made Investors way more aware of their
related to better outcomes…investors who spent perceptions in the venture marketplace, and if that’s the
less than the median 20 hours of due diligence nudge they needed to become more transparent and helpful
and investors who spent more, shows an overall to entrepreneurs; they deserve some applause, but not quite
a standing “O” just yet.
multiple difference of 5.9X for those with high due
diligence compared to only 1.1X for those with
low due diligence.” - “Returns to Angel Investors in
Groups”, a comprehensive study of 539 Angel led
investments. Robert Wiltbank, Ph.D. and Warren
Boeker, Ph.D.,11/2007
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Cont’d Due Diligence: A Brief History Cont’d New School Number Crunchers
Those numbers are staggering, not only in terms of “If their tool did such a good job, they’d raise a fund
the difference thorough due diligence makes, but the
themselves and beat the tar out of us.”
fact that the median of the study was only 20 hours,
and that people are actually spending less time on - Paul Kedrosky, investor & entrepreneur
due diligence than that! While this seems to support
both the “follow the roar” and the “trusted refer- “It’s a wantrepreneur focused product. Real VCs and real
ral” methods for selecting investments, this amount companies with a legit shot at VC money wont use it.”
of due diligence is far less than most people would
– Jeff Martens, strategic consultant
spend researching a major purchase. If you take a
step back and think about situations in which an
individual is preparing to spend a significant amount The above quotes are referring to the highly controversial
of money you see in each situation a unique stan- YouNoodle.com, an online platform for start-ups and early
dardized form of due diligence, and that spending a stage ventures. The feature that has sparked a lot of debate
good deal of time on them is the norm. The goal of in the investment community is their YouNoodle Start-Up
these efforts is to reveal any potentially damaging Predictor that analyzes data on early stage ventures and
information regarding the item to be purchased as generates a report on what that start-up will be worth in
soon as possible. Or as Richard Drake of business three years. For real? Yes, they’ve developed a software
law firm Womble Carlyle Sandridge & Rice explains, program that claims it can predict the valuation of early-
“a thorough review of what you are buying before stage start up companies (yes, companies that haven’t come
it’s yours is the best insurance against any unwanted within a whiff of a dollar in revenue…). The model relies on
surprises down the road.” basically four areas: 1) the team; 2) financial factors; 3) the
concept; and 4) advisors. How’s it work? The entrepreneur
It’s time the early-stage private equity industry takes fills out the survey and provides a little detail, and like
some notes and follows the models of other industries pulling a rabbit out of a hat, presto…YouNoodle spits out
in which thorough due diligence is the norm. Each a valuation. Smells about as real as the future predicting
example boils down to the basic, easy to remember information Miss Cleo (the famous TV psychic and
motto: cover your ass before you spend your shaman), provided after calling her “900” hotline.
hard-earned cash.
It’s hard for us to look at this with a straight face. Seri-
Love The Location, But How’s The Roof? ously. Has the venture community been Punk’d? After all,
Now ask yourself, would you buy a new home on a a “noodle” is defined in the dictionary as a fool or simple-
gut feeling or simply because the guy selling it says ton. Can you really believe that two teenagers working on
it’s a great deal? Probably not. A sensible real estate a few lines of code in the basement have developed a $2.75
investor would probably evaluate every aspect of million dollar idea? Ridiculous. Be very afraid of this tool,
the property; from the foundation to the roof, the looking at some number on the screen followed by a huge
plumbing, the electrical, the lot size, the appliances, string of zeroes right next to the name and your start-up
the paint, and of course the neighborhood. Even feeds the entrepreneurs ego like nothing else can. Think
more likely, you’d probably pay for a professional about the Far Side cartoon where the kids are all eating
21 Breaking Through The Broken: The Transparent Guide © 2009 North Venture Partners, LLC
To Overcoming The Inefficiencies In Early Stage Venture Capital dontgosouth.com northangels.com

Cont’d Love The Location, But How’s The Roof? The Influential and Informative
home inspector (who sees thousands of homes ice cream in front of the windows of a gym filled with
every year) to come over, take a look, and give you overweight people sweating on treadmills. It’s pretty sick.
a written report before you would sign the deed. We think it’s nothing more than a way to grow their real
ambition - - yet another social network for entrepreneurs.
