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 February 10, 2003 | WE ARE CLOSER to the end than to the beginning of the downturn.

Venture capitalists are paid to be either optimists or pessimists, so if entrepreneurs are contemplating approaching venture firms to raise capital, they must understand how those firms would react to that opening premise. The environment has been hostile to creating and sustaining compelling new businesses for nearly four years. How many truly viable business models were created at the height of the frenzy? With the explosion of liquidity and readily available venture financing, many companies created in the late 1990s were predicated on ridiculous assumptions and a lack of true understanding of customer needs, and they were operated poorly.

But we all know that. The present environment requires a complete overhaul of how entrepreneurs raise capital and craft business model frameworks. Venture financing rounds have decreased, yet they were still able to propel the entrepreneur as far as rounds in the late 1990s. The bio-IT entrepreneur should follow several important guidelines:

· The pre-engagement phase. This requires codifying all the reasons that the entrepreneur wants to launch the company at all. Entrepreneurs should clearly document what the customer pain points are and how their solution uniquely addresses them. Converting customer testimonials to specific shortcomings in current competitive offerings and juxtaposing those offerings against theirs is a powerful way to present the market opportunity. But the opportunity is not static. Entrepreneurs should present the product roadmap in the context of how the customers' needs may evolve. They may be addressing only a niche market segment, but they should present a roadmap that articulates a larger market over the next three to five years.

A critical element of this phase is sizing the financing round. In this environment, the amount of capital raised should provide the company with two years of operating runway. The presumption of a deep and readily accessible financing opportunity just waiting for the company to come back to market is flawed. Ideally, this round should get the company to break even, no matter the stage.

· The engagement phase. The CEO is the only person who raises money. While venture investors are keen to meet members of the team and the advisory board, they are investing in the CEO first and foremost. The CEO must own the process and understand that every interaction is a fund-raising event. Conversely, CEOs should meet with only general partners of funds; ideally, the referral is from a known and trusted confidant of the investor.

The presentation itself should be focused and deliberate, anticipating the obvious questions, and pitched to the audience and not over it. While many investors have deep technical understanding of certain sectors, some may not be fully aware of trends or recent industry developments. By definition, the entrepreneur is raising capital to address new needs and issues. It is frustrating and off-putting for investors if they do not appreciate the nuances of what the entrepreneur is saying.

Much like a sales call, the meeting should have a strong closing, with the next steps clearly articulated. Most venture firms have weekly partners meetings; the entrepreneur's goal should be to be a discussion item on the next partners meeting agenda. Recognizing three possible outcomes to this first meeting, having a consensus for the next steps will avoid a meandering process and preclude the company from getting "stale" in the eyes of the investor.

If the answer is "no," receiving that feedback would be useful to the entrepreneur before presenting to other investors. In most cases, that response is not necessarily a reflection of the company's prospects, but an indication that it was not an appropriate fit in that particular portfolio. If the answer is "yes," the entrepreneur should spell out what steps will be necessary for that firm to meet in short order the other members of the team, vet the technology, conduct customer calls, and visit the company's facilities. The entrepreneur should also be prepared to conduct additional diligence on that particular fund and any individual general partners involved.

· The post-engagement phase. The most difficult — and most common — response, however, is "maybe." Many investors today will want to monitor a company raising capital for several months to see if the CEO is achieving presented milestones. Leaving that engagement meeting, the CEO should clearly state what the concerns are and prepare responses immediately.

In general, investor concerns are either company specific or deal specific. Investors particularly appreciate CEOs who have addressed the transaction concerns upfront. For instance, new money will not arrive subordinate to the preferences of existing investors. New investors will want certain rights and representation on the board, which should be expected. A worthwhile exercise is to clearly delineate the least attractive set of terms and conditions that either management or existing investors would be prepared to accept. Having a consensus around the floor affords the CEO much more flexibility as new investors are considered. This will shorten the fund-raising process, which should in turn offer a greater likelihood of success.

At this stage of the engagement, time is the CEO's enemy. Holding out for materially superior terms will introduce a greater degree of risk, particularly if entrepreneurs are dealing with funds that still think we are closer to the beginning of this downturn than the end.

Michael A. Greeley is managing general partner of the $100-million East Coast investment portfolio of Boston-based IDG Ventures, which makes investments on behalf of Bio·IT World's parent company, IDG. He can be reached at 

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