Mark Suster is a partner at GRP Partners in Los Angeles. He’s an entrepreneur turned VC, who’s last company, Koral, was aquired by Salesforce.com. Having had his share of experiences raising money from VCs before becoming one, Mark has passed along his tips. We’ll share more of Mark’s insights in the coming days, and you can also see Mark speak at Startonomics on February 6.

What You Should be Thinking About if You Need to Raise Money in 2009
bu Mark Suster

As a former founder & CEO of two software companies I’ve had to pitch for money my fair share of time. I’ve sat though no less than 75 VC meetings and raised money in 1999, 2000, 2001, 2003 and 2005. I’ve seen the top of the market when VC’s called me at home to wonder why I wasn’t signing their term sheet, to the bottom when I couldn’t get phone calls returned.

Having managed my way through this process and on to two successful exits, I thought I’d provide some thoughts on what it feels like on the other side of the table and what you should be thinking about if you need to raise money in 2009. I’m going to assume that you have a really cool product, a great demo and a clever business idea because if you don’t have that you’re toast anyways.

Show me the money
I would hope that all my tips are obvious to you because it means that you’re probably a real entrepreneur, but I am always surprised how little thought people give to how they will make money. On at least 40% of all pitches the “money slide” is reduced to a single, high-level Income Statement on page 28 showing me hockey stick growth and you’re always profitable in year 3 (and certainly profitable on the money you’re going to raise from me). In most cases profitability 3 years into a new company and never needing more cash is not realistic. But more importantly I want to see entrepreneurs who have thought about:

• Who is going to pay for your service?

• Why would they pay for your service – what benefit do they derive? If a business service how do you define the ROI?

• What similar services exist and what do people pay for these?

• In order to pay for your product, will they stop paying for competing products or where else will they get the money to pay for yours?

• How will your fees be affected over time as the market has more competition?

• How will your fees be affected if we continue to have a protracted downturn?

• Who makes the decision to part with money to pay you? Do they have sole authority? How will you gain access to them? What are your total customer acquisition costs?

I could go on….

These are hard questions but as a result many entrepreneurs put them off in hopes of building the next really cool technology that will gain mass adoption (read: Google, Facebook, Twitter) and they can figure out the revenue model later. That’s soooo 2005.

In today’s market very few businesses will get funded that can’t answer the question of how to make money in a credible way. Extra credit: don’t try the line that “all I need to do is get 1% of this really large market and I’ll be making $200 million / year”.

I know what you think of VC’s, but I promise we’re not that dumb!

…thanks Mark! (More to come from Mark on: building a great team, managing your burn rate, setting a relistic valuation, and more in the days to come!

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