Lifting the Venture Capital Hood

Over the last few years I've met a few Venture Capitalists and have had a few things to say about the sorry bunch of people who try to cash in on others' innovation.

So it's always refreshing when I meet a venture capitalist who's "in it for the ride". You know, the guys who are actually really excited about nurturing innovation rather than just milking it for cash.

Last year I had the pleasure of meeting Patrick Polak of Newion Investments, a Dutch VC firm. One of the things that struck me first about Patrick was his brutal honesty ("No Henk, I don't want to invest in your firm.") Here are some of the things he says about entrepreneurship and venture capital:

Burning cash is easy! but earning cash...
"Newion's philosphy is to invest in companies with maximum 9 months of negative cash flow!"

When I first started doing financial projections, it was clear to me that we'd be cash-flow positive within 12 - 18 months with the absolute minimum investment (and we were). However, the advice came from clever consultants and the like that we shouldn't show such naive optimism and rather project negative cashflows for 36 months...

It's refreshing to hear from a smart guy like Patrick that that's simply a load of bull.

It is very difficult to go international
"The first thing you should do is become one of the top 5 players in your country or niche market. Then only start expanding country by country"

This sounds ridiculously obvious, especially if you've already made the mistake of putting too much emphasis on being global, which is exactly what I did with Skyrove. Our systems were built from the ground up to be international. Although we have a few Skyrove hotspots up overseas and have generated a lot of interest abroad, 99% of our revenues are generated in our own backyard. We've spent a lot of time and money on setting up overseas structures which really weren't necessary at the time.

Cash management is King!
"Monitor everything! Try to think 'scenarios'.
But... 'If you are in control, you are not going fast enough' - Mario Andretti
"Thinking Big - Living Small!" - Aztecsoft"

This is nothing new, in theory at least. At Skyrove we always know how much money we've spent and how much we're going to spend over next 3 months. That's probably the only reason why we're still going after 2 years with capital expenditure of less than $25,000. But sometimes you have to take just a little bit of a risk. If you don't, your competition will.

Partnerships can accelerate your growth
"Agents/distributors/dealers are difficult to manage. Rather OEM your solution with a partner"

This comes down to focus. Is your company designing and developing a fantastic new widget, or are you selling a fantastic new widget? I assume it's the former. Then don't waste your time trying to figure out how retail distribution works. Find someone who knows it and have them take care of everything.

VCs look at the management
"Build your team carefully"

Imagine you have 10 million dollars to invest in someone. Would you rather invest it in a couple of young graduates with a great idea or a few guys with a mediocre idea but a 10 year track record of phenomenal success?

The VC's money is almost always going to go to the latter. The trick is really to combine the two. If you are the kids with the great idea, get someone on your team to help manage the high level stuff and add some credibility to your business.

VCs try to follow companies a longer time before they invest
"Work on the relationship. Provide consistent information"

If I were to invest in a company, I'd spend a LOT of time with them before I do. I'd like to know how they think and approach things. Are they good listeners? How do they treat their co-workers? Do they have the stamina to see through tough times?

Some VCs boast of 4-week turnaround times, from pitch through to investment. This is highly unlikely. At the same time don't put up with VCs that want 3 month exclusivity to do due-diligence.

Choose a VC with experience in your type of company

I know of small VCs that boast to "understand" the internet, manufacturing, biotech, the retail sector and even game parks. It's bull. VCs that invest across various industry sectors probably don't know what they're doing. The reason they're throwing money around is that they're continually stuffing up and then blaming the sector they're in, therefore trying new sectors. They lack focus and will be extremely dangerous to your company's well-being. Stay away from them.

Do not go for the new kids on the block
"You have to learn from them instead of them learning from you. Look for their existing portfolio, see some peers? Check their references"

Venture Capital firms are getting started and being run by all sorts of misfits these days. The first thing to do is to see if they pass Guy Kawasaki's Venture Capital Aptitude Test.

Do not take more than 2 VCs

I shudder at the thought...


In conclusion: Venture Capital may be what you need to set your company sailing. However, as much as the VC firm will tell you that they are 'taking a risk' by investing, always remember that you are the one who might be risking it all by taking them on board, while they spread their bets amongst all their portfolio companies.

p.s. Patrick wasn't interested to invest in Skyrove primarily because we're outside Europe. I knew this beforehand, but also that it's always worthwhile to pitch to VCs for the feedback you may get. Most good VCs are also well connected and may be able to help in other ways.