VENTURE CAPITAL IS ABOUT INVESTING
By: Roman Kikta
If we open any newspaper, we are sure to find yet another epitaph for the financial, automotive and a various other industries. Granted, these are some of the toughest times our industry has endured, yet we should not lose sight of the big picture: our world is still growing and has an insatiable appetite for new products, applications, services and technologies! Venture Capitalists understand that successful investing is also about not doing things that are wrong. One of the biggest problems facing investors is letting emotions get in the way of economics. The dot-com mania is unfortunately a great and painful example. We saw how easy it was to hype a stock, and how difficult it is to build value, revenues and profitability in a company. But this doesn't mean that we should stop investing. VCs traditionally understand financial risk, and more importantly the financial risk of not taking any risk at all.
This recent business cycle has been a sobering experience for entrepreneurs and venture capitalists. By nature, we are optimists, and optimism, fueled by success and wealth generation creates a sense of invincibility that an economic downturn destroys. However, markets demand pragmatism, so in order to survive; some venture capital firms have announced recently that they are pulling back. But pulling back does not mean pulling out. We as investors need to maintain our positions and continue fighting to build great companies. Many of you may also be fighting your own financial battles that began months before last year's terrorist attacks, and continue with current accounting miss-representations and scandals. You have watched as stocks have struggled, 401(k) statements have lost money and as businesses are cutting costs to stay open. We must spend money to keep the economy moving, but sometimes many of you feel unable to plan the next 90 days, let alone the next year.
And yet, the livelihood of venture capital firms depends on looking much further than the next 90 – 120 days. As venture capitalists investing in early stage companies, our responsibilities are to identify market opportunities, companies that have a strong business plan, a vision, and a high probability of making a profit within three to five years. Of course, when we continually see the economy negatively impacting startups, our psyche is affected. But the reality is that recent events have not dampened our investing plans. We continue to see consistent deal flow. Furthermore many have expanded their scope, and investment strategies remaining flexible as conditions warrant it. With hot sectors including Clean Technology, The Life Sciences sector (Biotechnology and Medical Device industries combined), Internet, and Software (including Applications) are seeing the bulk of available capital.
I do believe this is a good time to back startups and emerging companies. Now, when valuations are low and prices are reasonable, is when we should be making investments. The economy puts us in a stronger position to negotiate with entrepreneurs and make smart investment decisions that are in the best interests of our investors and that will yield the greatest return.
We should seek out core business elements when considering an investment. These include:
* Being in a large, demand-driven, high-tech market. We must be able to determine there is likelihood the company can build sales to between $50 million and $100 million within three to five years.
* Having a distinctive technology, product, service, application. The company must be able to demonstrate that it has an edge, i.e. its technology is unique, has a real marketplace advantage and is protected by patents.
* Building an experienced management team. The founders should be striving to cultivate a team focused on growth and capital gains.
* Focusing on return on investment. Most venture capitalists look for investments that have the potential of returning 10 times the initial investment in a three to five-year period. Successful companies are typically funded through multiple rounds of capital, often from a variety of investor types.
The value proposition of a Venture Capitalist should go beyond simply supplying money. Venture Capitalists have consistently added value to portfolio companies by working closely with the founding team in formulating and executing strategies and business plans, including business development.
I do believe we can succeed even in this challenging economic environment and despite the uncertainties of these times, we are inspired daily by the perseverance and the talent of entrepreneurs making headway in today's business world. I believe entrepreneurs will continue to persevere and Venture Capitalists shall continue to be at their side to help them succeed!
Roman Kikta is the Managing Partner of Mobility Ventures, LLC