Buddy, can you spare some capital?

Think the money has gone out of the venture capital market due to the dot-com crash? Think again. The money's still there but the rules to get the cash have changed. Ed Mathias of the Carlyle Group tells us what you need to do to get your VC funding.

Conventional wisdom has it that venture capital has dried up - scared away by the much-maligned dot-coms. But the fact is that money always moves, and there's always some available. Singapore alone has $50 billion to invest - every year. What has changed are the rules. Start-ups now must show a "killer" application, experienced personnel, and earnings potential. So, what's different for today's entrepreneur taking a high-tech idea to a venture capitalist?

We got some advice from Ed Mathias, managing director at the Carlyle Group, who's examined hundreds of venture-capital proposals.

Q. Has the river of investment capital dried up?
A. Not at all! Last year venture capitalists raised roughly $70 billion - and that has largely not been spent. So there's money around. Last year some 4,000 companies were funded.

Q. Are entrepreneurs getting discouraged?
A. No, there's no dearth of entrepreneurial activity in the U.S.

Q. What are the venture capitalists doing differently?
A. Change has come in several ways. One is valuation; the second is area of emphasis. Venture capitalists are focusing on very-high-growth areas: Internet infrastructure, optical telecommunications, and Internet security.

Q. Should an entrepreneur try to schedule the search for capital around market swings?
A. The only way for venture people to succeed is to play the hand you're dealt. With a hot IPO market, try for liquidity - getting capital. If you don't succeed, decide whether to sell the company or fund it for another round. Remember, historically two-thirds of all successful venture companies have been sold rather than gone to an IPO.

Q. What's the worst impact of the current downturn on entrepreneurs?
A. A systematic lowering of rates of return causes a change in attitude toward the time required to succeed. You should project your financing requirements over a reasonable period of time, and entrepreneurs today need to lengthen their horizons.

Q. What's a reasonable expectation now?
A. A year ago you could go public on the strength of a business plan, and stocks zoomed. But the normal horizon for building a successful venture company should be three to five years.

Q. How does large research-and-development outlay affect your appraisal of a proposal?
A. Depends on the company: If you say you need a lot of research and development, you're saying the company doesn't really have the product to sell today - so you will need a lot more money. Biotech is the classic example.

Q. Is there a single critical element in finding venture capitalists?
A. See if you can get a good referral from a reliable source. The best venture capitalists spend a lot of their time cultivating and developing sources of information. Silicon Valley is a very small community. At successful venture firms, nothing gets done "over the transom."

Q. What is the biggest deal-breaker these days for potential investors?
A. Management is the key: The team's record and your sense of their potential. The best managers are adaptable, quick to respond, and flexible.

Q. So you're judging the person more than the balance sheet?
A. Proven entrepreneurs are very bankable - but the source of the deal is also powerful. The "deal flow" from proven entrepreneurs and from successful portfolio companies is a hallmark of future success.

Q. What's the dumbest proposal you've ever seen?
A. I've seen a lot of 'em - but some things that look crazy might actually work. Some of the people who ended up rich could not get funded, yet they bootstrapped what turned out to be a successful idea.

Q. What are the prospects for an Internet start-up today?
A. That depends on the merit of the idea, but the market is going to be very discriminating.

Q. What's the best advice for entrepreneurs?
A. Work hard.

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