Secrets of Venture Capitalists


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e is no game with higher financial stakes than the one venture capitalists play every day.

A ceaseless flood of hungry entrepreneurs are constantly knocking on the door, seeking funding to help their business advance to the next level and succeed. The most frequently used word in the VC vocabulary is "no" but the real trick to the job is figuring out when to say "yes".

Ask most VCs how they pick a winner and they'll say it all comes down to the people making the pitch. Ultimately, they're not investing so much in the product or idea (though that, of course, has to be exceptional), but in the people behind it.

And as they evaluate both the people and their ideas, there are a few characteristics that tend to jump out. (More: Secrets of Successful Entrepreneurs.)

"One thing we look for is a Pied Piper, someone who others will follow," says Jeff Bussgang, general partner at Flybridge Capital Partners. "So if I find myself thinking that this person is very compelling and I would go work for them, then I [can] imagine other talented people going to work for them and them sealing customers effectively. That's someone you know will be successful." (More: Lessons From a Food TV Star.)

Unique charismatic qualities, in fact, are a common refrain among the VC community as they describe how they know they've got a potentially lucrative investment opportunity in front of them. It's a rare combination of passion, drive, confidence and humbleness that perks up their ears.

"I will take great person with a good idea over a good person or team with a great idea any day," says Robert R. Ackerman, Jr., founder and managing director of Allegis Capital. "There will be problems [with any business]. The train's going to come off the track at some point in time. The ability to anticipate, identify and respond is going to come down to the quality of the people you're working with."

Too many entrepreneurs make the mistake of thinking they need to have all the answers when they speak with VCs. In truth, investors often toss out difficult questions they don't expect the applicant to be prepared for. When the business owner tap dances out an answer, it can be their undoing. The entrepreneur who admits they don't have that answer, but will find it, generally stands a better chance of obtaining financing. (More: Why Fewer Americans Are Starting New Businesses.)

Transparency is quality that VCs admire and respect. They're much more likely to continue a discussion with someone who is self-aware enough to admit their shortcomings and who isn't afraid to seek counsel. (That transparency also is a good building block for a strong corporate culture, they note.)

Of course, every VC looks for something different. Don Rainey, a general partner at Grotech Ventures, says he likes to learn about the background of the applicants he speaks with, since that gives him an insight into their tenaciousness.

"You look for somebody who has overcome material obstacles in their life," he says. "There's a reason 30 to 40 percent of venture companies are headed by immigrants. To come to strange country, where you don't speak the language and maybe don't know anyone is a challenge to overcome. That lets you clue into someone who's indefatigable — someone who's used to going over walls or not being stopped by setbacks. They are a breed of people who aren't easily discouraged or quitters at any level."

Flybridge's Bussgang, meanwhile, says he looks for someone who has a demonstrable ace up their sleeve.

"Ideas are a dime a dozen," he says. "People can replicate them very easily. But if there's something about the individual or partnership that gives them an unfair advantage, that's something I look for."

For example, one of the group's portfolio companies — 10Gen (which specializes in open source databases — was founded by the architect of DoubleClick's ad serving infrastructure. That gave the company an advantage in quickly finding employees and customers.

Meanwhile, at the Foundry Group, entrepreneurs go through a series of interviews with each of the company's four partners — all of whom must agree before the company makes a venture offer.

"We go very, very deep, assuming something fits, on two things: the people and the product," says co-founder Brad Feld. "We're not trying to evaluate the people against a well-defined set of criteria. We're trying to decide if we want to be partners with them for the long term. Its [also] not just doing a bunch of reference checks. It's actually doing stuff with them and getting to know them. … We want people on a mission."

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