Venture Capitalists Tell Us How To Get Funding In 2010.

In keeping with this month’s theme of “Starting a Business”, I thought I would share with you some information that I found while attending a recent event here in San Francisco organized by Dealmaker Media and the law firm of Manatt, Phelps & Phillips, LLC. While you can read the entire recap on the Solutions Are Power blog, I thought I would highlight some of the more relevant parts here. Why? Because out of starting a business, one of the things that people might be concerned about is funding, especially in 2010 when the economy may not be working in their favor.

During this event, dubbed Investor Outlook, several venture capitalists from well-respected firms shared their thoughts on the idea of being solicited for money and where it might be going in the next 12 months.

Speakers this evening included:

Jeff Clavier, SoftTech VC
Jonathan Ebinger, BlueRun Ventures
Mitchell Kertzman, Hummer Windblad Venture Partners
Brian Pokomy, SV Angel

What follows are questions and paraphrased answers posed by moderator Craig Miller of Manatt, Phelps & Phillips, LLP:

What’s the competitive advantage to get funding?

BP: gets 5-6 referrals a day. Looks at the source & whether it’s in the space they like. Looks at product and traction. When looking at companies, they look at the team primarily. The biggest factor is how much interest you can generate around financing. If you like a company and meet them, you need to show interest, or miss out.

MK: looks at young companies. Ultimately, they are “reality based investors” – they evaluate the market need. They are investors in core technologies w/intellectual property. They want to solve a problem that customers & prospectives want solved & willing to pay. We are big believers in highly automated and analytical marketing with inside sales. Subscription model pricing. Every company they believe can be a stand alone company – $100 million company.

What problems need to be solved?

JC: invest in companies that solve what’s the problem, but are lacking how to get the money from customers. Willing to take risks on monetization problem. On the enterprise side, there is a customerization belief. Trying to figure out engagement is always trying to be answered. Trying to find the pattern towards getting people visiting site & then being engaged.

How do you get funding in 2010?

JE: look at individual and see if they have a good head but aren’t bullish to reject advice. Don’t take the money – it’s a matchmaking process. Make sure tha your relationship is sound. More investments are to be made.

Social media in 2010-11?

BP: location-based technology to play big factor. More mobile. But trends will continue the same.

Valuation?

JC: valuation is a tricky formula. They are dropping down in Q1 and Q2. Way more investors willing to come in than are needed.

MK: VCs are often wrong. Every great VCs have list of startups that they’ve all passed on. From enterprise market, my firm doesn’t chase price, unlike in consumer market. If you let your post-valuation money get too high in A round, you’ll scare away investors in B round.

What’s not hot in 2010?

JC: someone who says they have a better implementation of an existing startup but w/a smaller tweak. Needs to be thousands of times better.

JE: UGC has run its course and mobile businesses is done. Mashups are emerging & incremental improvements aren’t going to happen. Very bullish in mobile technologies.

If you had $1M, what problem you want solved?

JC: cloud-based, gray markets, crowd-markets are markets I want to invest in. Likes search and mobile space. Strategy is to have white space between company so not a lot of competition. Email should be 1-2 paragraph with link to demo. Give enough of the pitch to get to the first meeting, then enough to get to the second meeting.

Three things to break through:

BP: Launch something, bootstrap to get a live product to show some traction/usage & get multiple referral sources

JE: recommendations and referrals…do your homework.

MK: understand that as an entrepreneur, you have a lot of power – VCs need you for business. Do some research in the firm to see if they invest in your space. Don’t send an email to EVERY partner in a firm. Look at partners and find who they invest in – look for one invests closest to you. Have you raised money before & what are you wanting now? Don’t be offended by a short email from VCs.

BP: find people face-to-face. Biggest factor they look for is reference source.

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Question: do we need 10 page business plans?

Answer: No…10 page PowerPoint presentations, no business plan – will need backup references. Anything more than 15 slides is too much in first meeting. Show 1 page summary. Business plan to be discussed in other meetings.

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Question: when should you approach a lawyer?

Answer: from the beginning. You don’t want to screw up your company. Get your paperwork done right, not cheap.

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What are you excited about 2010?

JE: post-iPhone world. Cross platform ubiquity

JC: new platforms being developed.

BP: real-time data and mobile.

MK: enterprise infrastructure.

What’s can startups do to get a competitive advantage in order to be funded?

Brian Pokomy: It’s important to get 5-6 referrals a day. We look at the source of the referral and whether the startup is in the space that we like. We also look primarily at the team. The biggest factor is how much interest you can generate around financing. If we like a company and decide to meet them, we need to show interest right away or risk missing out.

Mitchell Kertzman: We look at young companies. Ultimately we’re “reality-based investors” — we evaluate the market need. We invest in core technologies with intellectual property. Need to solve a problem that customers & prospective customers want solved and are willing to pay. We’re big believers in highly automated and analytical marketing with inside sales. Believe in subscription-based model pricing. Every company can be a stand-alone company – worth $100 million.

How can startups get funding in 2010?

Jonathan Ebinger: We’ll look at the individual and see if they have a good head, but aren’t bullish to reject advice. It’s a matchmaking process to find the right investor. Make sure that the relationship is sound – don’t just take the money.

What’s NOT hot in 2010?

Jeff Clavier: Someone who says they have a better implementation of an existing startup but with a smaller tweak of the system. Needs to be thousands times better.

Jonathan Ebinger: User-generated content has run its course and mobile businesses is done. Mashups are emerging & incremental improvements aren’t going to happen. Very bullish in mobile technologies.

On reaching venture capitalists, what should startups include in initial email?

Email should be 1-2 paragraph with link to demo. Give enough of the pitch to get to the first meeting, then enough to get to the second meeting.

Three things to remember when trying to break through:

Brian Pokomy: Launch something, bootstrap to get a live product to show some traction/usage & get multiple referral sources. Find people to have face-to-face conversations. The biggest factor that we look for is the reference source.

Jonathan Ebinger: Get recommendations & referrals. Make sure that you do your homework on who you’re pitching to get funding.

Mitchell Kertzman:Understand that as an entrepreneur, you have a lot of power – VCs need you for business. Do some research in the firm to see if they invest in your space. Don’t send an email to EVERY partner in a firm. Look at partners and find who they invest in – look for one invests closest to you. Have you raised money before & what are you wanting now? Don’t be offended by a short email from VCs.

There was much more explained during this three-hour conversation, but it seems that the above pieces of information is a good start on what you would need to do in order to get funding for your startup. A common theme that emerged from this event was to do your research when you pitch an investor. Don’t assume that investors will do the work for you. Also, before you start doing any work, make sure that you have consulted with a lawyer or legal team to make sure all the documents are completed correctly the first time – you don’t want to spend extra money trying to fix a costly mistake.