Based on the final report for 2012 from Thomson Reuters and the National Venture Capital Association (NVCA), it may appear that IPOs are back as a viable startup exit strategy. For the full year 2012, venture-backed initial public offerings raised $21.5 billion from 49 listings, and represented the strongest annual period for IPOs since 2000.
Yet 2013 is still projected by The Fiscal Times as a difficult IPO opportunity for startups, due to choppy markets, continuing fiscal uncertainty, and the Facebook fiasco. The dot.com heydays of free flowing venture capital and supercharged IPOs are not back. The market and venture capitalists are looking for business, but with a continuing focus on proven business models.
Sure, there will always some seed funding (10% of overall deal flow), but you can bet that this money goes to entrepreneurs who have been there before and won. Angels are also moving up-stage, leaving a bigger and bigger black hole for new startups. Your friends and family are really the only answer until you have a significant revenue stream.
So what can entrepreneurs do to get to the head of the venture capital investment queue and position their startup for a winning IPO? Here are some key action items that may give your business some visibility:
- Start with an investment-grade business plan. This means build a plan that hits all the hot buttons; problem/solution, executive team, competition, business model, reasonable financial projections, and what’s in it for the investor. Follow with a killer executive summary, investor presentation, and financial model.
- Line up a winning team. You have probably heard me say this too many times, but investors look harder at the people than they do the idea (bet on the jockey rather than the horse). They want founders who have been there and done that before, in the same business domain. Both operating executives and top advisors count.
- Timing is critical. Remember you only have one chance for a good first impression. Don’t try to talk your way to a deal before you have the documentation. Practice every step, including the elevator pitch to get the first meeting. Use friends, family, and angels, if possible, to get a product, revenue, and customers first before the VC connection.
- Identify the right people in the right venture firms. Mass mailing your business plan to every VC in the book won’t get you any credibility or traction. Investment firms specialize by business sectors, and each partner within the firm has a specialty. If you are in “energy,” do your homework to build a list of the top players in this segment.
- Make a personal connection, directly or indirectly. If you don’t personally know anyone on this list, talk to every professional friend you have to see who they know. Get introduced via one of the social networks, or a professional organization, before you approach a VC with a business proposal.
Overall, remember what VCs are looking for big numbers, in relation to Angels or other potential investors. They are looking for products (not services) that will be "must haves" for customers, not "nice to haves," and they are looking to multiply their money by five to ten times in five years.
That means the target market must be large (at least $500M), proven and growing, with revenue potential of at least $50M within five years. Initial investment targets are usually larger than $2M, sometimes up to $25M or $50M. To make this work, you will need an initial valuation of at least $5M.
According to the latest NVCA industry stats, most venture capitalists predict investment increases in Business IT, Healthcare IT, and to a lesser extent Consumer IT, the latter being the sector of greatest expectations last year. Most VCs see decreases in clean technology investment, medical devices and biopharmaceuticals, so tune your expectations accordingly.
Current market conditions should certainly convince you to be totally thorough, thoughtful and aggressive in your approach and presentations. But now is the time to get started, and remember to work friends, family, and Angels before you tackle the big boys and set your sights on a windfall IPO.