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    .COM – LIVE: Building a Business

    Join us each day this week at 1 p.m. to participate in one-hour live discussions with old hands in the world of business start-ups.

    Thursday: Getting Funding

    Leslie Walker
    ".com" columnist Leslie Walker
    Welcome to ".com - Live," a real-time, moderated discussion with the people who are shaping the business strategies in the era of electronic commerce. My guest this week was David Gladstone, vice chairman of American Capital Strategies and author of "Venture Capital Handbook."

    David Gladstone
    Venture capitalist David Gladstone
    If you're like most Internet dreamers, you have no clue where to start and you're worried about being late to the cyber-bonanza. But venture capitalists have good news for people who think they have the next Internet hit: It's not too late to start from scratch.

    While Internet startups may be the darlings of venture capital firms these days, plenty of people are still starting more traditional companies and getting financial help, too.

    Transcript Follows

    Leslie Walker: Welcome to all. And thanks to David Gladstone for joining us today. Let's start with a few more words about your own career. American Capital Strategies is a specialty finance company that does mostly buyouts, not startups, but in your previous post as chief executive of Allied Capital, you also financed everything from startups to medium-sized mature companies.

    You have wielded enormous power over the fate of many business ideas--personally approving more than $900 million in loans in one five-year period alone. Can you tell us some of the highs--the most fun and challenging parts from your side of the investment table?

    David Gladstone: I have been investing in small businesses for 24 years. It is great fun. Entrepreneurs are the greatest people to work with. At Allied Capital I financed some start-up companies. But I retired from Allied and sold my stock. I now have money in American Capital (NASDAQ: ACAS) that finances buyouts and I founded a group of angel investors called Capital Investors that invest in start-ups. I am also working on a new fund. It is one of the most exciting periods of history for entrepreneurs and investors. The opportunities are so abundant and capital is available for good ideas. If you are going to be an entrepreneur, now is the time to do it.

    The most difficult aspect of investing in a small business is trying to guess what the earnings potential is for the company and to determine if the management team can make the projections happen. Investors wear two hats. One is the MBA hat that you use to analyze the business. You crunch the numbers for the business and evaluate the industry. The other hat you put on is psychologist. You try to get inside the head of the entrepreneur and members of the team and determine if they have what it takes to make it happen. Both aspects of investing are critical. There is also an intangible part of investing called “gut feel.” This one comes from having invested in thousands of small businesses. After you read a few hundred thousand business plans and meet thousands of would-be entrepreneurs, you develop the skills that help you pick the winners. At Allied I had a loss rate of less than 1%. At American Capital we have had no losses. If you can make bets that have the potential to return in excess of 30% and have low losses, it is a great business to be in.

    Leslie Walker: I suspect many people are wondering how anyone gets in the door of a venture capital or investment firm in the first place. How do you get the introduction that leads to the chance to pitch your idea in person? I'm looking for specific tips about how people should submit business plans.

    David Gladstone: Well Leslie, every venture capital firm is different. Some are very helpful and read and respond to every plan that comes in the door. Others want the introduction to be through a friend. At American Capital we read every single plan that comes in the door. At Capital Investors, we have just hired someone to help us keep up with the business plans. Unfortunately at some firms a junior person is assigned to read some plans and the entrepreneur may be sent a turndown letter without getting a review by a partner. So it is better to get a contact to introduce you if you can. I get quite a few business plans and read every one. Sometimes it takes a few days to get to it but I read them all.
    However, persistence is the name of the game. Pester the firm to read your plan. Do whatever you can to get in front of a person at the firm. Call every day. It will not turn off the venture capitalist (“VC”). Remember that the VC looks at 1,000 plans and makes ten investments. You have to be a persistent entrepreneur if you want to get your chance. Every VC has a desk full of business plans. You have to push to get them to look at your plan first. And now with email you can bug the VC with calls and email. Be pushy it pays.
    And don’t be turned off by a turndown, you should have your business plan on as many VC desks as possible. Push all the buttons at once and drive to see every VC. Keep going until you get funding. Every interview will make you a better presenter and the feedback on your plan can be some of the best advice you will ever get.

    Washington DC: Is it possible to get bank loans for Internet startups? Or for most businesses when they are just starting out?

    David Gladstone: Getting a bank loan for a startup is not possible unless you can post some collateral. For example you could put a second mortgage on your house and get the loan. And you can run up credit card loans, but banks are not in the business of backing startups.

    Seattle WA: What are the key traits you look for in entrepreneurs?

    David Gladstone: What are some of the human traits that VC’s look for? This will sound a little obvious, but most VC’s are paranoid, and they look for honest people to invest in. So many people think that saying untrue things is the way to win. But for the VC honesty is a key human trait. They expect you to promote your business and say it is the best, but not to lie about the facts. Just keep the two straight. Promoting and telling white lies are two different things.

