Expert Columns

New Ventures Face Serious Challenges Beyond Those of Raising Money

By Christopher S. Meldrum

Editor’s note: Chris Meldrum is Managing Director of Durham-based Golden Pine Ventures.

DURHAM - Most people believe that the greatest challenge for a new venture lies in raising enough money to take the company from a “technology” to an actual business which can be financed at a major round of funding.  But, as Gib Myers, emeritus partner at Mayfield, noted, “Finding the right people today can be very difficult, particularly if you are starting with a seed company.”

Raising adequate financing is certainly an important issue for fledgling ventures, and it can be especially challenging in today’s environment.  Even with more developed businesses, only 601 companies were able to raise venture capital in Q3 2004, down from 794 in the previous quarter, and significantly down from the “tech bubble” of 1999-2000, where approximately 1,700 companies were financed each quarter (PriceWaterhouseCoopers MoneyTreeTM Survey, November 2004).  Venture capital funding has been particularly scarce for early-stage companies.  However, perhaps an even larger hurdle than lack of capital is the lack of qualified business talent that is capable of leading an organization in this most meaningful time in a company’s life cycle.

The management team of an early-stage venture must address two critical elements for the business to be successful.  First, the company must have a strong corporate strategy and business model.  A good corporate strategy affords a company the potential to generate returns for its investors, but remains flexible to position the company in a dynamic and ever-changing global marketplace.  Many of the most promising technologies failed or were supplanted because of an inferior or flawed corporate strategy.  For example, in the 1980’s VCR market, Sony was first to market with Beta, which was superior to VHS in terms of visual quality.  But because Sony did not license to original equipment manufacturers, the marketplace chose VHS as its standard, and Sony was left with negligible market share.

The second critical element that must be present for success is execution.  The best strategies are meaningless without a strong management team to carry them out effectively and efficiently.  Possessing these two elements does not guarantee success for a new venture, but it certainly improves a company’s chances for prosperity.  As an added benefit, it also improves the company’s odds of attracting venture capital financing.

For a start-up company, strategy and execution are required to successfully complete the following tactical elements:

• Developing a commercial vision, formulating a business strategy, and preparing a business plan;
• Negotiating the acquisition of technology which will form the basis of the venture, and securing a strong intellectual property position;
• Obtaining initial and follow-on financing from venture capital, private placement, or industrial sources; and
• Attracting and retaining key scientific and management staff.

Unfortunately, strategy and execution are difficult to establish in a new start-up venture, where oftentimes the business side of the company is often not well developed upon creation.  There is usually a scientific founder who serves as the scientific visionary of the company, but this individual rarely possesses the key knowledge, skills, and abilities to lead the venture from the business side.  The lack of strong business expertise hinders a company’s ability to attract adequate funding, because early-stage investors of today want to see strong management capabilities before they are willing to invest.

Fortunately, there is a movement among some venture capital firms to play a more active role in the development of a new start-up company.  These firms are willing to do the “heavy lifting” – to provide interim management and strategic direction to start-up ventures, in addition to capital.  The best of these firms have teams who have experience in managing the operations of a company, and have launched, raised follow-on money for, and built successful portfolio companies in the past.  Consequently, they are well suited to assist fledgling ventures down the path to becoming successful and sustainable enterprises.

It is an exciting and rewarding road that an entrepreneur must travel to start and grow a new company.  The thoughtful entrepreneur can avoid the many potholes and dead ends on this journey by building a management team with strong business acumen – one that can add value to the venture by providing the strategic and executive elements that are so critical to a start-up’s success.

Chris Meldrum is Managing Director of Golden Pine Ventures, LLC (www.goldenpineventures.com), a venture capital firm located in Durham, North Carolina. Golden Pine Ventures joins scientists and entrepreneurs in founding, investing capital in, and providing business and management expertise to portfolio companies. The directors of Golden Pine Ventures have a history of past successful ventures in biotechnology, having successfully launched over two dozen companies, raised over a billion dollars for portfolio companies, and taken seven of these companies public.