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(Janne Ahvo)
(Janne Ahvo)

Exit: John Warrillow

Inside the mind of a venture capitalist Add to ...

Did you ever see the movie What Women Want, in which the character played by Mel Gibson had the power to hear what women were thinking?

Now imagine you can hear what a venture capitalist is thinking when you're pitching your business idea.

I asked Sam Ifergan, a venture capitalist who invests in technology companies and is fresh off his $75-million exit from Visualsonics, to detail what goes on in his head when he's asked to put money into a business.

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"Why you?"

The first thing Mr. Ifergan tries to understand is whether you are uniquely qualified.

"If you're a teller at the bank and you're pitching me on starting a new bank, we're not going to have a very long conversation. I'm looking for people with deep expertise and experience in their field."

By contrast, Mr. Ifergan explains what got him interested in Visualsonics, a company that works to improve the resolution of a typical ultrasound machine. With Visualsonics technology, rather than grainy images that can - usually - reveal a baby's gender, the highly detailed pictures can uncover abnormal patterns of blood flow in the brain.

When Stuart Foster, the co-founder of Visualsonics, came to Mr. Ifergan and pitched him on creating the business, Mr. Ifergan was interested because Mr. Foster had dedicated his life to imaging technology: he has a PhD in the field, he had pioneered high-frequency ultrasound, he is a professor at the University of Toronto and he teaches at Sunnybrook Hospital.

"Foster is the world's leading expert on the subject. I'm going to listen to a guy like that."

"Should your concept really be a product?"

Next, Mr. Ifergan tries to understand whether you have the potential to create a business, whether your idea is really just a good product, or worse, whether it's simply a new feature for an existing product.

Mr. Ifergan was recently pitched by a start-up that claimed to have developed technology that helps e-mails move more quickly through corporate networks.

"I didn't spend much time with the guy," Mr. Ifergan says. "If he truly has a subtle improvement on e-mail routing, he should go license it to Research in Motion (RIM) or Cisco. It's a feature on an existing product, not a company."

In the case of Visualsonics, Mr. Ifergan saw that an entirely new company was needed to go after markets for imaging technology with a product line of different ultrasound machines.

"How much will it cost to get someone to buy your product?"

Third, Mr. Ifergan will try to understand the demand for your product and how much it will cost to reach the market.

For example, a company wanted to take U.S.-based teaching materials, translate them into Mandarin, and sell them in China. With a billion Chinese people eager to join the middle class, Mr. Ifergan was interested enough to write up a term sheet for the company.

During due diligence, Mr. Ifergan discovered the distribution for educational materials in China is a fragmented spaghetti ball. There are millions of small retailers, none of which have enough coverage to reach a meaningful portion of the market. Mr. Ifergan walked away from the deal, reasoning that, while some Chinese people may be willing to buy the product, the cost of getting it to them would be prohibitive.

Tomorrow: Mr. Ifergan's other three criteria for making an investment.

Special to The Globe and Mail

John Warrillow is a writer, speaker and angel investor in a number of start-up companies. He writes a blog about building a valuable - sellable - company.

Follow on Twitter: @JohnWarrillow

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