Securing venture capital: today's realities. (Financing for Growth: Special Section).

Garnering the attention of VCs and securing capital is far different from its heyday, but those entrepreneurs that survive the winnowing process will enjoy unprecedented levels of attention and support from VC partners.

Executives at start-up companies wistfully reminisce about the dot-com heyday, when venture-funding deals were scrawled on cocktail napkins or closed on a handshake. Nowadays, they lament that equity financing -- if done at all -- is done with painstaking due diligence.

But don't let the hazy shroud of memory obscure the truth: This reversion to funding fundamentals is a positive development, a sign that sanity and sound business principles have been restored to their proper priority. The fact that venture capitalists now require a detailed business plan -- including a thorough analysis of the market opportunity and the competitive landscape -- may mean more work up front for the entrepreneur, but will likely result in vastly enhanced prospects for building and growing a company, along with long-term, sustainable success, as opposed to success measured in "Internet time."

If VCs are being more selective, what does that mean for your company? More effort certainly, but also more access. Venture partners who were doing nine or 10 deals a year in the late 1990s are now doing one or two. As a result, those entrepreneurs that survive the winnowing process will enjoy unprecedented levels of attention and support from their VC partners.

Without an unwieldy portfolio to juggle, venture capitalists can deliver their full array of business resources, including the accumulated wisdom and expertise of the partner within the VC firm and contained in that most valuable of assets -- the VC's Rolodex file.

But before you can reap the benefits, you've got to pass muster. A rigorous checklist of items must be adhered to, and any uncovered areas in your plan will be quickly exposed.

What can you do to avoid getting burned? For one thing, the conventional wisdom that says you must present a perfect, blemish-free proposal to potential funders is mere hyperbole. The reality is that you'll have strengths in certain areas and weaknesses in others. VCs expect as much and -- if they sign you on -- will help you firm up the soft spots. But note that while some checklist items can be deferred, others are immediate and non-negotiable concerns. Indeed, some components are so essential that without them, you won't get a foot in the door.

How do you determine what's important? Here are several myths and mantras to consider:

Myth #1: You Must Create a "Killer App"

Sure, Mark Andreessen's web browser was the classic killer app, but has he -- or anyone else -- built a viable business around it? The browser wars, in fact, have consumed far more capital than they will ever create. Or take email, another fabulous and widely deployed technology; yet Yahoo and Hotmail lose countless dollars on their free email services, and Eudora struggles to survive.

It is often the non-sexy technologies that provide real company growth and wealth creation. Think routers, memory and servers. Think operating systems, middleware and firewalls. Such technologies generally don't capture the imagination of the public. But they're profitable.

Mantra #1:

Focus on the Marketplace

This is the number 1 issue for any company seeking funding. If you cannot prove and validate your market opportunity, your funding prospects will sink faster than a portfolio full of dot-com stocks.

Conversely, if you can provide your VC with a substantial list of customers who will state two things -- 1) that your technology solves a significant business problem they have; and 2) that they have a budget to fix that problem -- you are virtually guaranteed to land a venture deal.

Basically, the "venture game" can be defined in terms of risk: technology risk -- the danger that you can't actually build what you've set out to create, and market risk -- the threat that you won't be able to sell what you've created.

Before the dot-com era, venture capitalists would take a technology risk, but never a market risk. They would demand that the entrepreneur validate the market, and only then would they wager their funds that the company could build the technology. During the dot-com era, that pattern inexplicably got reversed -- VCs stopped taking technology risks and started taking market risks -- with disastrous results. Today, we have returned to the traditional order. Validate your market first and then worry about the technology.

Myth #2:

You Need "Defensible Technology" Companies worry far too much about protecting their technology. Here are two thoughts to put your concerns into perspective:

1. Technological Advances: With today's rapid rate of innovation, whatever you bring to market will soon be reverse-engineered, analyzed and improved upon, thus making your patents obsolete.

2. Resource Limitations: If you're keeping vigil over your burn rate (see Mantra #5 below), you won't have money to throw at every problem. You are better off using your resources to develop your technology and your markets.

Mantra #2:

Build a Solid Management Team

Most VCs will tell you they invest in three things: management, management and management. However, it's important to remember that great management teams, like great ball clubs, are usually built over time. You'll need the proverbial draft picks, trades and free agent signings to be competitive.

Years of experience in venture capital show that less than 10 percent of funding proposals had the perfect team right out of the gate. There are always holes early on. Plug as many as you can with the best people possible, but don't think of them as fatal flaws.

