Look for investors who understand your product: local attorneys talk VC

When entrepreneurs seek outside funding, it is important to find a source that shares the same interests and appreciates the market opportunity. During the late 1990s, Wharton entrepreneurs pitched manufacturing funders “who did not understand” the Internet, recalled attorney and Wharton professor Robert J. Borghese.

That was one point that Borghese made during a panel organized by Drexel University’s Entrepreneurship Association for Graduates and Alumni and Duane Morris, LLP. Hosted at Duane Morris’ office in Center City, the Philly Tech Week panel “What Keeps Entrepreneurs Up at Night?” featured attorneys Borghese of Borghese Law, Neil Cooper of Conshohocken’s Royal Cooper Cohen Braunfeld, Richard Cohen of Duane Morris and Joel Solomon of Center City’s Clark Hill, who underscored some of the complications associated with accepting venture capital.

Borghese said there are three “buckets” of venture capital firms.

First, there are “white shoe” or large notable firms, such as Silicon Valley’s Kleiner Perkins Caulfield & Byers, with large networks, established structure and a sizable fund and portfolio.

Second are more traditional, later stage financial firms that are increasingly willing to fund good ideas but lack experience growing small businesses. Commercial banks are increasingly following this model too, the panel opined.

The most desirable “bucket” for many entrepreneurs today are newer venture capital firms that have often been launched by founders who combine funding with familiarity. Entrepreneurs understand the day-to-day pressures of running a startup and have capital to invest from their own exit. University City’s First Round Capital is a prime example of third bucket — though the firm’s national reputation could fit into the “white shoe” bucket, despite its smaller size.

Here are some other highlights from the event:

• Venture capital often comes with strict conditions about expected company growth, return on investment time horizons and dilutes the control of founding partners. “This isn’t charity,” moderator Solomon said.
• Cooper encouraged entrepreneurs not to ‘date’ their first interested investor. “You have to make sure you are doing due diligence on your investors,” Cooper warned. Instead entrepreneurs should check their social network to assess the success of previous deals and probable level of involvement.
• “The media is forcing on you this notion that when you start a company you have to take venture capital,” Borghese said. However venture capital is not the only way to go.
• The “exit” — selling a mature startup or going public — is the end game for many entrepreneurs. However, in a $300 million dollar sale, cofounders may walk away with only $10 million in pretax income. This can turn into less than half the amount after paying taxes.