The good news is that venture investing grew in 2010 for the first time since 2007, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Assn. (NVCA). Venture capitalists invested nearly $21.8 billion in 3,277 deals last year, up from $18.3 billion in 2009.
The bad news: although more venture money is going out, less investor money is coming in, points out Michael Greeley, founder and general partner of Flybridge Capital Partners, a Boston-based venture-capital firm. Venture-capital funds raised only $12.3 billion in 2010, down from $16.3 billion in 2009, according to the NVCA and Thomson Reuters. That was the fourth consecutive annual decline and a far cry from 2006, when VC funds raised about $31.9 billion. All told, there were 157 VC funds in 2010, says the NVCA and Thomson Reuters, compared with 237 funds in 2007.
For Flybridge, which focuses on technology start-ups in the consumer, energy, health-care, and information-technology sectors, the shrinkage is a positive, says Greeley. “There are great candidates for us to invest in — almost every sector is being impacted by innovation — and fewer firms to compete against,” he explains. “It would be the golden age if not for the lack of liquidity.”
Given the shrinking pool of venture capital, CFOs will have to sharpen their presentation skills if they hope to obtain funding from selective VC firms. Greeley says he receives between 500 and 600 business plans per year and will ultimately fund 2 or 3 of them. Flybridge currently has about 55 portfolio companies, he says.
In a recent interview with CFO, Greeley discussed how finance chiefs can best capitalize on their meetings with VC firms, and why he would rather sell a company these days instead of taking it public. An edited version of the interview follows.
What should finance executives know about pitching their companies to a VC firm?
Some CFOs do it really well, others don’t. I have several pet peeves, and I’m amazed at how often these mistakes are made. One, I get frustrated when a CFO isn’t thoughtful about the capital intensity of a business. When I invest in a company, I’m really committing to invest in each subsequent round. When a CFO can’t answer “How much do you need to get to break even?” it tells me he hasn’t been thoughtful about how the business scales, its margins, and how profitable it could become. It undermines everything he says.
Two, I like to hear about unit economics — the cost and revenue per unit of product. One CFO who did it really well knew clearly how much his product cost, including sales and distribution costs, and how much he could charge for it. I really appreciate that.
The third thing I find disappointing is when a company pitches us and we say we’re interested, but the company is not prepared for the follow-up and supplemental materials we need. I probably meet with 150 to 250 companies per year, and if a CFO is not prepared to run a diligent process, it’s very quickly out of sight, out of mind. If the CFO can’t give you what you need in 24 hours, you’ve lost momentum. I’m quite critical of CFOs who run a bad process.