This past April, many thought striking it rich with loads of dot-com stock options had become a fond memory, as the NASDAQ went into a tailspin. But market observers claim there are still plenty of opportunities in the world of hot dot-com startups. However, this time around it's best to take a closer look at which companies have a better chance of surviving the next Wall Street shake-up than others. And the best way to do that is to play venture capitalist. "Pretend you're an investor, not an employee," says Roger King, an executive with RagingMouse.com, an IT staffing company in Sausalito, Calif.
So where do you look for advice? Venture capitalists review thousands of business plans each year and have perfected the art of reading between the lines, knowing which companies are more likely to succeed and survive. A recent report by Barron's revealed that more than 51 Internet companies may run out of cash in the next year. So looking for a company that will be around for the long haul is crucial.
It's no secret that common sense prevails in making a good decision. But there are several points VCs single out for those looking to join the next Yahoo!. First, look for a strong and experienced management team. Next, make sure the new company has a service or product that addresses a real demand in the market. And, be sure it has a clearly defined competitive edge. It's also good to know who the investors are: Steve Jobs would be a more compelling investor than the founder's aunt, for example.
Once you've identified a company, start looking for the competitive edge. George Zachary, a general partner with Mohr Davidow Ventures in Menlo Park, Calif., looks for a company with a "barrier of entry so cool the company could become a monopoly." And barriers of entry can be anything from a series of patents on a product or technology to strategic alliances. With about 80 percent of startups failing, Zachary has to be extremely selective when he reviews an entrepreneur's business plan. In his four-and-a-half years as a venture capitalist, he has reviewed over 8,000 plans and funded only nine companies. Ask your potential employer for a copy of the company's business plan, typically reserved for top management. And if the employer balks, ask for the executive summary.
Another thing to look for is market savvy. Brian Ascher, a venture capitalist with Venrock Associates in Palo Alto, Calif. says the first thing he looks for is a strategy that addresses a real need in a large market. In simple terms, "you want to go for a pain killer vs. a vitamin," says Ascher, "A lot of people don't take vitamins." And venture capitalists aren't just looking to make two times the return on their money; they're looking to cash in on millions of dollars of return for their investors. That means there must be a large customer base to pay for the product or business solution. Of course, a successful startup will pay big dividends to an IT professional vested in company stock options.
Nicholas Hall, founder of Startupfailures.com, a Website started last month that offers a venue for failed and failing entrepreneurs to vent their frustration and share tips, knows all too well the risky business of startups. Having survived three failed startups, Hall has firsthand knowledge of what can go wrong and emphasizes the importance of the quality and intentions of the management team. "After a while you can start to differentiate between teams that want to start a long-lasting company and those that want to 'get rich quick,'" says Hall. Adds Venrock's Ascher: "Companies more focused on a 'quick flip' -- all they talk about is the IPO and getting bought. They're not going to last."
To hope for success, a company must have a distinct advantage over its competition. Warren Packard, a director with Draper Fisher Jurvetson, a venture capitalist firm in Redwood City, Calif., looks for a company that doesn't have firmly entrenched competitors. "Right now there are so many ideas in virgin territory; as things age, there will be more and more companies that pose a real competitive advantage," says Packard. And staying ahead of the curve with what Packard calls an "unfair advantage" can keep a company viable. Anything that differentiates a business, whether it is an important technology, access to exclusive partnerships, or domain expertise, can keep a company out in front. And "viral marketing," or the ability of getting customers to advertise on a company's behalf, is an extremely powerful advantage. Hotmail, for example, sends an endorsement for the company along with every customer email.
It can be a bit disorienting to put on an investor's shoes, but if you do your homework, the hard work will pay off. Alfred Mandel, an angel investor and business advisor in Palo Alto, Calif., admits to being "a little bit schizophrenic" when it comes to funding a startup. "I never was a big investor in pure dot-com companies that didn't have a compelling business model," says Mandel. In the next round of shake-ups, the companies with strong business models will be the ones that don't get shaken.