Aquiring venture capital after the ‘tech wreck’

ENTREPRENEURS now believe that venture capital has become much harder to obtain.

Advertisements are being run with catch-phrases of ‘Venture capital hasn’t dried up … it has wised up’. With a slowing economy and a plunging dollar, it is perhaps now more important than ever for Australia to be developing new businesses that create real value. But has the acquisition of venture capital really become any more difficult now that the Internet bubble has burst?

In very general terms, venture capitalists certainly bore the brunt of the downturn in Internet stocks. By early 1999, business ideas of a dubious nature were being funded, even though their earnings potential had not been properly investigated. When the ‘tech wreck’ happened, significant amounts of venture capital disappeared with nothing to show.

New entrants were the venture capital firms which were hurt the most. Often they had diversified from their traditional businesses to cash in on the quick money being made at all stages of the value chain.

To catch-up, these firms invested aggressively in business ideas that had often already been rejected by established players. It was these new entrants which tended to fail – established firms suffered far less. Today, the majority of Internet businesses are yet to show a profit, but the best business concepts with the best management teams have survived.

Venture capital firms are still working with entrepreneurs to get new business ideas off the ground. These specialised firms continue to be very demanding. Stories abound of entrepreneurs doing 30, 40 or even more than 100 presentations before getting their seed capital.

Nevertheless, capital is still available and, in many ways, is no harder (though no easier) to obtain than it has been in the past.

Those wanting venture capital must be able to show how their business is going to make money – just selling Internet advertising space is no longer considered to be viable. Once you can show your money-making ability, you need to demonstrate why you have a competitive advantage.

What is going to stop an established firm from replicating what you are doing and eliminating any first mover advantage by leveraging their established position and brand name?

You will also have to show that there is a real demand for your business. Claims like: ‘if I achieve just one per cent of the Australian market, then …’ will not be viewed favourably. You need to show there are real people who need your product or service and that they will incur the switching costs to move from their present supplier.

Beyond this you need to demonstrate a high degree of familiarity with the industry.

What drives purchasing decisions, who are the competitors, what are the strengths of these competitors, how would you segment the market, what drives competition, how are competitors likely to react to a new player? Answers to these questions will allow you to develop realistic financial propositions.