By Rohit Talwar CEO / 21st Century Tour Guide Fast Future Ventures
www.fastfuture.com

The Venture Funding Challenge

The first bubble has burst, hype is out of fashion and no longer can you expect to secure venture funding on the basis of a neat idea, an endearing smile and a 90-day globalisation strategy. Wave after wave of dot-com failures and the collateral damage for their backers - a dangerous mix of burnt fingers and bruised egos - have caused many investors to shy away from early stage and start-up propositions.

Despite the difficult funding climate, some will still be successful in raising venture funding or other forms of support to help build and grow their business. This article sets out some key pointers for would-be entrepreneurs looking to build sustainable ventures.

So if you are thinking of launching a start-up what are the factors that will differentiate sustainable business propositions from good but unworkable ideas? Summarised below are some of the key factors we look for in assessing new venture opportunities, guidance on how to put the right support around your venture and 6 sets of rules we give to potential entrepreneurs when they are looking at choosing partners.

What constitutes a good venture?

For us there are some key question we ask first of any proposition:

1. Is this a real business proposition - i.e. can it make money - one of the big problems in the last Internet wave was that many of the ventures that got funded were good ideas with no real market, or ideas that could form part of another business but were not strong enough to stand alone.
2. Is there a clearly definable market - i.e. can you name who you'd like your first 20 customers to be
3. Can we test customer interest - letters of intent are a powerful indicator of whether an idea can get 'traction' in the market
4. Is there enough management in place to carry things forward and are they up to the task - the journey from vision to action does not come naturally to all of us
5. Do they really understand the critical success factors for their business - often these relate to forming the right partnerships and establishing strong channels to market - many lose sight of this in favour of building the technology or perfecting the offer; by testing the idea early you can gain valuable feedback and refine the proposition before making expensive and potentially wasteful investments of time and money.
6. What external advisors and non-executives have they got on board - the advice these 'externals' can provide, their market insights and contact networks can help transform the prospects of an early stage venture.
7. Do the founders have a clear vision and delivery orientation - you need a sense of where you want to take the business and the positioning you want to establish - a clear vision can be a powerful filter in helping you sort through the numerous options and decisions that will present themselves on a regular basis.
8. Can we create entry barriers - without patent protection it can be hard to lock out the competition. However, key customer contacts, people and partnerships can become valuable barriers in their own right.
9. Is there enough about the proposition to attract high calibre staff with the capacity to execute
10. Is the management capable of working with the partners they'll need to bring on to help accelerate the delivery of their proposition.
11. What have the management done already - have they got momentum, do they make things happen or wait for external events to drive them.
12. What are the next steps - is it clear what they'll do with the money - or how they'll progress if they don't get investment.

What makes a business sustainable?

Whilst we don't inject cash directly into the businesses we work with, we do make a major time investment and put them through the Venture Catalyst Programme (www.wiredsussex.com) - through which they are introduced to potential investment partners. Hence there are a number of tests that need to be applied to assess the value and sustainability of the venture. Our focus is on building businesses that are in it for the long term and hence of paramount importance are their ability to create real value, build and sustain partnerships, create a trustworthy reputation and motivate their people by establishing an innovative working environment. Key tests of sustainability would include whether they:

· Have a clear plan for how they will get to and sustain profitability
· Can deliver an attractive return on our 'investment' in 24-36 months
· Can genuinely capture a worthwhile share of the target market segment
· Have a strategy for creating future value streams
· Are obsessed with customer service
· Create lasting partnerships and invest time in relationships
· Have simple values, clear ethics and use trust as an asset
· Learn fast and listen
· Anticipate, pre-empt and adapt
· Give something back to the community
· Build businesses not websites
· Are all about the people
· Have fun

Building a support infrastructure

A good non-executive team and / or advisory panel can help transform the prospects of a young company. An Advisory Panel is a good stepping stone for many - offering both the company and its advisors the opportunity to work together before formalising the arrangement. The panel structure also helps you identify the individuals with the strongest interest in the business and with the aptitude to become a non-executive director of your business.

A good advisory panel or non-executive board will provide you with a clear mix of skills, knowledge, experience and contacts encompassing strategic thinking, market insight, financial management, people management and the ability to open doors for the business to prospective partners and customers. It is particularly valuable to have people who have been successful in raising investment, who have experience of working in a recessionary environment and of working in or assisting businesses in crisis.