    Arlington, VA: Two years ago, I started what I thought was going to be a small commercial cleaning business to supplement my teaching income. The business has grown well beyond my projections and I am working it full time. I am in need of additional equipment and vehicles. Up to now, I have not borrowed any money but with the addition of a large new account, I am considering outside financing. I don't want to borrow too much though and am curious if there are lenders or VC's that are interested in amounts less than 50K?

    David Gladstone: There are no VC firms I know of that are interested in such small amounts. However the SBA has the SBIC program that has a large number of lenders that make small loans. Go to the SBA web site ( and look for the SBIC program. The listing tells you how small a loan they will make. Also ask your bank about a SBA guaranteed loan. That may do the job.

    Washington, DC: Does the SBA offer loans to start-ups?

    David Gladstone: Yes SBA loans are for start-ups too. But you need to go to a bank first. The bank makes the loan and the SBA guarantees the loan.

    Leslie Walker: In addition to Capital Investors, the Washington-area angel investing group that you belong to, how many other local “angels” and angel groups are there in the D.C. area, and what steps do you recommend entrepreneurs take to contact them? Should they simultaneously submit business plans to many angels? Or approach one at a time?

    David Gladstone: I believe in the shotgun approach. Sent the business plan to as many VC firms and angels as you can. There are several angel groups in the area and most can be found by going to the site of Potomac Knowledge Way. They have a list of groups there.
    Just start asking everyone you see and all the professionals you know (accountants, lawyers, etc.) for the angels they know. It is a hunt and peck system but it seems to work.

    McLean, Virginia: Can you highlight the differences between "angels" and VC firms?

    David Gladstone: Angels are individuals investing their own money.
    Venture capatalist are managing pools of money for other people.

    Boston, Mass: You hear a great deal about VC funding for Internet startups, but what about those of us who want to start a company that has nothing to do with the Internet? Do venture capitalists even want to hear about our ideas anymore?

    David Gladstone: There are plenty of VC’s that don’t invest in the Internet. There are some that specialize in retail. Some who go for medical deals only. Some only do buyouts. So grab a list of VC firms and submit your plan to them. The VC community raised over $65 billion last year from pension funds. They have more money than they have good ideas. They are desperate to hear from you in you have a great idea.

    Leslie Walker: Should entrepreneurs worry about protecting their ideas from being stolen by potential competitors? I guess I’m asking how careful they should be, whether NDAs (non disclosure agreements) are common with VCs, and what steps you recommend for people trying to protect innovative business ideas-- other than, say, filing for a patent.

    David Gladstone: Leslie, there are bad people in every segment of society including venture capital. While 98% of the VC community is honest and too busy to take your idea, there are a few bad one. All the good VC’s have an agreement they will sign to protect you. Just ask for it and they will trot it out and sign it.

    Austin TX: How much time do you typically spend reviewing each business plan--from low to high?

    David Gladstone: About 2 minutes on the plans that don't fit what I am looking for like medical products. About an hour if it is a good one. After an hour I usually try to call the entrepreneur

    Centreville, VA: What are the major disadvantages of taking seed investments from Angel investors?

    David Gladstone: Not really. Money is money. But the advantage of dealing with a VC is that they have many contacts in the business community that can help you. It may be a better fit for you long term.

    Reston VA: I read your answer about using a shot-gun approach to sending out business plans. Others say that this can hurt you because venture captial firms talk to each other, and it can prevent a business from having any future chances of getting their business plan accepted. Is this true since the VC crowd is a close knit group?

    David Gladstone: There was a time that VC’s were a close group and talked about their deals. But not as much any more. Most do not talk about the deals they are working on for fear of having someone else get the deal. I don’t know of any entrepreneur that has lost a deal because they “shopped” it

    Leslie Walker: We are about halfway through today's discussion. Please keep your questions rolling in. David Gladstone told us he was slow on the keyboard, but I guess he was talking in Internet time, because he seems to be on a roll!

    Reston VA: Are you coming out with a new book on venture capital soon, or an update to your book "Venture Capital Handbook?

    Leslie Walker: I was wondering the same thing. And I know in the past, you've used the book format to solicit business plans, offering to review any that are submitted using your templated format. Did you wind up funding any that came in via the book, and have you thought about doing more Web-based VC development?

    David Gladstone: The book is a classic! Just kidding. But it has sold more copies than I ever dreamed. The editor has asked me to update it and my daughter, Laura Gladstone, and I are working on it. Look for it in mid-2000. However, the book still is a very “nuts and bolts” approach to the problem of raising capital. I have review about 300 plans that used the format in the book and funded ten.

    Vienna, VA: I have heard that many VC firms are now also playing the role of matchmakers - that is, bringing technical-marketing-business development talent together with money and good ideas. In your experience is this phenomena widespread, and if so, how do you find that talent -and more importantly, how does it find you-?

