With venture capitalists’ peculiar knack for spotting potential bonanzas and taking tremendous risks to make big financial hits, it’s no wonder entrepreneurs can find their first encounters with venture capitalists a bit puzzling.
The wizards of modern start-up and growth-stage finance, venture capitalists make possible the spectacular expansion — and personal fortunes for founders as well as investors — of companies like Fore Systems or FreeMarkets Inc. The reality, however, is that they miss at least as often as they hit. But when they do succeed, they often do so handsomely.
Not surprisingly, considering that such investments by nature are nearly always calculated gambles, descriptions of meetings with venture capitalists conjure up images of shrewd poker players who never give away a hand.
“Nobody ever tells you, ‘This is a bad idea,’ or ‘No,’” says Demetris Varotsis, a partner in Laurel Networks.
While not every venture-funded company displays this kind of performance, here’s an example of what can occur. Sycamore Networks, a Chelmsford, Mass., company, was founded in 1998 by two high-tech veterans. Sycamore amassed $40 million in venture funding within three months of its launch, went public in October of last year at $38 a share and floated a secondary offering in March, this time with shares going out at $150 each.
For understandable reasons, venture capitalists want to play things close to the vest. If a deal turns out to be a good one, they don’t want someone else jumping in ahead of them at the last minute.
“If they’re interested in funding you, they won’t say a word to anyone else because they want to get the deal,” says Steve Vogelsang, another partner in Laurel Networks. “If they’re not, they’ll start telling all of their buddies about it.”
That poses a quandary for the entrepreneur. Not revealing enough about your idea to the right parties may cause you to miss the mark with the venture investor. Telling them too much presents the risk of a potential competitor swiping your idea if there’s a lot of banter about it in the venture community. So being selective about who you talk to is prudent.
Says Vogelsang: “One thing you don’t want to do is present your business plan to too many people.”
Ray Marano