“A home inspection is perhaps the most important If it isn’t, then why haven’t their own founding members
chapter in the home-buying process and can run themselves through their magical predictor?
benefit both the buyer in understanding the
With all of the hype and hyperbole currently swarming
condition of the house and the seller who wants
the early stage venture community, it sometimes makes
to provide accurate disclosure information.” it hard to hear, let alone focus. But within the chaos,
- Lynette Wyrick, PC from RE/MAX Equity Group. we believe there are a few refreshing voices that manage
to rise above all the noise and break through; offering
Because buying a new home is most likely the single up a steady serving of insightful nuggets to entrepreneurs
largest investment an individual will make in his or and investors.
her life, it is difficult to remain completely objective
and unemotional about a home that is seemingly per-
fect. Flaws get overlooked as judgment is affected.
“Think you’ve found the home of your dreams? So
did Hansel and Gretel. The fact is, every prop- Matt Marshall founded VentureBeat in 2006 to provide
news and information about private companies and the
erty has its dirty little secrets that only the owner
venture capital that fuels them. Marshall and co. have
knows about. In a perfect world, owners would done a good job delivering “insider” news across innovative
come clean about the quirks and glitches in the old sectors like: digital media, life sciences clean tech,
homestead when they fill out the property condi- and mobile. It’s their mission to act as a megaphone for
tion disclosure form that many states require. But as the entrepreneurial and venture community, ultimately
Hansel and Gretel found out, real estate is fraught connecting decision makers with information they can
use to grow their brains. One of our favorite features of the
with subterfuge.” - Jay MacDonald, Bankrate.com.
site is their guest columnist link, where a compelling mix
of successful entrepreneurs and investors are invited to
For accurate information, it is best to obtain an im-
spread their wisdom on a weekly basis. (venturebeat.com)
partial, third party opinion by a professional in the
field of home inspection. From a seller’s perspective,
How can you really go wrong with a site that calls
an objective inspection will provide valuable infor-
themselves “Hamburger Helper for entrepreneurs”?
mation and the opportunity to make repairs that will
This enthusiastic and candid bunch of experienced
make the house more attractive to prospective buy-
entrepreneurs and investors feed off helping other
ers. A third-party objective inspection is therefore
entrepreneurs succeed. And after reading the words of
beneficial to both parties.
their Advisor Brian Norgard, you can’t help but wish
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Cont’d Love The Location, But How’s The Roof? Cont’d The Influential and Informative
What’s interesting is that in some markets it’s stan- these guys well, “Nivi and team
dard for the seller to provide a detailed third party are creating the premiere
inspection to prospective buyers, while in other destination for top tier start-
markets the buyer is the one who needs to invest in ups to raise money, hire and
the inspection if they want to remove contingen- get attention. Raining money
cies in their offer letter. The responsibility of who shouldn’t be a pain. Getting
pays for the inspection tends to shift to the side of a meeting in The Valley
the market that has the upper hand at that particular shouldn’t be like getting tapped
moment. In the recent housing boom it was the sell- for the Skull & Bones. Good
ers who got to push buyers with a “take it or leave it” companies should rise to the top
attitude, today sellers are doing everything they can without friction. VCs should get
to make their property more attractive and they are access to these deals. We’re
now shouldering all sorts of costs, effort, and conces- working on it.” Give them a visit to hear some straight
sions that weren’t even on the table two years ago. talk and be sure to give their “Recommended” sub-site a
What does that mean for raising investment capital? spin. While the Internet clearly doesn’t need another social
In today’s investing market the available capital is network, maybe these guys can create one with less friction
constricting while at the same time the pool of and more efficiency, so we can all win. (venturehacks.com)
available deals is expanding. Will this shift some
pressure (and costs) onto the sell side of the venture
market like it has in the real estate market?
