Finding magic, money with VC

Wireless entrepreneurs looking to scrape up venture capital would do well to recall a college radio hit from a few years ago: it’s all about chemistry.
There’s been no shortage of investment cash in wireless lately. More than 40 mobile players raked in a total of $460 million in new financing in October, according to figures from Rutberg & Co., and VCs poured a whopping $627 million into the industry the previous month.
For startups, though, it’s not easy to tap that surfeit of cash. Venture firms and investment banks aren’t just looking for a good idea and a viable business model, they’re looking for a team they can work with and a chief executive officer who knows how to lead-and, sometimes, how to get out of the way.
“We look first and foremost at the management team-at their expertise, their experience, their creativity,” said Michael Quinn, a partner at the Denver-based investment banking firm Q Advisors. “The most important thing is knowing what they don’t know. Nobody knows everything.”
Which is why so many VC deals involve players they’ve partnered with in the past. Investors aren’t interested in just writing a check, of course. In addition to a stake in the company, they want a place at the table, a hand on the steering wheel. Early-stage VCs, particularly, are far more likely to back a familiar face than a leader with whom they’ve never worked.
“You’ve already got a pre-existing chemistry. . Having a proven, backable entrepreneur you already know and have already made money together with is a tremendous advantage,” said Chip Austin of New York’s i-Hatch Ventures, an early-stage VC whose wireless successes include M:Metrics, Vindigo and Ztango. “(Starting a company) is a lot of energy, a lot of risk, a lot of free-form thinking, and you’re going to run into the ditch at least five times. There will be one or two dark days when you think the whole thing is going to fall apart, and that’s when chemistry is absolutely crucial.”
Such coziness only makes it harder for startups to snare that initial round of cash, of course, but small businesses can increase their odds by aiming their pitches at the right target. Just as the sponsors vet their suitors, entrepreneurs should check out potential backers before they try to get in the door.
Homework matters
Many venture capitalists urge company founders to investigate potential sponsors and talk with entrepreneurs with whom they’ve worked-even if the companies have failed. Any VC willing to gamble on a new idea-which is to say, any successful early-stage investor-will have a number of flops, after all.
Also, don’t waste time hitting up a late-stage investor if you’re looking for seed money, investors say, and be sure to take your ideas on interactive mobile television to a firm that specializes in the technology sector.
“The one thing we see that entrepreneurs aren’t doing-especially entrepreneurs who aren’t experienced in venture capital-is the research around a VC firm,” Austin said. “It’s devastating not to understand and target. .. That adds an extra six months to fund-raising.”
Entrepreneurs should be sure to secure enough cash the first time around so they can focus on growing their business instead of immediately trying to raise more cash, Q Advisors’ Quinn said. And they should make sure the VC has enough left in the tank for a second round, and perhaps a third. Even the most promising young business will be viewed dubiously by other potential investors if the initial backer doesn’t support it over the long haul.
Most importantly, be persistent, said Tom Huseby, managing partner of SeaPoint Ventures, a Seattle-based firm that has backed Qpass, SnapIn Software and Tegic Communications, among others. While it may take months, or even years, for a startup to notch that first investment, the resulting relationship could pay off for years-and with a series of different startups.
“This whole world of what VCs are looking for, what entrepreneurs should sell them-it’s really a magic combination that leads to these successes. When I find an entrepreneur I really love working with, I will do anything I can to work on their next deal,” Huseby said. “The one message I’d give to the entrepreneur community is the same message you have to give to the VC community: you’ve just got to kiss a lot of frogs before you find a prince. You’ve got to keep trying.”