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Putting Investors and Entrepreneurs on the Same Page

The NJBIZ Interview – Chris SugdenChris Sugden is a partner with Lawrenceville-based Edison Venture Fund, a venture capital firm that manages more than $650 million worth of investments in information technology companies in the Mid-Atlantic region. Last week, Sugden led a seminar held by the Venture Association New Jersey in Morristown during which he gave tips on how entrepreneurs can attract the attention of venture capitalists. NJBIZ Staff Writer Thomas Gaudio spoke with the former certified public accountant about the dos and don’ts of raising venture funding.

NJBIZ: What percentage of proposals does Edison Venture Fund invest in?

Sugden: We see on a yearly basis between 1,200 and 1,500 general, top-of-the-funnel opportunities with about 1,000 truly new opportunities. We make between 10 and 12 investments per year. It’s a pretty selective process. The ratio is much better when you consider that we only do detailed diligence on between 30 and 40 deals a year.

NJBIZ: How can entrepreneurs attract more venture money?

Sugden: If New Jersey needs to improve anything it’s really in creating the ecosystem in which early-stage firms can really blossom: VCs [venture capitalists] referring other deals to VCs; entrepreneurs referring other deals to entrepreneurs; contacting anybody and everybody for guidance and assistance. And the service providers—accountants, lawyers, bankers—working the referrals, so to speak, so that deals that are worth getting funded can get funded and introduced to the right funding source. The entrepreneurs need to understand that it’s all about networking.

NJBIZ: Why is networking important?

Sugden: A deal with a VC takes a long time. Some of it is because of due diligence and the rest is really becoming comfortable with the entrepreneur because you’re making a bet. The typical duration of a venture investment is somewhere between five and seven years. That’s a longer duration than most marriages. It’s a strange way to put it, but since you really are in a lot of ways making a long-term commitment to one another you really have to understand each other. The tendency of entrepreneurs in New Jersey—versus the West Coast in particular—seems to be to keep their heads down and build the business without realizing there is an ecosystem in place to tap.

NJBIZ: What else should entrepreneurs be aware of?

Sugden: The idea of being prepared when you approach the market is really critical. Things as mundane as learning what terms are standard in a venture capital term sheet. It helps speed your way through the process. Referrals are also important.

NJBIZ: What are some red flags?

Sugden: There are oftentimes deals we see done by early-stage or angel investors that create a messy capital structure in that the valuation either wasn’t set or was set in a way that used a security that is not a common security for an angel or early-stage investment. You see lots of warrants or options being issued later down the road for early money. The VCs want ownership to be in management’s hands.

NJBIZ: Anything else?

Sugden: The other issue that often pops up is that VCs—particularly at Edison, but in general, too—want to quickly understand what the application and the business problem is that’s being solved by your product. The “value proposition” phrase is probably overused, but really, why does the customer care?

That’s such a big deal because it’s all about revenue down the road. Too often, the entrepreneur and management teams focus a lot of time in their pitch on the technology. The technology’s great but you don’t get to the business issues and the opportunity for why you can grow a company fast enough.

NJBIZ: What is a deal breaker?

Sugden: It’s hard to generalize but when we’re doing due diligence, entrepreneurs need to be extremely candid. What really scares VCs, I think, or worries them at least, is doing business with people you can’t trust. If you catch someone who isn’t telling you the whole story or the whole truth, we find ourselves really doubting ourselves and the deal.

NJBIZ: Can you give an example?

Sugden: It can be something as simple as saying that you have 20 customers up and running on a new software product. So we say “OK, show us the customer list.” We randomly choose six customers to call and find out that only two are live. It may not be enough to walk away from a deal but the question is, as you dig further, will this half-truth lead to a whole bunch more?

NJBIZ: What is the Edison Venture Fund excited about right now?

Sugden: Relative to the Internet, interactive marketing—and this isn’t just the Web 2.0 cliché—we’re seeing lots of interesting companies in New Jersey, particularly because of the New York kind-of-effect of media. The processes around creating infrastructure and software to make online advertising more productive and more effective are an untapped space in our opinion. We’re also pretty excited about wireless applications both for the consumer and business-to-business.

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