Note: one other insight that can be pulled from
the real estate market is the standardization of deal
documents and terms. The liquidity of real estate
hinges upon the simplicity of the standardized
paperwork. Just imagine the efficiencies that could
be gained from standardized deal terms in early
stage venture investing.
Are They Ready For Prime Time?
Professional sports franchises spend thousands of
dollars on scouting, background checks, and running TechCrunch is a must-read weblog for anyone that has
draft prospects through a series of mental and interest in web-related information, products, and services.
physical tests before they decide to invest millions In addition to covering new companies, TechCrunch also
of dollars. General Managers look at everything profiles existing companies that are making an impact
before risking their pick on an expensive draft pick. (commercially or culturally) in cyberspace. Be careful
This is even truer when it comes to making a first though, you can kill a good chunk of your morning
round selection.
23 Breaking Through The Broken: The Transparent Guide © 2009 North Venture Partners, LLC
To Overcoming The Inefficiencies In Early Stage Venture Capital dontgosouth.com northangels.com

Cont’d Are They Ready For Prime Time? Cont’d The Influential and Informative
Take the story of Kwame Brown. Back in 2001, the
bouncing around this deep site; learning about the latest
Washington Wizards had the honor of drafting #1
technology ventures, electronic gadgets and oddities
in the NBA Draft. With their pick they decided to
(Japanese space diapers anyone?). One very cool feature
choose Brown, becoming the first team to ever select
they offer for start-up entrepreneurs are the TechCrunch
a high-school prospect with the first overall pick.
Elevator Pitches. Here, a CEO or Founder can upload a
While still playing in the league, Brown’s career just
60-second elevator pitch (explain their business and how
never lived up to the hype. When drafted, Brown
they intend to make money) and receive comments and
was 6-11 and an imposing 250 pounds, and a gifted
votes from the site’s visitors. If you plan on becoming a
athlete. He was strong, had quick feet and a ton of
successful entrepreneur, you better be prepared to listen
potential. But after Washington selected him #1,
to what others think of your idea. If you haven’t gone
many scouts said they questioned whether his small
through this exercise, this ain’t a bad place to start.
hands would hinder his play. They noticed in
(pitches.techcrunch.com)
pre-draft workouts that Brown was having trouble
catching passes and he missed quite a few dunks.
Transparent Evangelists
Last but certainly not least, we thought we’d mention a
Small hands? Yep, out of all of the upside of this
few of today’s talented teachers that upon becoming VC
young man, it’s his small hands that wound up being
rockstars, didn’t just ditch those that are still playing in
the primary liability of this particular investment.
the small dive bars of venture capital night after night.
With professional sports, like early stage ventures,
These individuals remain as active as anyone in terms of
you have to look at the entire investment (right down
sharing their insights and wisdom with entrepreneurs
to the little details) before moving forward with a
and are very deserving of your free reading time.
big decision. Sure, some mental and physical
attributes can be suppressed or enhanced later on,
but when that attribute is fixed, like hand size;
you’re stuck with it.
