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VC Insights -The Other Side of the Desk: 29 insightsfrom a software CEO turned venture capitalistby
Gordon Graham
 
 Alain Couder has looked at software from both sides of the desk.Here's the short version of his illustrious résumé:Born and educated as an electrical engineer in FranceHolds seven patentsWorked in management for IBM and HPWas COO of the $4 billion computer firm Groupe Bull while it was being privatized by the FrenchgovernmentLed the turnaround of Packard Bell, finding $500 million in additional profits in one year Was COO for the $6 billion HP spin-off Agilent TechnologiesServed as CEO of two successful software startupsSold the second, web services management firm Confluent Software, to Oblix in February 2004 for anundisclosed amount After that, Couder decided to try something completely different.So, he joined the San Francisco-based VC firm Sofinnova Ventures that focuses on investments in IT andhealthcare startups.
Coulder's Insights:
 
Insight #1
: VCs are people too.Many business people stereotype VCs as a school of sharks who are all after exactly the same thing:some juicy entrepreneurial flesh to put the bite on. On the contrary, says Couder, "VCs are people too."Each one operates a little differently. They will invest with their brain, doing a lot of analytics, but in theend their final decision is based on a kind of gut-feel as well, a strong belief that a company will work."That means a deal one VC would never touch can be appealing to another. That's good news for anentrepreneur who's been turned down once or twice.
Insight #2
: VCs have to show results too.Entrepreneurs and VCs have more in common than many CEOs realize."From an investment viewpoint, VCs have their own constraints. They are getting money from their limitedpartners. Every two or three years they have to go back and ask for more funds, and at that point theyneed measurable results to get it."Couder says a VC's investors will ask him tough questions about the background and capabilities of histeam, and the results and future potential of his portfolio of companies.Sounds rather like a CEO seeking his next round of financing, doesn't it?
Insight #3
: VCs may surprise you, especially the younger partners.These pressures sometimes play out in surprising ways."I learned at my last company that the VC will sometimes make decisions that don't feel rational to theCEO," Couder says. "It can be better for them to exit for many reasons besides the company itself."If you're a new general partner at a VC firm, you're not considered a real partner until you've done your first exit. So if you have any young general partners on your board, you have to watch their motivation." And don't take it personally if they decide it's in their best interest to exit.
Insight #4
: Allow more time to raise money.Most CEOs are trying to raise money in a hurry. Couder says that now that he's been on the VC side, hecan see this is not the right approach."You have to start to raise money early enough so that the partners who would be interested haveenough time to digest your plan and your technology. As a CEO, you are working full-time on fund-
 
raising. But every partner at a VC firm is working on a lot of companies at once. To pick the right onetakes time."For example, Sofinnova Ventures manages $600 million, split between its investments in IT and lifesciences. Each of two partners on the IT side will make only one or two seed or first-round investments ina given year.That means Sofinnova can invest in a maximum of four young software companies per year, to the tuneof $2 to $4 million each."Probably at any point in time we're looking at 10 to 20 companies," Couder says.Those are long odds. What Couder doesn't say is that time is on the VC's side, especially in today's morecautious investment climate.So what can an entrepreneur do to get a better shot at VC funding?
Insight #5
: Don't waste time presenting to juniors.Couder says if he were seeking VC funding today, he would spend more time checking out the topinvestors in each fund he was considering."There are a lot of presentations I have done in the past that I probably wouldn't do now, because theyare a waste of time. You can make the fund-raising process much more productive."How, exactly?"You have the blue-chip VCs that everyone wants to present to. So you can end up presenting to junior partners since they are the only ones who have the time to see you. But they're not decision makers. Inthe end, this is a waste of time for a CEO."In other words, you have to get in front of the right audience, just like when you sell software. The key iseither work your way up to the senior partners in a blue-chip firm, or present to decision-makers in smaller firms.
Insight #6
: Get a referral.Sofinnova's website has a good description of how to approach them and what they're looking for that istypical of most VC firms.To start, it may come down to who you know."The best way to contact us is to have someone we already know refer you to us," the website says. After this initial contact, they like to see "short executive summaries that capture the essence of the plan in justone to two pages."What are they looking for specifically?Companies that develop "compelling new IT products that serve horizontal enterprise and carrier markets... Companies that have proprietary technology run by a seasoned management team with aproduct for a multi-hundred million-dollar market."
Insight #7
: Know your audience.If you manage to clear the initial hurdles and get a hearing, you need to pitch to the concerns of your audience. Couder says CEOs need to understand that different VC partners do their due diligencedifferently."Different partners have different views. Some want a very detailed business plan with all the questionsanalyzed. Others basically don't believe in the plan, because they know that it will be changed 10 times.""You should try to understand whether you are presenting to a detail person or a more conceptual person,and then speak to their personality," he says.
Insight #8
: Spend time developing a relationship.This touches on a significant issue: getting to know who you're getting into bed with."The personal fit between the lead investor and the CEO is particularly important," says Couder. "Therelationship with the partner is something the CEO needs to pay more attention to."They are so passionate about their technology and their invention that they tend to forget that in the end,this is a matter of trust between themselves and their partner. I don't see many CEOs spending the timeto establish the relationship."Even at the beginning of a presentation, you need to look people in the eye. Make sure everything is allright and that they are really in the mood to be listening."
 
