KB Partners - In The News

ATTRACTING VC FUNDING

By T.J. Becker,
The Collegiate Entrepreneur
Published: Winter 2001

Think a VC won't give you the time of day? Think again.

"Venture capitalists are in the business of raising money and then investing it in a business that provides an extraordinary rate of return in a short period of time," says Byron Denenberg, co-founder and managing director for KB Partners, a venture capital firm in Northbrook, IL.

Speaking at the recent CEO! Conference in Chicago, Nov. 2-4, Denenberg explained that his own firm usually looks for a return of 10 times its initial investment within three to five years. Yet VC expectations and investment philosophies vary considerably. If a VC firm says no" to an entrepreneur, it doesn't mean the idea is bad: "It's probably because the deal doesn't fit their investment profile," explains Denenberg.

KB Partners provides equity financing for early-stage and start-up technology companies in the Midwest. When it receives a request for funding, it reviews the company's business plan. A major checkpoint is whether one of the firm's partners has some experience in the company's industry. "We want to add value - and not be just dumb money," stresses Denenberg.

If a company's business plan looks appealing, KB invites its team in to make a presentation. During that presentation, KB is looking to gauge:

The team. Do they have all the people they need?
The leader. Does the entrepreneur possess leadership skills? And is he or she coachable? "You can have a great leader, but if he or she is not ready to listen to someone else, that's a big problem," says Denenberg.
The market. What is the size of the market that the company plans to enter? How mature is it? How many competitors are out there, and who are they?
The product. Does it have a sustainable advantage? Is it revolutionary rather than evolutionary? KB looks for products or services that solve existing problems merely improve on what's already out there.
Risk factors. Risks vary from marketing to financing: Is someone going to get to market before you? Does the VC firm have enough resources to stay with a company and provide what it needs?
Exit strategy. Because investors ultimately want their money back, all VC deals require a viable exit strategy. Typically that involves an initial public offering (IPO) or sale to someone in a related business. When a company finishes its presentation, KB makes its own. The VC arena is highly competitive, points out Denenberg: "We want the entrepreneurs to know how we provide added value besides just money." VC firms can help nurture companies in a number of ways:
- Introduction to support people, key customers and suppliers.
- Recruiting employees. VCs have a constant stream of resumes crossing their desks and can assist in building your team.
- Future funding. It's unusual that first money will get you to the finish line. "Our fund gets you from point A to point B," says Denenberg. Yet KB has relationships with other VCs that can provide latter-round funding.
- Real estate. One of KB's partners has a commercial real estate background and can assist in negotiating creative leases. One of the most difficult parts of negotiations is establishing a value for the company. Numerous factors can affect that "pre-money" value: Is the product ready to go to market? Is the management team complete? Are there any existing revenues or customers? For KB, an average deal might be a $3 million investment for 20% of the equity. Usually that equity percentage will be diluted as additional funds are invested to support the company's growth. Some final advice on approaching a VC:
  - Research a firm's specialty. Most VCs are market-centric, and you're more likely to get a deal done with someone familiar with your market niche.
  - Find a personal reference. It might be the VC's lawyer, accountant or even an entrepreneur who has done a deal with the firm. Get that person to introduce you.

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