In the book Wages Of Wins three economists took
player analysis a few steps deeper. “Weighing the
relative value of fouls, rebounds, shots taken, turn-
overs, and the like, they’ve created an algorithm that,
they argue, comes closer than any previous statistical
measure to capturing the true value of a basketball
If you haven’t read Fred Wilson’s blog, don’t worry…you’ve
player. …Looking at the findings that Berri, Schmidt,
probably read one of his refreshingly perceptive threads
and Brook present is enough to make one wonder
on any number of other blogs. Fred’s been a VC for over
what exactly basketball experts—coaches, managers,
20 years and he’s currently a Managing Partner of two
sportswriters—know about basketball.” - Malcolm
venture capital firms, Flatiron Partners and Union Square
Gladwell, The New Yorker
Ventures. He’s got a gold star rep for being a very straight
24 Breaking Through The Broken: The Transparent Guide © 2009 North Venture Partners, LLC
To Overcoming The Inefficiencies In Early Stage Venture Capital dontgosouth.com northangels.com

Cont’d Are They Ready For Prime Time? Cont’d Transparent Evangelists
The National Football League (NFL) has developed shooter with entrepreneurs and if that’s not enough of
a unique system for their 32 franchises to evalu- a reason to read his musings, he was the original lead
ate and score college seniors who may potentially investor in del.icio.us before people really understood
become NFL players. “The Combine,” as it’s known, what it was all about. (avc.com)
is a standardized system of physical and mental tests
which, along with full medical examinations, gives Perhaps you’ve already
teams a huge amount of objective and standardized read all of Guy Kawasaki’s
data which they can use to weed out and ultimately books. If not, you’ve cer-
select which players could be a potential fit for their tainly heard a few
locker rooms. of the titles (probably
recommended reading
“I think it’s the total picture you get from the from VCs themselves);
combine. The combine is another means of helping “The Art of The Start”,
“Rules For Revolutionaries”,
teams make good decisions, and the escalating
and “Reality Check: The
cost of signing first-round draft picks makes the Irreverent Guide to Out-
decision-making process all the more crucial. smarting, Outmanaging,
Teams spent a total of $160 million on signing and Outmarketing Your
bonuses for last year’s first-round picks. They Competition” are just a few
of his entrepreneurial compasses. A Founding Partner and
want to make sure they know what they’re doing.”
Entrepreneur-in-Residence at Garage Technology Ventures,
– Tony Dungy, Head Coach, Indianapolis Colts Guy seems to be as known for his “genius” as he is for his
“generosity”. If you’re an entrepreneur and are in need
It also happens to be Dungy’s current star quarter- of some inspiration, visit a Guy book, magazine article,
back, Peyton Manning who was part of one of the podcast, or blog posting near you. (blog.guykawasaki.com)
most well known draft debates of all time. Back in
the 1998 NFL Draft it was all about who do you
take #1, the safe choice with “pro-ready” skills
(Manning from the University of Tennessee) or
the wild card with all the upside (Ryan Leaf from
Washington State). Most analysts agreed that
Manning was the more mature player and should
be the consensus top choice. Turn’s out they were
right and then some. Manning just earned his third
NFL MVP award to go along with his Super Bowl
ring and Ryan Leaf, who played only 25 games in
his career, has become known as one of “the biggest
busts in the history of professional sports.”
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Cont’d Are They Ready For Prime Time?
Of course, each professional team has different wants of the vehicle you’re looking at, you’re better off
and requirements, but the implementation of a stan- shelling out the 300 bucks to make sure you’re not
dardized setting has allowed personnel directors the going to have to sink thousands into the car as soon
opportunity to systematically evaluate the upcoming as you get it home.
draft class. Because the tests are standardized, the
players are able to focus their efforts on performing A quality mechanic with experience in checking out
well in specific areas. Obviously, there is no substi- used cars will have a systematic inspection process
tute for on-field performance, but for players coming that will cover all the bases in terms of the integ-
from less-than-storied programs their performance rity of the car. Their trained eye will surely find
at the combine can drastically improve their stock the spots where the previous owner slapped on some
in the draft. The transparency of the system is what Bondo to cover up where they were sideswiped, and
allows players to improve and provides them with can sniff out the sawdust in the engine.
instant feedback at to how they have done compared
to other players. “When excited buyers get emotionally caught up
in the vehicle purchase, they often miss mechani-
What does this mean for the venture market? Well,
cal, cosmetic, and safety issues during visual in-
consider the fact that in sports standardized tests
like the 40-yard dash can be applied to all players. spections and test drives…to eliminate much of the
Coaches and scouts have a common benchmark upon anxiety and get an accurate picture of the condi-
which they can look at players from all over the tion of the vehicle, many buyers choose to have a
country in a standardized way. What this system pre-purchase inspection (PPI) done before the sale
can offer is a way for scouts to filter out the over-
is final.” - JD Power & Associates.
hyped big school superstar, as well as discover that
small school player with remarkable physical ability;
Did you know that 1 out of every 10 used vehicles
an effective standardized measurement of a complex
has hidden problems from its past? This well-known
set of attributes. Who said football players aren’t
fact has led to the building of two successful busi-
smarter than Venture Capitalists?