Insight #9
: Follow up personally.Couder says that in his experience, a CEO usually comes in with his management team and makes apresentation, and then they all troop out together.His advice: Don't leave it at that. Follow up personally. Remember you're dealing with people, notautomatons."Try to get some one-on-one time with the partner. Call back later for a person-to-person chat. And don'thave your CFO do it. Do it yourself."Beyond the personality issues, what advice does he have on drawing up your business plans and makingyour actual pitch?
Insight #10
: Bring along printed copies of your plan.This is a basic courtesy that many presenters forget. After you find the right firm and get an audience with the perfect partner, you don't want him to sit theretaking notes on his laptop the whole time. You want him to pay attention and make eye contact.This tip is important enough that Sofinnova put it on their website:"Be sure to bring paper copies of your slides, and hand them out to us when you present. We'll be able tomake notes on the copies, and spend more time understanding your vision... and less time writing."
Insight #11
: Spin your story to fit today's hot markets.Couder says as a CEO he always tried to be consistent and tell the same story to both the customer andthe VC. Today, he might do it differently."You may have to position the company in a somewhat different way for the VC than you position it for thecustomer. You have to consider what subjects are hot at a given point of time."What's hot right now?"Wireless, content management, search, XML, security. All of that is quite hot," he says. If there's a wayto hit any of the current hot buttons in your presentation, do it.This isn't so dumb. Many journalists and analysts will consider your firm hot news if it plays to some bigindustry trends.
Insight #12
: Keep it simple, and avoid hype.Couder admits he's seen a lot of presentations that could have been better.But the "stellar jobs" he has seen all have something in common: "The story is always very simple, andthe proof is in the achievement and results, rather than the talk."So forget the hype, the superlatives, and the wishful thinking. Build your case with believable facts andfigures, quotes from analysts, and stories from customers.Of all people the people you'll meet in your business life, VCs have heard too many pitches to be fooledby unsubstantiated claims.
Insight #13
: Go big or go home."Most CEOs at the startup stage don't care about going big. They just want to get the company to breakeven," Couder says.But VCs are looking for the next Google."So that's something to keep in mind: How can you demonstrate that you can build a large business?" If you don't think big enough, you may lose their interest.
Insight #14
: But size your market carefully.OK, but can people actually dream too big? "Oh yes, we see quite a few of those," he chuckles."I often find a company will quote a very big number in terms of a market, but what they address isactually only a tiny portion of that market. And often their portion is very poorly defined and assessed."VCs want to know how you can direct your technology into different areas of that marketplace as yougrow. It's all part of testing whether you truly understand your market and have a vision for growing thebusiness to the scope that interests them.
Insight #15
: Never say you have no competition. Another frequent failing in the plans Couder sees is not scoping out the competition."What is most astonishing to me is that CEOs have not done their homework on the competition. People
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