What makes a sustainable service partnership?

Alongside non-executive directors and advisors, start-ups and early stage companies often look to venture capitalists, consultants, corporate finance groups, accountants, lawyers, incubators, accelerators and venture advisors to help drive forward their proposition. The choice can be difficult - especially if you've never done this before and you 'don't know what you don't know' and hence aren't clear on the questions to ask. A good partner will:

· Listen and understand your business
· Explain what they can and can't do
· Show how they can add value to your business
· Explain their processes
· Focus on you, your needs and motivations
· Work for your business
· Open doors but let you close the deals
· Keep you informed
· 'Cuddle and slap'
· Maintain momentum
· Show ambition
· Continuously add value

Rules for Sustainable Partnerships

The following may help you in making choices about the kinds of organisations you want to work with and in assessing potential partners.

Rule 1 - What makes a good relationship?

· Do you like the key players
· Do they understand your vision
· Have they tried to understand your motivations
· Do they have a passion for your venture
· Do they try to add value from the first meeting
· Are your values aligned
· Is the 'chemistry' there
· Do you understand their 'agenda'
· Are they willing to invest time in building a relationship
· Would the relationship survive the first argument
· Can you trust them.

Rule 2 - Be clear on what services you want from the partner e.g. · Financial · Finance - from seed through to IPO / trade sale

· Corporate finance, accounting, tax and legal advice
· Strategic · Strategic direction / guiding hand / mentor / contacts / access
· Consultancy on the business proposition
· Business plan development · Sales and Marketing
· A contact network
· Marketing and PR
· Use of the brand
· Implementation Support
· Project management / progress chasing
· Technical resources
· Training
· IT Support
· Site design and development / Web hosting
· Technology - applications and infrastructure
· Databases
· Operational Support
· Premises / Office services
· Recruitment
· Design of operational processes
· Access to research and development resources
· Production facilities
· Intellectual property
· Employees on secondment
· Other assets
· Management/commercial expertise
· Other services

Rule 3 - ask how it will work- you need to understand:

· The process - pre and post-deal
· Their level of involvement / responsibilities
· Your responsibilities / autonomy in decision making
· Contact points / relationship management
· How will it work day to day
· Frequency of reviews / Reporting requirements
· When and how the financing will be delivered
· Process for introduction of new investors / partners etc.
· Service level agreements
· Rights and expectations of both parties
· How will issues be raised and resolved

Rule 4 - understand the deal before you sign · What proportion of the equity is being acquired?

· How much will you get of whatever it is you are getting - money, services,
· What's definite and what's contingent
· When will you get the money
· What share structure is being proposed
· What are the implications of different possible models
· If there is more than one class of share - what rights attach to each class
· What are your responsibilities / restrictions under the proposed agreement
· Do you understand the exit clauses
· How will any ratchets / escalators / claw backs etc. work
· Are there any warrants / carries - what impact will they have
· What is the overall impact on your holding · Can tax relief be claimed?
· Are there any authorisations, consents or licences required before can start?
· Are there any restrictions on the company disclosing information under the terms of any confidentiality obligations contained in existing contracts?

Rule 5 - Do due diligence · Meet their team

· Meet any key partners who are integral to the deal - technology, finance etc.
· Ask around · Check the press / web for stories
· Talk to their other customers
· Ask for proof that they have the money or capability to deliver the services
· Check out their backgrounds
· Try to meet at least one other player in the same field for comparison
· Check out the business they've supported
· Talk to others who've done similar deals - how does your deal stack up

Rule 6 - make sure you're up for it

· Have you done your homework
· Do you know why you are doing it - fame, fortune, regular income etc.
· Do you understand what's involved
· Are you committed to the idea · Are you willing to invest the effort
· Are your partners, family and friends going to support you working 24/7
· Can you work with the other people in an intense environment
· Can you live with the level of involvement proposed by the partner
· Write your own epitaph.

This may seem like a lot of factors to consider when all you want is the money to get on with it! However, in what has become an increasingly tough market for fund raising, it is those ventures with the best thought out business propositions and who have done the best homework which will attract the most appropriate partners and secure the best terms. Good luck.

Fast Future Ventures is a strategic innovation consultancy which works with major corporations and entrepreneurial ventures and to help them accelerate the development of innovative business propositions. Rohit Talwar CEO - Fast Future Ventures June 22nd 2001

Suggested next stage:Choosing a business structure