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Several steps can be taken to improve VC success rates.  Many technology entrepreneurs/start-ups get overwhelmed and frustrated by inappropriate capital allocations and/or meddling by early-stage investors posturing for an eventual exit.

Much like the steroid-enhanced era in baseball, there is now excessive investment emphasis on prodigious home runs rather than batting averages made up of many singles and doubles.

The first step for any investor is to understand the entrepreneur and his/her chosen team: thought process, motivations, experiences, market/company vision, interpersonal/communications skills, strengths/weaknesses, fears/assurances.  This is where the seed of partnership is formed as entrepreneur/leadership team and investors/VCs establish mutual needs and trust to assess whether the chemistry is right.

This begets the second and third steps: Is the entrepreneur's strategy sound and does the product/service and road map match the strategy and business plan?  Insufficient due diligence or meaningful deep-dive into the technology/product/service restricts investors/VCs in providing qualified advice.  What many entrepreneurs need is a trusted, objective consultant to fine tune and validate strategy, plans, products, and model operating/capital costs, while facilitating implementation through connections, sharing market research and cross-pollinating with other relevant portfolio companies.  This is where the partnership is truly defined.

Without these, the final step, valuation, is not really possible.  Only at this point can the VC work with the entrepreneur on honing "the pitch".  As a result, many start-ups are either under- or over-funded; in either case, the investors cannot gauge the appropriate value of the business.  The answer is not merely in looking at “the comps”.  With more pressure on bigger exits, there has been a tendency to over-fund and over-value "hot" start-ups and too rapidly cast aside founders in place of "professional management".

No one understands a founder’s raison d'etre better than they do.  They birthed the idea.  No professional management can co-opt this understanding.  This is not to say that experienced professionals cannot be an asset; quite the contrary.  And investors/VCs that commit to these steps can make instrumental introductions that further the partnership between the business and themselves.

Success rates are low.  Volatile markets make navigation more turbulent.  Increased compliance/regulations are costly thorns.  Finicky investors with much shorter time horizons is the norm.  The objectives are stronger entrepreneur-investor partnerships, sounder business models and operating performance, and more accurate valuations that satisfy the needs of all constituents.  Sometimes you just have to state the obvious. 

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Tags: Capital, Investing, VC, Venture


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