nesses that assist the consumer when making a
decision about a used vehicle. If you’re in the market
Be Forewarned About Those Four Wheels
for a used car and haven’t yet heard of CARFAX and
Buying a used car is an exciting process, but com-
AutoCheck, take notice. For just a few bucks you can
ing home with buyer’s remorse is easy if you don’t
perform your own PPI over the Internet.
do your homework. To avoid a financial disaster, not
to mention having a two-ton paperweight parked in
CARFAX’s pitch is that you don’t have to rely on a
your driveway, it’s prudent for any buyer to bring
stranger’s truth in advertising to find out about the
an experienced mechanic with them to look at the
mechanical and driving history of the vehicle they
car before an offer is made. Why not do it yourself?
want to sell you. A CARFAX Vehicle History Report
Unless you’re a gear head with extensive knowledge
includes: 1) Title information; 2) Accident History;
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Cont’d Be Forewarned About Those Four Wheels
3) Odometer Readings; 4) Lemon History; 5) Number transactions. Entrepreneurs and investors, we hope
of Owners; 6) Accident Indicators (like airbag you all took good notes.
deployments); 6) State Emissions Inspection
Results; and 7) Service Records. All the critical Focus On Efficiency
information you need to avoid driving home with A good presentation with a good PowerPoint given
a lemony scent. AutoCheck tries to differentiate by an individual with a strong personality can easily
their service by attributing a score to each vehicle, sway a room full of investors into cutting a check.
although the services are basically one in the same. Investors need to be sure they’re not getting charmed
out of their hard earned cash and that the great
“Many used car buyers quickly dismiss the thought presentation was great because of what was being
of buying a CARFAX report because of the money, offered. Investors need a better mechanism
for filtering investments, a standardized venture
but let’s get real, the $25 spent on a quality vehicle
“combine” if you will. There are simply too many
history report is the best investment you will ever new ventures looking for help and money, and the
make. There are thousands, no probably millions, process for filtering these opportunities is still based
of drivers who wished they had spent the measly on a complex network of personal relationships that
$25 to look into a car’s history instead of spending will never scale to meet the market needs. As the
global economy expands and moves forward, new
thousands of dollars on a car that has a damaged
systems and technologies need to be implemented
history, salvaged title, or is even a lemon!” to accelerate American innovation as well.
- Jake Newberry, automotive industry insider.
As we mentioned, trust is key, so an investor may
So we’ve looked at three separate industries where make a move on a deal because it was given to him
big-ticket buying behaviors have driven the creation or her from a trusted individual (as a favor, for
of tools and techniques that enable both sides of the example) even though it may not be the best deal for
equation to benefit. Athletes know what criteria them. Angel networks provide some buffer between
they will be measured on and can train accordingly. enthusiastic entrepreneurs and investors, but more
Real estate agents know the impact a third party often than not the Angels are the ones who are doing
inspection will have on the transaction so the can all the screening work anyway; it’s not as if they can
gauge whether or not they want to provide it, or just show up with the confidence that all the pitches
push it onto the uninformed buyer. And CARFAX they see will be high quality opportunities.
has created a way for buyers to pull an honest
background check in an industry where the deceptive The answer to this problem is pretty simple; look
salesman is legendary. In each of these three at the entire investing ecosystem and see where
scenarios we see lessons that need to be applied to there are constraints. Then we need to collectively
early stage investing. These systems, tools, and implement plans that remove those constraints.
processes ALL serve to accelerate trust and enable
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Cont’d Focus On Efficiency
The systems and technologies are at our fingertips, Also, when you are looking at which aspects of
it’s time we stepped up and innovated ourselves. the capital raising process you need to offload, be
realistic about the time factor here. Sending an
Entrepreneurs need to stop jumping in just upstream email to X number of Angel groups or VCs takes
of a logjam and wondering why they aren’t floating about 30 minutes each (to find the site, read about
downstream to paradise. Here’s a tip; paddle to shore, them, then apply), take that number and multiply it
load your canoe onto your back, and hike around by X applications and we’re looking at X hours. At
the blockage, and then put in downstream. Ignore what point does it make sense to pay someone to do
the reams of angry entrepreneurs clamoring on and this work for you?
on about how the market is this or how the market
is that, or go ahead and join the masses pushed up 240 Investors X 30 minutes = 120 hours. Okay, if
against the dam who are wondering what will you do this yourself that means that you could spend
happen next. 8 hours a day every working day for three straight
weeks, sending (not responding to) emails. Is this a
DIY or Farm It Out good use of your time?
