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Pastimes : Venture Capital -- Ignore unavailable to you. Want to Upgrade?

To: Doughboy who wrote (21)	4/30/1999 12:24:00 PM
From: jonathan romanowsky	Read Replies (1) \| Respond to of 26

Doughboy, Nobody can provide a crystal ball. Plus, if this idea is so great, there is probably other companies out there that your circles don't know about doing the same thing. These issues are out of your control. You can and should be very skeptical about their business plan. The more prying questions you ask, the more of a sense whether these guys really have their act together or are naive. Some questions I would have: 1. How good is their management team? Why did they leave their old jobs for this opportunity? Do they have experience with start-ups? Have they been through a growth phase? Have they dealt with VCs? How strong are their network ties with potential partners/customers? 2. Reality check on the business plan: Work backwards... If they want to go public in 2 years, start there and determine whether getting from here to there in 2 years is possible. Also, do they have a detailed action plan? 3. Financial model. What is their profit model? Does it make sense at a much larger scale (You mention they make profits now)? How sensitive is it to changes in the environment (run some sensitivities around key variables- revenue growth rate, gross margin, compensation expense, development costs, time to market, etc.) 4. Organization/Legal Structure: Do they have accelerated vesting of shares for employees (if they do, nobody would ever buy this company since its people will leave or be lazy)? What will their hiring needs be as they grow (if they need to add a ton more software engineers, it may take them forever since the market is tight)? 5. Market Analysis: Do they understand their market? Who are potential competitors? Partners? Suppliers? Customers? Can this company capture the future profits or will they go to someone else in the market place. Regarding your questions about VCs and their investments: VCs are bright people who will invest in home run type ideas. They look at dozens of business ideas and chose to invest in only a very few. Their interest in your company is a good sign. They look at the business plan more as a reflection of management's ability and foresight than the plan itself. They know that comapany strategies change often and thus those detailed in the plan will likely not be caried out. What's more important is that they think that management can make the right adjustments and tough decisions to put the company on the path of success (and not just the path detailed by the plan). On the other hand, VCs can be somewhat conservative. They want to invest in people with history of success and they want to invest when other VCs have also taken the plunge. This conservatism often leads them to miss some opportunities. This issue also often leads to long delays in forking out the needed cash. Finally, if they've already raises cash from other angels, ask your friends at the company if you can speak to them. If they are experienced investors, they may have an interesting outlook as to why this company can (or can't make it). That's my 2 cents worth. I am not trying to dissuade you from investing. It's human nature to be optimistic and hopeful. Therefore, playing devils advocate is very important. If after going through this list of questions and many others, you feel that they have their act together, put your money on the wheel and let it ride! I wish you the best of luck and keep the thread posted on the company's progress and your decision. Take care, Jonathan