Myth #3:

You Need a Stellar Track Record to Get Funded

Given the current market uncertainty, entrepreneurs with a track record of success have a built-in advantage. The bar tends to be lower for serial entrepreneurs -- they don't need the same market validation, the same degree of separation between their company and the competition or the same high-level management team as a rookie entrepreneur might need. Nonetheless, listing a few grand slams on your resume is not de rigueur, as most VCs recognize that new talent and new ideas constantly bubble up through the ranks.

Mantra #3:

Beware of Skeletons in the Closet

With increased frequency, venture capitalists are scrutinizing the backgrounds of their funding candidates -- a direct result of having been burned in the past. During the heyday, VCs made a number of quick decisions that they ultimately came to regret.

For example, a couple of this author's potential deals were scuttled once some questionable personal histories were unearthed. In one, it was discovered that the CEO of a company we were on the verge of bankrolling had a warrant out for his arrest. Axing deals based on questionable revelations is not prudishness - it's good business sense. Such disclosures usually blow up the company, and they can't recover from it.

Yet VCs are realists. They know that everybody has a flaw or two. Minor personal faults don't have to become an issue. What's important is that you own up to the problem and take responsibility for it. Integrity is paramount: VCs need to work with people they can trust.

Myth #4:

Founders Must Sink Substantial Personal Assets into the Company

An entrepreneur helped bootstrap his company by talking his wife into selling their dining room furniture, which had substantial heirloom value. The story, is impressive to a VC -- not because he displayed great salesmanship by persuading his wife, or because he hawked the family heirlooms and thus had "skin in the game," but because of his clear demonstration of commitment.

Commitment by the founding team is a key component of success, but you don't need to take out a third mortgage on the house or max out a fistful of credit cards to show it. Commitment can be confirmed through a number of other measures:

* Time spent on the job -- Making a new company a success requires sacrifice, and putting in long hours is a prerequisite in the early years.

* Conservative business decisions -- Choosing office space in a low-rent district to preserve cash, or eschewing expensive "decorator" chairs in favor of standard office issue shows devotion to the cause, not the lifestyle and amenities.

* Modest compensation structure -- Entrepreneurs can get cash compensation or they can get equity, but they can't get both. If you go in and ask for $250,000 a year and 20 percent equity, you're going to have a very short meeting.

Mantra #4:

Know Thine Enemy

The classic blunder many early-stage entrepreneurs make is to claim that they don't have any competition. If you are meeting with a venture group and you maintain that other companies are not doing the same thing, or that their product can't match yours, you are demonstrating either naivete or arrogance -- neither of which will endear you to the VCs you are trying to impress.

You must have the utmost respect for your competition. Make the assumption that whatever you are doing, they can do it better, and they can get it to market faster. Doing so will keep you nimble and infuse a sense of urgency into all your activities. Don't get so blinded by the "elegance" of your own solution that you lose your competitive instincts.

Myth #5:

VCs Will Squeeze Every Last Drop Out of You

The notion that VCs will wring you dry is patently false, and any fears along this line are entirely unwarranted. A deal with a venture capital firm is a partnership, not a dictatorship. No venture capitalist wants to own so much of the company that when things get tough -- and things will get tough at some point along the way -- the entrepreneur decides to throw in the keys and walk away.

First-time entrepreneurs should expect that 20 percent of the company will be in the hands of the founders by the time liquidity (IPO or sale) is attained. The VCs won't allow substantially more, but they also will ensure that you don't wind up with less. And if the company performs the way everyone expects it to, all the parties will be richly rewarded.

Mantra #5:

Strike a Balance Between a Slow Burn and a Fast Pace

Today, maintaining a sustainable burn rate has become an issue of survivability. With extended timeframes to liquidity, cash conservation is key. But at the same time, getting to market quickly remains as important as ever. So here's the dilemma: You can do one or the other, but you can't do both. You can't preserve capital and get to market quickly.

To address this, you must create a strategy. You need to think about your timing for getting to market; you need to determine what is a sustainable burn rate; you must assess your need for resources.

For the most part, the days of huge funding rounds have passed, and now you are going to see small rounds put in at increments along the way.

The amount of money raised should get you to the next risk inflection point -- whether that's when you're ready to ship, first revenues or become cash flow-positive. If you meet your inflection points, by the time you get to the next round, there should be less risk.

Mantras #6, 7, and 8

If, after all of the above, you are still intent on pursuing venture funding, here are a few parting words of wisdom:

* Hope is not a strategy.

* Markets will always develop slower than you expect.

* According to one Silicon Valley venture capitalist, the secret to building a successful company is deceptively simple: Make things that people are going to buy a lot of -- and soon. (Don't brush this recommendation aside -- it is deeper than it initially appears.)

Mark Jensen, the National Leader of Venture Capital Services at Deloitte & Touche, has worked for many years in venture capital and international finance. He can be reached at [e-mail] or 408.704.4790.