Entrepreneurs are an interesting bunch. While nearly
all of them have an “I can do it myself” attitude, For investors it’s the same problem. Reading 40
which is crucial to get the ball moving, that same business plans a month for 30 minutes each = 20
attitude usually ends up preventing the company hours of reading. Before an investor has even picked
from scaling. The truth is there are some situations up the phone, or a golf club for that matter, they’ve
where you simply can’t be the most effective per- already spent 4 hours a day reading highly subjective
son for the task. Now if you have to lean on others business plans.
(something you should get comfortable with if you
ever want to scale a business where you don’t work Most Angel groups perform their own due diligence,
22 hours a day), you should think about the cost/ which for most groups means handing off the task
benefit relationship of doing it yourself or having to a “casual” investor member who then has to take
someone else do it for you. on the responsibility for the entire group and
conduct some free form analysis of the venture. Don’t
Think about it. Can you be a reference for yourself? be surprised to hear that most investors arms retract
How is an investor to trust an entrepreneur who has approximately 4 inches into their shoulder sockets
conducted his or her own due diligence? These are a when someone is asking for a volunteer to perform
few examples where you simply CAN’T do it yourself. due diligence. For the Angels, it’s hard to get enough
In fact if you even try, it starts to have an adverse to do it yourself, not to mention the threat of having
effect. Try telling an investor that you’ve done a to corral your investment buddies in order to perform
background check on yourself and that it came back a thorough analysis of the company, that is,
clean (and please film their response and send it to assuming you can get any volunteers to help you
us if you can…). at all. For the entrepreneur, due diligence is a
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Cont’d DIY or Farm It Out
distracting, time consuming effort that ultimately ranked private school. While the standardization of
takes away from their focus of growing and analysis would be powerful, what really matters is
improving their business. Outsourcing this work if the investors value the standard.
may be a way for both parties to get back to doing
what it is they want to be doing. A standardized There are no analytics that tell the entrepreneur
set of criteria for this process would also provide who is reading their plan, how it has been distribut-
complete transparency, allowing both investors ed, and what parts they are spending the most time
and entrepreneurs to be on the same page when it on (or how much time they are spending reading it
comes to evaluating the strengths and weaknesses in general). This data is simple to capture and may
of a business. give an entrepreneur some valuable feedback as to
whether or not their plan is getting into the hands
Many investors admittedly invest in the manage- of people who can help them grow, and how they
ment team rather than in the idea, essentially are receiving it.
betting on the jockey, not the horse. This makes
sense, since the most other parts of a business can Look for opportunities to transform investment
be easily changed. But it’s unrealistic to expect review into something that is more attractive.
even the best management team to bring a That is to say, as an investor you have the ability
genetically flawed plan to market with any kind to greatly influence the plan and direction of a
of success (remember Kwame Brown?). Investors company. Some simple suggestions or compromises
need to be clear on the whole picture; without such may make the investment much more feasible for
insight it becomes betting rather than investing. you and also help out the team in the long run.
In fact, a study done by Willamette University’s
Rob Wiltbank shows that Angel investing is Who Does What & Who Should Pay For It?
actually riskier than people think. The study As seen in other industries there is a balance
found that 61% of the Angels surveyed had between buy side and sell side of how expenses in
returns greater than the amount they invested, any transaction get allocated. Typically the sell side
which means that 39% didn’t! That’s not a surpris- of a deal is the one that has to put forth tremendous
ing statistic; investors simply are not taking the effort to gain the approval of the buyer. In most
necessary steps to provide themselves with all the hyper-competitive markets (like software or
information available to them. advertising) there are huge resources dedicated
to winning a chunk of business. From unpaid
Looking at the world of college admissions we see pitches, to long and expensive pilot projects, other
a highly standardized method for measuring industries have established roles of who’s chasing
prospective students in the SAT and ACT tests. whom and which party stands to benefit from the
These tests show how you can have a straight A transaction the most.
student from a small high school who may not
score nearly as high as a B student from a top
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Cont’d Who Does What & Who Should Pay For It?
