Boston Business Journal

VCs look at the team as much as product, market

by Keith Regan
June 20, 2008

In some ways, Bullhorn Inc. is not the typical venture-backed startup. The nine-year-old Boston company has been growing rapidly and profitably for some time and has a strong base of existing users for its human resource management software.

Still, when Bullhorn was in the market for its recently announced $26 million round of venture backing, it faced many of the same questions a typical startup would, says CEO and co-founder Arthur Papas.

"The most important thing to a VC is they want to fund a leader in a meaningful category," Papas says. "You hear a lot that investors look at people first and then product and then market. I think the team is important. In our case, they could look and see that after nine years, all three of us remain energized and engaged and are excited about getting even more aggressive in the marketplace. That plus the fact that we're in a good market and our customers rave about us drive a good investment."

John Simon, managing partner at General Catalyst Partners LLC, which co-funded the Bullhorn round along with Highland Capital Partners LLC, says a startup seeking venture backing should be able to demonstrate it can operate in a way that makes customers happy.

"We look for great entrepreneurs, people who can run the whole business," he says. "We want a team that has the capability to take the business to the next level, whatever stage that happens to be."

The size of the market is also key for venture backers. In the case of Bullhorn, says Simon, the market could be between $500 million and $1 billion in the United States, and three times that size worldwide.

Before approaching venture capitalists, a firm that is seeking funding should first seek some good advice, says Amy Mastrobattista, an attorney with Ruberto, Israel & Weiner PC in Boston.

"It's really important to have good people around you that you trust to help you. You should get your team assembled sooner rather than later," she says.

Those experts may include attorneys and accountants as well as experts in a market or regulatory niche a business will be competing in. "From there, a business needs to prepare to spend hours upon hours honing a business plan," Mastrobattista says. "When it comes to investing, everything old is new again."

Indeed, regardless of the novelty of the technology or the track record of the entrepreneurs, venture investors always look for a solid business plan that details the opportunity and the market being targeted, says Mark B. Stein, a partner with McDermott Will & Emery LLP.

"The very starting point is whether the plan describes a compelling business proposition," Stein says. "Is there a business they can make money on? Is there something about it that's relatively proprietary that acts as a barrier to entry for competitors?"

Attracting the right venture capital takes a solid business, persistence -- and time. Much of it may simply be finding the right venture firm for a startup's market, stage and other factors, such as whether an investment shop can provide a strong board member.

The process is almost a constant one, in fact. Stein advises clients who secure a venture round to take a quick breather and immediately begin laying the groundwork for the next one. "Most of the time is spend finding a fit between the company and the investor group," he says. "Making that match takes a fair amount of time."

Bullhorn's Papas said the firm's recent round took several months to put together from start to finish, with much of that time spent evaluating which backers would make the best partners for the firm going forward.

"At one point in the past, we thought money was money, but now we see that where it comes from does matter," he says, adding that Bullhorn decided to seek funding after looking back and recognizing it could have captured more growth with more resources. "A firm should make sure the culture and philosophies fit as well."