5 tips for locking in VC funding

Venture capitalists and entrepreneurs offer advice on what they're looking for and what it takes to nail down money in a competitive fundraising environment

With less VC funding and more startups in the market in the market these days, entrepreneurs looking to nail down money for their newest venture could be in for a tough time. But there are some tricks of the trade that venture capitalists say they are looking for and successfully funded companies have.

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According to early-stage VC firm New Enterprise Associates, there is about 20% less funding in the overall venture capital market today compared to a decade ago. This year alone has seen further contraction, with a 7% drop in investments during the first half of 2012 compared to the same period last year, with 5% fewer deals funded, according to Dow Jones VentureSource. IT and Internet investments have not been hit as hard by shrinking funds compared to healthcare and energy sectors, Dow Jones points out. But Peter Sonsini, general partner at NEA, says one reason there is less money is because there are fewer investors compared to the economic heyday of the tech bubble. Still though, VCs like Sonsini say they're still eager to invest if it's the right deal.

While keys to locking in critical funding are often sometimes pretty basic, below are five tips gleaned from VCs and successful entrepreneurs that serve as good reminders.

Put a good team together

Companies are made up of people, so to have a good company, you need good people. It's one of the first things Sonsini says he looks for when evaluating companies: the roster of executives. "You're looking for a team that has a really unique insight into a challenge, and is uniquely qualified to exploit it," he says. One pet peeve that Frank Artale of Ignition Partners has seen is people not knowing what they're talking about when pitching a company. If you're a game developer, don't pitch a software-defined networking (SDN) solution without doing your homework, he says. "If you come talk to me, be an expert in what you're talking about," he says.

Know your vision

Investors are looking for companies that are in hot markets, or are on the cusp of the next hot one. "Focus on a space with momentum," says Artale. He's looking for technology solutions that have a broad customer base and that don't just appeal to a niche audience. The reality for the entrepreneur is that technology changes quickly, though, and companies have to be able to adjust. With a solid vision for your company, market dynamics can change and the big picture idea can still apply, says Milind Gadekar of CloudOn, his second startup. "There needs to be a big enough problem so that even if the market modifies itself, you can still pivot and have a viable solution," he says. Gadekar's startup provides a mobile app version of Microsoft Office tools and down the line he hopes to expand to more devices and applications.

Have unique technology

High-tech startups are in the technology field after all, so they need some sort of innovative or unique technology. A few years ago hot funding areas may have been around Web 2.0 companies and consumer technology, but enterprise infrastructure, analytics and optimization tools have heated up of late. Area such as big data, social media, mobile and SDN are all catching the attention of investors. Then again, there are some areas that will always make for an appealing business model, Sonsini says. "Any company that saves customers money will always be in style," he says. Whatever it is, it needs to be new and unique.

Work your network

"Having people I respect speak highly of you can go a long way," says Artale, the Ignition Partners investor. There's nothing better than having a good reference, especially for first-time entrepreneurs or people looking for early-stage funding. What helps even more is if there's a prior relationship between the entrepreneur and the investor. "If you know the people involved, it can go a long way," says Sonsini. Proven execution experience along with extraordinary leadership capabilities are invaluable traits, and can especially make the difference in early-round funding opportunities where the technology is not yet matured.

Don't ask for too much money

Many startups need less money to get going today than they did a decade ago because they're able to leverage cloud computing resources to get off the ground. Gadekar, for example, says without hosting his company's app in Amazon's cloud, he expects that he would have needed at least double the amount of early-stage funding compared to what he received. Once a company has gotten going, Sonsini says there are still traditional costs around sales, marketing and R&D, which require investments. But in the early stages, one good way to not get money is to ask for too much of it.

Network World staff writer Brandon Butler covers cloud computing and social collaboration. He can be reached at BButler@nww.com and found on Twitter at @BButlerNWW.

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Copyright © 2012 IDG Communications, Inc.

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