Funding Column

 

Venture Funding in the Information Technology Sector: The Three-legged Stool of Success

 

By Ron Heinz

Managing Director, Canopy Ventures

 

As a venture capitalist operating in the information technology sector, I am often asked what differentiates successful companies from the mediocre ones or the failures. While there is no silver bullet when it comes to investing, at Canopy we apply our version of the "three-legged stool" analogy to help discern a greater probability of success. The model is built on an in-depth analysis of people, products and markets.

The most important factor in our analysis is a thorough review of the people involved. Do we know them, or are we close to people who know them well?  What is the track record and background of the team? Is there a strong mix of technologists and business people who can commercialize the technology?

Do they have the work ethic, integrity and attitude needed to be highly successful? Lastly, do we truly like the people and enjoy spending time with them, and do they like us? If the answers to the above are positive, we move to the next step in the process. If not, we pass.

The next phase of the review involves the actual product or service itself.  Do they have a technology that is not only innovative, but disruptive? The product must be a dramatic improvement over what is available in today's market or customers will stay with the status quo. Does the product work as advertised, and work in a reliable fashion, with significant testing and accountability? We also look for systems or methods in the product that have been patented, or are patent pending, as the intellectual property component can be a swing vote in an investment.

The final analysis determines if there are channels of distribution (either established or in development) where the product can reach scale quickly.  Is there a large addressable market that will allow for rapid and dramatic growth?  Does the management team have domain expertise in sales, marketing and business development to drive a sales-driven culture? Understanding the competitive landscape as a part of this section is also extremely important, as competing with large and dominant competitors needs to be well understood.

In finalizing an investment decision, the above three "legs of the stool" must be in place. Where they do exist, with hard work, drive and a bit of luck, we have a better-than-average shot to win. This, of course, is why we are here.

 

Launch - Fall 2007

 

 

For the full "digital magazine" version of Fall 2007, visit: http://www.nxtbook.com/nxtbooks/growutah/launch_2007fall