Sweat beads on Clifford Richstone's upper lip as he starts to make the pitch that could make or break his e-business dream.
The former marketing manager and optometrist Jerri Nolfi are about to experience one of the most stressful hours of their lives - convincing KBL Capital Partners Inc. to invest $2.7-million in their idea. It's an on-line database that will allow optometrists to boost their sales by giving vendors access to patient information and to personalize their product promotions. The e-business would get its revenue from advertising.
The two men wait in the Toronto boardroom of KBL Capital for managing partners Michael Mendelson and Bo Manor, and associate Bing Chang.
The pitch begins with little ceremony. "Do you have a card?" Mr. Manor asks. "We don't have cards yet," replies Mr. Nolfi as he hands Mr. Manor a business card from his optometry practice instead.
"All right," says Mr. Mendelson, setting down his coffee mug and yellow pad of paper. "Let's hear it."
Out comes a PowerPoint presentation, which Mr. Richstone steadily makes his way through, although his voice trembles a bit at the start.
Several times during the presentation, the trio from KBL asks in various ways, "But will doctors use it?"
Sixty minutes of sweat later, the two hopeful entrepreneurs get ready to leave the boardroom. Mr. Nolfi asks how long it will take to make a decision.
"We'll have to digest it," says Mr. Mendelson.
It has become tougher than ever for a startup to win first-time financing. During the frothy times leading up to the dot-com crash, it seemed that almost any startup with an idea, an acronym, and an address in a strip mall was deemed worthy of at least a few million dol
That's put the squeeze on startups because they now have to compete with their more seasoned competitors, who have one big advantage: venture capitalists already have a stake in their success.
For entrepreneurs, the market changes mean it's a lot more difficult to land the money needed to get a business off the ground - and a dream headed toward reality. That's made the pitch to venture capitalists even more critical because there's less room for error.
"Realistically, the dollars are tighter for first-time opportunities," says Mary Macdonald, president of Toronto research firm Macdonald & Associates Ltd.
Venture capital investments in Canada totalled $3.4-billion during the first nine months of 2000 and are expected to reach about $4.5-billion for the entire year, she said. (Final results are to be released in the next two weeks.) By contrast, the industry was worth $2.7-billion in 1999 and $1.7-billion in 1998, with the vast majority of money directed at the blossoming technology sector.
However, things are tighter for startups seeking their first round of financing, Ms. Macdonald says. For the first nine months of 2000, venture capitalists dished out 66 per cent of funds to companies in which they'd already invested. Contrast that to 1998 when a bare majority - 54 per cent - of venture capital was invested in second and subsequent rounds of financing.
As Peter Standeven, president of Vancouver-based Canada IT Ventures Inc., puts it: "I think people have to be a little more selective in making their choices."
That added pickiness may cost some young companies the money they need - at least for now. "If it's more competitive, then you've got to have a pitch that's a good business proposition and a compelling pitch," says Robin Louis, president of Ventures West Management Inc., a $400-million venture capital firm based in Vancouver and Toronto.
Venture capitalists say making pitch can be an anxious, nerve-wracking situation. "It can be a terrifying experience - in some cases, they're out of their natural habitat," Mr. Standeven says. "I think they always sweat and that's a good thing because it means they're taking it seriously. You usually have to do a bunch of pitches before you do it right."
One common rookie error is dismissing the competition, he says. "If there are no competitors, there's no market."
Another mistake is failing to explain your business model succinctly, Mr. Standeven adds.
Yet sometimes no matter how hard you try, you still get swept aside.
Chris Klotz, chief executive officer of JobShark.com Corp., says his Toronto-based company made about 10 pitches last spring for a first round of financing of about $15-million (U.S.). But when the market for dot-coms dried, so did his plans. "We missed the window."
Mr. Klotz's company was able to find an alternative path by developing partnerships with three foreign media firms that were able to boost the company's exposure without financing.
But not everybody finds the situation intimidating.
Amit Gupta and Derek King, partners in Ottawa-based chip maker Analog Design Automation Inc., say they weren't worried about making their first pitch. And they got the money they needed in October last year.
"I wasn't nervous," Mr. King says. "Nervous people are worried about succeeding."
Nervous or not, there are some dos and don'ts in making a pitch for venture capital.
In broad terms, venture capitalists say, the most important thing is to convince potential lenders that you stand a good chance of building a company that will be able to turn a profit down the road. This is far more important than trying to dazzle them with your product or showing off your technological expertise.
One of the best ways to demonstrate you can make money is by explaining in clear, specific terms how your product and plan will create a niche that is different from other players in the sector. In short, explain in simple, brief terms why customers will want what you've got to sell.
Mr. Louis of Ventures West Management says he's looking for evidence of five primary things: A strong market; an ability to create and sustain a niche or a competitive advantage within that niche; an understanding of the market and its competitors; a business model that will lead to profitability; and most importantly, good people.
Mr. Louis says proven winners, or at least people with experience, are the best bets. But if they don't have that background, he adds, venture capitalists want to see passion and evidence that the applicants have thought about some of the problems they'll likely encounter along the way.
Canada IT Ventures' Mr. Standeven says he looks for a team of at least three managers with direct experience and a deep understanding of the market. He says the pitchers should be able to name potential customers and the characteristics of the buyers within their market.
It's also important for startups to demonstrate they've been able to hit their early targets, such as being able to assemble a team of advisors, developing a prototype or landing a first customer.
But if you've got great people with proven track records, you can come up a little short in some other areas and still get your money.
"In part, the pitch is about the pitcher," Mr. Standeven says. "I really look to the individual who's making the pitch - people who really understand what it takes to build a successful company.
"You look at a guy like [Newbridge Networks Corp. founder]Terry Matthews and he's just not a normal person. There's just something special - a certain charisma."
Strong people backing your startup, or at least acting as references, is also a boon, he adds. "Investors like to invest in people they feel comfortable in - They like to invest in people they know."
Mr. Louis says you can't have too many good people. "People say real estate is about location, location, location," he says. "Venture capital is about people, people, people."
With a report from Showwei Chu.