One of the big differences between professional Reminder, this is the log jam that is trying to filter
VC firms and Angel investors is that VCs are through 140,000+ new business plans using an
managing money (the fund) and taking a fee from uncompensated, poorly motivated, volunteer army
that “work.” These professional investors have to of semi-retired older investors. So, this seems to
invest the dollars in the fund in a specific time be one major issue that needs to be examined
frame, so they are in a sense under some pressure (check out the North Mindmeld section for more
to find great deals and fund them quickly. This on this issue).
scenario leads to a VC having a stable of analysts
and smart employees who help find, filter, and There is an outlier here that deserves a mention.
research investments. These resources, combined The Keiretsu Forum is the largest Angel investment
with the pressure to fund deals within a finite group in terms of both members and dollars
amount of time leads to a market where the VC invested in the world. They are considered an
absorbs most of the costs of due diligence from industry anomaly since they break from the pack
their operating budgets. This is unlikely to change and charge entrepreneurs substantial fees for
unless there is a massive shift in the market rate filtering and reviewing their proposals and
for fund management, which seems highly unlikely. presentations (Up to $6,000 in certain markets).
So, for VCs, the power between the sell side What is even more interesting about Keiretsu is
(entrepreneur) and the buy side (VC investor) is the fact that despite their membership size and
fairly even. Both parties have some strong investment strength, the “old guard” of the Angel
incentive to move a deal forward. Investing market are quick to cry “foul” because
of their inverted fee structure. When did
The big difference between Angel investors and investors start to look at the most successful
VCs is that there is no management fee subsidizing business in a given market and then completely
the efforts of the Angel group. True, most groups reject the strategy that led to their success in order
do charge some form of a membership fee, but that to fight to maintain the status quo? Last time we
fee typically covers meeting expenses and a single checked, when a company achieves a break out
employee (low salary) who is basically keeping the success with an innovative new economic model,
lights on, running the website, and executing some we should take a long hard look at what they are
basic marketing and promotional efforts. This lack doing differently and then try to apply that
of resources (both time and capital) creates is a knowledge to our own business.
market where entrepreneurs are conditioned (from
VC industry norms) to expect a balanced power At North, we believe that we‘ve finally isolated
equation. Clearly for Angels there is no pressure to the underlying issue that nearly nobody in the
invest, there is no compensation for simply filtering early stage venture investment market seems to
deals. When this time pressure is removed, be working to solve: throughput and yield growth
and there is no budget for deal evaluation, we end with a balanced cost structure.
up with a system that is severely constrained.
30 Breaking Through The Broken: The Transparent Guide © 2009 North Venture Partners, LLC
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Conclusion
What’s Worse Than and tell” with your trusted inner circle are you really
going to learn anything new? Feedback from a candid
Sitting In Traffic? and objective outsider can often make the difference
Going The Wrong Way. between your business growing and maturing vs.
As we’ve outlined throughout this guide, the system remaining underdeveloped. Are you listening?
for raising early stage capital today is fundamentally
2. Don’t Buy Anything That Doesn’t Provide
flawed. Even though the road to success for entre-
Value Back.
preneurs trying to kickstart their visions is littered
As mentioned throughout this paper, there are a ton
with potholes and deceptive directions, it can all be
of services marketed to entrepreneurs, especially
corrected with a little teamwork. If change is going
those that pitch the promise of raising money or
to happen, we can’t just tease the entrepreneurial
connecting you with investors. However, before
community with brief moments of candor and trans-
you take the plunge (or get out your credit card) ask
parency. The only way we truly accelerate the rate at
yourself a simple question: “am I getting useful value
which that innovation is created in this country and
back?” What you’re doing is hard and takes a lot of
solve our financial crisis is for us to come together
time, don’t waste it. Surround yourself with experts
and provide enormous value back to the very entre-
that can inspire and help you reach your goals.
