If you’ve been considering launching a tech-related venture, has the turbulent economy cooled your entrepreneurial fervor? The flippant start-up funding of the late 1990s is a bygone era, and many venture capitalists are increasingly wary of where their investment dollars go—especially in the volatile tech sector.
But just because the venture capital (VC) community is more circumspect than it has been in the past several years, it doesn’t mean that firms aren’t eager to fund, or at least review, well-conceived technology ventures with promising financial returns.
In this article, Bret Maxwell, managing director of Chicago-based First Analysis Private Equity and Venture Capital, shares some of his thoughts about the state of technology start-up investments and the increased demands on CIOs.
Forget about technology alone
The latest and greatest technology, while exciting and quite possibly full of potential marketability, won’t carry much clout with many venture capitalists if there isn’t a solid business model behind it. More often than not, the technology that is pitched to venture capitalists is solid and impressive, but it’s hardly enough to get a funding term sheet on the table.
At First Analysis, Bret Maxwell and company focus less on the technology itself and more on the fund-seeking team’s ability to create a viable business.
“What we ask ourselves here is how effective they are in getting [the technology] commercialized. A lot of times, their ability to commercialize the application and the value added is more important than the technology itself.”
Established in 1985, First Analysis has managed over $500 million in capital and invested in over 150 companies—75 of which have been information-technology ventures. In the coming months, First Analysis is looking into the areas of security, peer-to-peer, business productivity tools, and microelectromechanical systems (MEMS) technology. Maxwell admits that a lot of these areas are the same fields that the firm has been evaluating for some time, but the focus has changed somewhat.
“A lot of it is similar stuff, but I think it’s kind of a sharper pencil. We’re focusing on the value added to the customer and, specifically, the customer’s attraction to the product or service.”
The changing roles of CIOs
With so much emphasis on the viability of the business model and the team’s ability to meet the financial projections that it predicts in its business plan, venture capitalists are going to fund ventures with nothing short of top-notch management teams.
According to Maxwell, “The more successful teams are ones that understand how to build an organization and how to motivate people, that understand key points that customers are looking for, and that have thoroughly thought through the business model.”
This places particular pressure on CIOs. The bar has been raised for new-venture CIOs—and technical expertise alone is no longer a sufficient core competency. CIOs must be able to demonstrate solid business judgment and the ability to make strategic decisions for the company. Maxwell believes that even in established, nontechnology companies, CIOs face the need for a more expansive skill set.
“I think there will always be a need for technical people, but I think you’re going to see CIOs growing up and being the number two or three guy in the organization,” he said. “[But] they’re not going to do that based on their technical skills.
“You’re already seeing this. There are a number of CIOs sitting on the executive committees of major companies or on the management committees in the top tier.”
While CIOs face the challenges of balancing their skill sets between technical skills and business prowess, investors have their own, related problem: Entrepreneurs with these skills are few and far between.
“It’s very hard to find someone who has technical abilities and good business judgment, there’s no doubt about that,” Maxwell said. “We have a hard time finding them as entrepreneurs and big companies have a hard time finding them as CIOs.”
People with demonstrable skills in both areas promise to be highly valued and well-compensated managers in existing companies. In the scope of new ventures, having team members with these skills will make the venture a much more attractive prospect for VC investors.
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