    David Gladstone: Most VC’s spend 50% of their time on people. Finding good people for firms is critical. Everyone is “management” crazy. Many people know of the hunt and send their resumes to the VC firms. And of course, the VC’s all use the major headhunters.

    Fairfax VA: I enjoyed your book and found it very helpful in preparing our business plan. Our board of directors are a little weak when venture captial firms look at us, even though we have a strong company. Where is the best place to "hunt" for board members, and does this really affect the ability of a company to be funded?

    David Gladstone: A good board is a great asset. To find good board members ask your professionals (accountants, lawyers, etc.) to suggest some names. Try to get board members who are business-people rather than professionals like lawyers and accountants. A person, who is on the line or has been on the line making decisions, will be very good for you. Look a long time and get the best board people you can. It is not a “must have” to attract capital, but it will help.

    Leslie Walker: How long do you think Internet startup mania will last, and what future trends do you foresee in investment capital availability for Net companies? I’m talking about the next one to four years. Do you expect a significant change, for example, after VCs see what kind of returns they wind up getting from their first big round of Internet investing?

    David Gladstone: The Internet mania will last for about three years. The Internet is having the same impact on society as the PC did. It is a major shift that will finish its major impact in three years. But as cable comes in and takes over the ISP role, you will see the second wave come on. That will be that the Internet is “always on” like your phone and TV. Turn on the electricity to the box and it is there to do the work you want. Ask questions in your natural voice and it will go do the job. Interaction between your computer and you will be more like working with a friend.

    San Antonio, TX: I received an SBA 8A certification 5 years ago but only used it for the first time last year. Can I get the cetification extended for the length of time that I had the certification but did not use it?

    David Gladstone: I don't know the answer, you have to call SBA

    Silver Spring, MD: What should I expect to give up of my company in exchange for "Angel" investors and-or "VC" investors?

    David Gladstone: This depends on how much value you bring to the party. If you have a lot of perceived value in your company then the VC/angel, then you will keep more of your company. There is no formula. It is up to you to persuade them that you have a gold mine. Make them want to invest. Sell your heart out.

    Richmond, Virginia : What is the typical range of interest rates on a risky business venture? Higher than credit card interest rates? Does it matter whether you're investing in the Internet or Used Cars?

    David Gladstone: The return that a VC wants is related to risk. Most investors in start-up companies want a 50% per year compounded rate of return.
    If you are seeking later stage money it can be as low as 15% or about the rate of a junk bond.

    Tyson's Corners, VA: Where do VCs go to find upstarts with promise? Or, do most VCs wait for small businesses to find them?

    David Gladstone: Many of the deals come in the door every day. Others are referred into the VC by friends and professionals. But the VC's do a fair amount of active looking for deals. They go to conventions and entrepreneur fairs. MAVA has a big one here this fall. Go see the show. It is a hoot.

    Washington, DC: Statistics are showing that minority- and women-owned businesses are receiving a very small amount of traditional venture capital financing. Many attribute this that the existing venture capital networks are very exclusive networks. Do you have any suggestions for minority- and women-owned businesses seeking venture capital financing?

    David Gladstone: It is true that women and minorities get less of the venture capital than they should. It is changing but not very fast. Most VC's are color and sex "blind" but many are not. There are more and more women and minorities in the field but still not enough. The only thing you can do is keep trying to crack the network. There is the Womens Growth Capital Fund in DC. And some of the Sbics that are charted by the SBA look for manorities. Just keep pluging, if you have a good idea you will get funded.

    Fort Washington, Md: Web sites have traditionally relied on advertising for a primary revenue stream. But lately, I've heard venture capitalists say that an advertising-based revenue model is unreliable. What are the revenue models prefered by v.c.'s these days, and ones more likely to win financial backing?

    David Gladstone: The VC's like to see subscription based businesses like AOL. They like web sites that sell products and services like the ecommerce sites, Amazon. And they like sites that are direct from the mfg. to the customer like Dell.

    Crofton, MD: As you said, the business plan is very important. Should I hire a professional to help me to write it in order to get VC investment? Where I can find these professionals?

    David Gladstone: Your accounting firm can help you write a business plan.

    Washington, DC: If an internet startup is too new to be considered by a VC firm, how does one go about seeking the "angel investor" who may consider investing in such a firm, to get it beyond the initial phase of operation?

    David Gladstone: There seems to be no such think as "too new" for VC's. You just need to keep looking and if your idea is a great one, it will get finaincing.

    David Gladstone: Thank you Leslie for having me on your show. It was great. If anyone wants me to review their business plan please send it to me at American Capital Strategies, 3 Bethesda Metro, Bethesda, Md. 20814. If you want to send me a summary send it to Best of luck to all of you.

    Leslie Walker: That is all we have time for today, folks. Sorry we couldn't get to all of your questions. Thanks to David Gladstone for taking the time to answer venture capital questions -- and thanks to everyone who submitted questions. Hope to see everyone again in two weeks!

    © Copyright 1999 The Washington Post Company

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