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exit: john warrillow

Today I continue my discussion with Sam Ifergan, a venture capitalist who invests in tech companies. In case you missed it, here's the first part.

I asked Mr. Ifergan what goes on in his head when he's being pitched by a business owner who wants his money. Mr. Ifergan earlier revealed that his first thoughts turn to the owner's credentials, the market and the product.

As Mr. Ifergan gets closer to making an investment, three additional thoughts cross his mind.

"Can I protect your idea?"

Once he likes your business idea and he believes in you as an entrepreneur, Mr. Ifergan wants to know how easily a competitor can copy your idea.

Most venture capitalists like to invest in technology businesses with some intellectual property that cannot be easily replicated. It's why Mr. Ifergan does not invest in retail concepts: "Retail businesses rarely have IP (intellectual property), so if something works, it's copied by competitors in six months."

By contrast, Mr. Ifergan became interested in a company called Tri-Link, an early leader in developing technology that allows phone calls to be made over an Internet connection. The founding team of 30 engineers had spent a year and a half creating the technology. Mr. Ifergan reasoned it would be difficult for a competitor to catch up on 45-man-year's worth of research and development, so he invested in Tri-Link and eventually orchestrated a successful sale of the business.

"How much money do I need to invest before your company will be worth more than it is today?"

Mr. Ifergan avoids investing in companies that have business plans featuring internal engineering milestones such as creating a beta version of a new product by a specific date.

Instead, he looks for "value creation milestones" in a business plan that relate to external achievements to increase the value of the company, such as revenue, profitability, or number of customers.

For example, with Tri-Link, Mr. Ifergan invested only after it was agreed that the company's goal was not an engineering milestone but to get 12 companies to use its product. Mr. Ifergan reasoned that once a dozen big companies were using Tri-Link's product, it would become a more valuable company.

"Can I fill the holes on your management team?"

Clearly, a business needs good leaders, but if you are located in a city where the talent pool is shallow, Mr. Ifergan won't invest.

He learned this one the hard way by investing in a media company based in Columbus, Ohio. Mr. Ifergan took the company public but he was never able to get the right talent to move to Columbus, and the business languished.

By contrast, Mr. Ifergan found Southern Ontario to be a great place to recruit the Visualsonics management team, given the region's extensive network of hospitals, universities and technology infrastructure.

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.

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