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Tips from a VC: Small Business Investment Options (part 1)

It takes a lot to become a successful small business entrepreneur. That great idea is just the beginning. You need a plan. You need a reliable team. You may need financing beyond what family and friends and your own hard work can provide. We were lucky enough to get some face time with Bob Davis, who founded and was CEO of Lycos and is now a respected venture capitalist with Highland Capital Partners. From his office in Cambridge, Mass., Davis tackled five major areas of small business investment.

In part one, we investigated key points and options that every business owner should know and understand before they even begin the investment process.

You can follow Bob on Twitter on @BobDavisHCP or learn more about him at www.hcp.com

Staples: What key points should small business owners consider when they investigate outside investment?

BD: The entrepreneur should understand they are setting up a long term and important partnership. A new investor means somebody else is going to own a piece of your business. It’s rare that an investor, especially a venture capitalist, will ever just write a check and disappear.

Investors should be thought of as a helpful adjunct to the company organization. They’ll be an advisor, a mentor, and a partner. They’ll also be someone who helps with connections, with strategy, and with building your team.

They should also know that it’s a rare company that raises money and instantly sees some magical liquidity event. In most cases it’s a five- to ten-year relationship. That’s a long time and you want to be sure that in addition to everything we’ve already discussed, the chemistry is right.

When I’m looking at a company, in addition to saying, “This is a great entrepreneur and I like their business idea”, I say “Do I want to spend the next seven years of my life in the trenches with this CEO?” That’s a key criterion, because the average time today for a company that is engaged with venture capital before they see an exit is nine years. Now, that number is a little misleading because the companies that fail, often fail very quickly and the companies that do really well often do very well quickly but the companies in the middle are riding it out for the long term.

Staples: Do you feel most of the entrepreneurs who approach your firm understand that time investment?

BD: No, but that’s not necessarily a negative. It’s hard to find an entrepreneur that doesn’t think they’re going to be different—which is a good thing by the way—that they are going to be the next Facebook and that they are going to change the world overnight.

Staples: You mentioned Facebook, and we’re curious to see how the “next big thing” mentality may have affected the candidates that approach you, for better or worse?

BD: Ultimately, it’s been affected in a good way. Entrepreneurship is still about following the dream but the reality still is that the life of an entrepreneur is one of setbacks, challenges, failures, disappointments, missed birthday parties, missed anniversaries and travel in the back row of a plane. It is still really hard work and sacrifice. And ultimately, as an entrepreneur, when it all clicks, when it all works, there is really no greater reward as a business owner. I don’t mean the financial reward. Of course that’s nice, but what I mean is the sense that you work with pride and can say, “I built that, that was me, this is what I did and this is a reflection of the success I had.” As an owner or CEO, you can still look at the many hundreds of thousands of jobs you’ve created as part of your innovation. That's a pretty special feeling, it’s a pretty magical find, and it's still very much intact today.

Staples: Even Apple started in a garage.

BD: That’s true with any company. Whoever they are - General Electric, Staples, Google. Whoever they are it started at one point with one person with the courage to follow a dream.

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