The dream business

Okay, you've dreamt up an idea for a great new tech product -- cool software, new web service, matter teleporter, whatever. You've got the brains and you're as excited as a virgin at a porn festival. What next?

Okay, you’ve dreamt up an idea for a great new tech product -- cool software, new web service, matter teleporter, whatever. You’ve got the brains and you’re as excited as a virgin at a porn festival. What next?

Easy, all you have to do is develop your idea into a product, market it and sell it.

Ah ... reality bites.

Developing the concept will take time, lots of time, and you’ll need some help, and some hard/software, and somewhere to house it all. While you’re doing it you’ll have to pay your mortgage, and the mortgages of everyone helping you.

Unless you’re independently wealthy, or have lots (and I mean LOTS) of collateral, you’re probably going to end up looking for venture capital, from venture capital firms.

I’ve canvassed the opinions of some fledgling entrepreneurs in the industry and was surprised to find that the general attitude to VC is negative – there seems to be a subtle belief that without an unbeatable, risk-free business plan, prepared to perfection, a fully working system and some reference customers that love the product, you've got problems. There also seems to be a belief that a VC will take away control of your company, your idea, and eventually all of your money.

I’m not an expert on VC, so I thought it best to ask them if this is true (believe it or not I actually do research these articles). I phoned around some of the country’s top VCs, and spoke as well to Francesca Benga, an economist and general manager of the New Zealand Venture Investment Fund (NZVIF).

The VIF is $100 million of government funds that is to be matched by $200 million of private funds. It has been spread across five fund managers, three in Auckland, one each in Wellington and Christchurch. The idea is to stimulate growth in the technology industry by stimulating the VC market in the area of seed and startup companies. Five VCs were chosen last year, from a list of over a hundred, to manage the fund (that is, to invest it).The fund restricts a VC to a maximum of 15% of the fund for a single investment, and 50% of their investments have to be in very early stage companies.

I spoke to the VCs on the subject of them being risk-averse, predatory and greedy. It turns out (not very surprisingly) that they’re none of these things. VC, by its nature, is a very risky business. Something like nine out of every 10 businesses fail. If you’re a VC you’ve got to assume that most of your investments are a total waste of time. Of course you can’t tell beforehand which ones are going to succeed, so you’ve got to ensure that the ones that do succeed make up for the ones that don’t.

The image of risk-aversion that they have probably comes from the fact that they do everything possible to reduce the risk of failure.

To alleviate this risk they become very involved in the business they’re funding. (They’re investing lots of money in these businesses, too much to allow someone with a poor understanding of business to do on-the-job training.) If you’ve not run a number of businesses before, and failed, then you don’t know anything about business. Most of us in IT are technically sound, smart, and fast learners, but that doesn’t qualify us to go throwing around other people’s money. Running a business successfully requires experience and skill; running a global-scope tech company will add talent to this list. If you don’t have both of these, and you’re not a chronic over-achiever, you should welcome the assistance a good VC manager can offer you.

There’s a difference between being risk-averse and managing risk, says Benga, and VCs do the latter.

To manage the risk of competition, you have to have a business that’s new in some way -- something that gives you the edge. Intellectual property rights are often seen as a ticket to a global monopoly, but they’re not the only thing that can give a business an edge. You probably couldn’t get a VC to fund a PC desktop operating system replacement, but there are lots of ideas that don’t require a fight with Microsoft.

Investment in bio-tech seems to be quite popular at the moment. According to one of the country’s top VCs (who I’ve agreed not to name because he’s a little pissed off at me -- oops), this area is extremely high risk but it’s one in which they’re very interested.

So, how do you go about getting your ideas funded?

You start by building a very sound and detailed business plan: VCs want to know how likely it is that your competitors will stomp you. They want to see that you’ve analysed the business, researched the market and aren’t making any assumptions that would damage the business. They want to see projections of earnings and costs for a number of years. (Benga notes that New Zealand is small, so if you want big growth then you’ve got to expand overseas.) They want to know everything about your businesses, and see that you too know everything about your business.

A prototype, demonstrating the technology, is a good idea. VCs are financial and business people, not techies -- telling them that it’s a new type of application server will make their blood run cold. Some ideas aren’t amenable to a demo, but don’t let that put you off. If you’re going to succeed with VCs then you absolutely have to show personal commitment. If you’re going to give up just because you didn’t get the VC you wanted then you’re not dedicated enough and you won’t get the funding.

I always thought that the people in our industry were very smart. It’s obvious to me now that we need to get smarter, but not about technology -- we can already do that -- but about business. We need to stop inventing fairy stories about VCs and other methods of funding, and start investigating the realities. Getting funding for your idea isn’t trivial, but it’s not impossible either.

If you want the economy to flourish then you, personally, are responsible for making that happen. Don’t sit there and complain about how bad things are -- it’s your world and it’s your life. Nobody else is going to look after you. Now, get off your arse and go build a multibillion-dollar business.

Dollery is a Wellington IT consultant. Send letters for publication in Computerworld to Computerworld Letters.

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