preneurs from which we expect that innovation to
come. By the way, that busted road we mentioned… 3. Those With Fewer Words Win.
it’s a two-way street. We can’t express enough the importance of being
able to concisely state your business idea in a very
So without further ado, here, in no particular order, persuasive manner. Investor’s have limited time and
are North’s 10 Rules for Breaking Through: even a more limited attention span (do you know
how many pitches they hear a day?). If your “single
sentence” about what you do and how you make
10 Rules For Breaking Through money is confusing, you’ve wasted your breath and
1. Listen To The Challengers, Not Just other’s time. Take time to dial this in. The results
The Congratulators. will follow.
Turning an idea into an actual operating company
is hard work. So make it easier on yourself, bounce 4. Talk To Anyone Who’ll Listen.
your concept off those people that have no problem Okay, quit hiding behind your laptop screen and
ripping it apart. Seriously, if all you do is play “show go talk to people. If you’re too remote and working
31 Breaking Through The Broken: The Transparent Guide © 2009 North Venture Partners, LLC
To Overcoming The Inefficiencies In Early Stage Venture Capital dontgosouth.com northangels.com

Cont’d 10 Rules For Breaking Through
from a tropical island somewhere (good for you), viable idea in the first place. You’ll be smarter for
but at least pick up the phone. Investors know each it, and a more prepared entrepreneur the second
other and if you talk to large number of them it can time around.
actually create more buzz about you and your con-
cept. Healthy competition is good when it comes to 7 Heighten Your Bullshit Radar.
.
raising money. The more options (and contacts) you The early stage investment capital space is crawling
have, the better off you’re going to be. Lastly, when with unsavory characters. Do all you can to avoid a
you’re doing all that talking, be sure you don’t forget lengthy unfruitful and expensive ride on the scam
to take pauses and listen! (see #1). tram. We already mentioned in #2 above that you
should seek out value. Well, in order to do so, you
5. Momentum Is Your Friend, If… must first sharpen your perceptive skills. If someone
Don’t waste precious time hunting for cash if you’re says they “know how to find you capital” (and they
not yet “investor ready.” Keep dialing in your haven’t shown you any credible evidence that they
business model and make that sucker bulletproof. know how), ask them how they intend to do that.
As an entrepreneur, it’s important to stay focused, Remember during the last presidential race when
inspired, and moving forward with steady pace. If John McCain proclaimed, “I know how to catch Bin
you know which direction you’re going, it’s okay to Laden.” Hey, if he knows how to “do it” then why
sprint. On the other hand, if you have no clue where hasn’t he shared it with anyone already. It’s because
you’re headed, slowdown hombre. Speed without it’s just desperate drivel from a man seeking votes
direction is the fastest way to getting nowhere. from unperceptive swing voters.
6. Start Smart Or End Stupid. 8. Cash Is King.
Take it from people who have “been there done that.” Do your economic models scale beautifully? Do you
Be wise with your time in the early stages. If you’re have a solid way to make money? Can you prove
not truly confident and frequently find yourself sec- it? If this part of your plan is not credible, you will
ond-guessing your path, stop. “Green” entrepreneurs quickly be voted off Start-up Island. No question
blast out their concept stage plans when they’re not about it. If an investor were hosting the show Sur-
even mature enough to be considered for funding vivor, they’d say, “Bring your business plan up here
(and then wonder why they hear crickets?). Instead (after handing it to them, they toss it in the fire).
of taking this route, go meet with experts that can The tribe has spoken. It’s time for you to go. The rest
help you tighten up your concept, train of thought, of you looking for funding, head back to camp and
and give you an indication whether you even have a work on your financial models.”
32 Breaking Through The Broken: The Transparent Guide © 2009 North Venture Partners, LLC
To Overcoming The Inefficiencies In Early Stage Venture Capital dontgosouth.com northangels.com

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