The Venture Capital Numbers Game

venture_capital.jpgAs I promised in my recent post on linear entrepreneurship, I have put down my thoughts on venture capital as a “numbers game.” Venture capital is a numbers game, but in more ways than you may realize if you are an entrepreneur living anywhere other than places like California, Boston, or Chicago.

While I consider myself to be a business-person first, I am (or was) a software engineer by trade. So, either way you slice it, I like data. The more the merrier. So, let’s examine things logically.

Fact #1: There are far fewer sources of venture capital in Georgia than in other, more established markets. Atlanta, while large for a city in the southeast, is an island. Other areas, such as southern California, NYC, and Boston, all are “connected” geographically to surrounding areas. Let’s face it – looking down from a 747, the northeast corridor from Boston down to Washington, D.C. looks like one massive suburb. Atlanta, on the other hand, looks a lot like a young couple’s first ultrasound – when the baby is only a few weeks old in the womb. Think of Atlanta as a “zygote” when it comes to its maturity as a capital market.

Think I’m kidding? See for yourself!

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Note: for the purposes of this discussion, I am not including capital brokers, angel syndicates/investors or private equity groups.

Consider that there are only a handful of large-stock “pure” venture capital firms in Georgia. Here are the current “major” players:

Then you have a few smaller boutique funds, such as:

There are a few others, but my point is this:

There are that many players on one floor of the average office building in Silicon Valley. Okay, I’m exaggerating a little bit, but you get the point.

Over 35% of the nation’s venture capital money is centered in northern California (Silicon Valley, San Francisco, etc.) The number of venture capital firms there is somewhere around 175-200.

Fact #2: The funds here in Georgia are very small. If a VC firm here raises a $50M fund, it is a big deal here. If a west coast VC invests $50M, that is a big deal there. With a small fund, you have even fewer chances to swing and miss.

Noro Moseley is the biggest venture capital player here in Georgia. They recently announced the raising of their latest fund, which is a $200M endeavor. A $200M fund is gargantuan for Georgia. Massive. Compare that to NEA’s (D.C. area) recent announcement of their raising of a $2.5B fund, or even Norwest Venture Partner’s (California) current fund, which sits at $650M.

Perhaps when investors here stop putting their money into real estate, we can plant the seeds for some larger funds of our own, but that is a story best reserved for another blog entry.

What does this mean? With more money to invest, more deals can get done. Bigger deals get done as well. You see a bigger diversity in the types of deals as well. Remember, venture capitalists have investors behind them as well, and they aren’t serving those investors well if they are just sitting on the cash and not investing. And this pressure level goes up proportionately with the size of the fund being managed.

Fact #3: The chances of the average entrepreneur raising venture capital is (based on my exhaustive scientific calculations) is roughly zero (.000).

I say this a bit facetiously, but also a bit realistically. Most ventures are not venture-backed. Very few are, actually. If 1,000 deals come into a VC, 100 will get looked at because they generally have their act together. 10 will go through due diligence, because they have all of the right elements in place. Out of those, one will get funded. The proverbial pyramid.

Fact #4: If you talk to three investors here in Atlanta and get rejected three times, you are batting zero (.000).

This is just simple mathemathics. If you pitch anywhere three times, and get rejected three times, you are batting zero. However, this is a logical segue into my next point.

Fact #5: If you walk down Sand Hill Road in Menlo Park, California (Silicon Valley) and pitch to three venture capital firms, and get rejected three times, you are still batting zero (.000). The difference being that you can pitch in Georgia a handful of times and quickly be out of options. In other markets, you can simply walk down the hall and pitch three more times to three different firms. Welcome to the numbers game.

If you pitch here in Georgia, and you don’t raise funding, all it means is that the handful of firms based here passed on your deal. If there were more venture capital firms with a presence here in Atlanta, your chances would go up, much as it would in Silicon Valley, New York City, Boston, or other such markets.

So, here is my advice to you entrepreneurs who live in an area with a limited capital market:

Look outside your state: Raising money is a numbers game, as I’ve said. The more times you can pitch, the better. If you want to pitch locally (assuming you can get an audience), then do it. But do so with an eye on the larger picture.

Think of raising money as fishing. To catch a fish, you need to go where the fish are. If you are one of 3 dozen fishermen all chasing the same 3 or 4 fish in the pond, it is time to move your quest to a bigger pond.

There is a LOT of capital floating around out there, you just need to find it. One of the many hats you get to wear as an entrepreneur is the one of “archaeologist”. The cash is out there, buried. And it is up to you as an entrepreneur to get out there and uncover it. Good luck!

Cheers.

2 Comments

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  2. Offemidernert ยท December 23, 2008 at 3:34 pm

    Hi all!

    As newly registered user i just want to say hi to everyone else who uses this forum <:-)

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