306 ENTREPRENEURSHIP
allowance for variation. In other words, everything does not have to go perfectly for the
venture to succeed. Because events seldom turn out perfectly, this is important. If the
venture must be launched with the precision and perfection of a NASA space shuttle,
investors will steer clear. A rewarding opportunity makes money. Returns do not have to
be 100 percent compounded annually to be considered rewarding (although it helps). If
early projections show returns in the 10 to 15 percent range, though, and the investors
know that early projections are optimistic, then the project is not rewarding enough.
Finally, the investment should be enduring. An enduring venture has a semblance of sus-
tainable competitive advantage and is able to resist economic and competitive pressures.
It must endure long enough to provide a clear exit for early investors as they pass the
reward and risk to the next level.New Venture Investor Processes
From the point of view of the investor, the rational investment process is a seven-phase
cycle.^14 Each phase is designed to maximize the potential gain (or minimize the poten-
tial loss) for the investor at the lowest possible cost in terms of time spent evaluating
proposals. Investors usually view the world as teeming with more proposals and entre-
preneurs than they can afford to finance or even to review. This is especially true at the
top of an investment cycle, like the one for Internet companies that lasted from the late
1990s through 2000. At the trough of a cycle (like the period from mid-2000 through
2001), there appear to be few entrepreneurs and too much money available.^15 Investors’
emphasis, then, is on bringing in the most likely proposals and eliminating those that
waste time and human resources.The Search. Investors scan and monitor their environment just as entrepreneurs do.
When investors find an opportunity that appeals to them, they make the first contact
through a reference or introduction from a mutual acquaintance or business associate.
Cold calls are rare. Entrepreneurs should emulate this behavior, but there are directories
of venture capitalists for entrepreneurs who cannot arrange a personal introduction or
reference.^16 Only a few investors should be contacted at a time. One-at-a-time contacts
are too slow and deliberate, but a shotgun approach should also be avoided. The invest-
ment community is small and word of a new proposal travels quickly.
One way to expedite the search is to bring investors and entrepreneurs together at a
meeting. This is what Demo does. Demo is a Phoenix, Arizona, based event at which
selected inventors and entrepreneurs present their ideas to a group of rapacious
investors. It resembles speed dating and it is very efficient if somewhat strange. Says Guy
Kawasaki, a noted venture capitalist and author, “It is a great event, especially if you
understand the dance that is going on: entrepreneurs acting like they don’t need capital,
and venture capitalists acting like they don’t need entrepreneurs.” He concludes that the
behavior at Demo is like “acting prudish in a brothel.”^17The Screen. Once in the hands of the investor, the business plan is screened for further
interest. In a large investment company, initial screening might be handled by junior
staff using the criteria for investor screening discussed above. As the plan passes various