BW Online | July 23, 2003 | "What the Real World Is All About"

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JULY 23, 2003 VENTURE CAPITAL Q&A

"What the Real World Is All About"
Taconic Group's Ed Mufson talks about what entrepreneurs need to keep in mind when hunting for funding

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The recent revival in Corporate America's appetite for mergers and acquisitions could signal a greater willingness among venture capitalists to invest in startups (see BW Online, 7/23/03, "The Return of Trickle-Down Funding?"). Still, as funding matchmaker Ed Mufson notes, only a fool would expect a return to the go-go days of the tech boom. Over the past two years, which have seen the veteran entrepreneur cut half-a-dozen major funding deals for outfits in widely different industries, there has been one constant: an absence of fantasy.

"These days, realism is key," says 63-year-old Mufson, whose New York City-based Taconic Group walks entrepreneurs through the funding process. He spoke recently with BusinessWeek Online's Roger Franklin about what VCs are looking for -- and what entrepreneurs need to do if their business plans are to be taken seriously. Edited excerpts of their conversation follow:

Q: Supposing I've got a business idea -- an untested concept, like so many of those that were funded during the dot-com boom, and I come to you to help secure financing. What would your reaction be?
A: I'd tell you very candidly that while the market for early-stage businesses is improving, businesses with no customers and no revenues are more difficult to finance than ones having something of a revenue flow, and where there is some proof that the business model actually works. The '90s are over for the foreseeable future -- and possibly for our lifetime.

Q: A good thing or a bad thing?
A: It's a healthy thing. What's happening now is that deals that deserve to be funded -- deals that have inherent merit, where there is a legitimate niche in the marketplace, that have either a validated business model or a patent or something that provides some kind of assurance to prospective investors -- those deals are getting financed. Deals that lack merit aren't being financed.

Q: Entrepreneurs looking to see their startups funded are often warned about matchmakers taking an upfront fee, promising the world, and delivering very little. That's not Taconic's model. What makes you different?
A: I was an entrepreneur for 34 years, I know what entrepreneurs go through -- and there aren't many early-stage entrepreneurs who can afford substantial retainers and fees for service. They don't have the money, and they need what money they do have for their businesses. I understand that, so we work very closely with our clients, and I'm very candid: If I don't think I can be of help, or if I feel the market is not right, I will tell them, "I can't help you."

Q: Without getting too specific, could you give an example of an offer that didn't pass the acid test?
A: It would be inappropriate for me to mention specific names, but I'm thinking of prospective clients I have dealt with that just booked their first orders for small change, a few thousand dollars. My advice to them was, "Listen, if you can hang on, wait three months. Get more than a couple of orders from substantial customers, and then you'll find that investors are more receptive." When that happens, when they get get the big order from a huge Fortune 50 company, then I can be very comfortable that we're going to raise money for them.

These days, that first round -- $100,000, $200,000, or whatever -- almost invariably has to come from the entrepreneur or friends or families. They have to prove themselves first -- and they also have to show that they're willing to stand behind their ideas by putting some money up themselves.

Q: VCs have become more wary. Are they also sticking closer to their specific areas of competence, specializing in fields they know well?
A: There are a lot of individual angels and venture-capital firms that lost a lot of money, so they're certainly investing only in situations that they're very comfortable with. The level of risk-taking has been reduced. These days, there must be must be a valid business model -- and it must meet much more rigid requirements -- geographically, industrywise, development of the business, etc.

Q: Do you find that a lot of people come to you with too many stars in their eyes?
A: The preliminary meeting is designed for me to get a gut feeling about the people I'm dealing with. Frankly, I won't get involved with people I don't feel comfortable with and don't trust. I'm here to tell them what the real world is all about -- what they can expect, how long the process takes, what's involved -- and to remind them that they'll have to work hard, very hard, on the process of raising money. It takes months and months, and at the end, there is no guarantee we're going to raise a nickel.

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