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Innovation Agents

Kleiner Perkins On The Keys To Unlocking Venture Capital

Consider this: Venture capital funding is often responsible for taking startups from the napkin sketch and slide deck stage to products and services that disrupt their respective industries and deliver handsome returns. Yet according to the National Venture Capital Association, out of every 100 business plans pitched to VCs by entrepreneurs, only about 10 will get a second look, and only one of those will score funding.

To make things tougher on founders, total venture capital investments for the first three quarters of 2012 were $20 billion into 2,661 deals. A MoneyTree report by PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson Reuters estimates that this year will fall behind 2011’s total of $29 billion investments in 3,906 deals.

Chi-Hua Chien

Good thing Chi-Hua Chien, a general partner at the Silicon Valley-based investment firm Kleiner Perkins Caufield & Byers, doesn’t heed such trends. Chien, whose investments have backed companies like Klout, Spotify, and Zaarly, has a simple investment philosophy. "I usually have a strong gut reaction within the first 20 minutes," he explains. That’s how long it takes him to get a clear read on whether the entrepreneur has an incremental view versus a revolutionary vision. "My tendency is to invest in entrepreneurs who have extremely clear visions and can see around corners to where the market is heading."

His colleagues at KPCB seem to share this uncanny knack for singling out the next big thing(s). Codecademy, Fisker, Nest, Path, and Spotify are among the firm’s more recent investments. Since its establishment in 1972, KPCB’s backed more than 500 ventures, including a host of digital enterprises from AOL and Amazon to Zynga, along with life sciences companies such as pharmaceutical juggernaut Genentech and greentech pioneers like Recyclebank, a loyalty program for people to cash in on everyday conservation. No wonder KPCB’s been lauded as a standout among the clutch of VC firms that line Sand Hill Road.

Mike Abbott

While venture capital has no shortage of critics (even from within its ranks) and competitors (hello Marc Ecko and crowdfunding), getting backed by a choice firm can boost a startup’s profile as well as provide its board with a savvy advisor. With that in mind, Fast Company asked Chien and his colleagues Mike Abbott and Trae Vassallo about what makes the difference between snagging the capital or being shown the door. Here’s what they told us.

Rules of Attraction
If an entrepreneur can say, "Hey come with me. It’s all uphill, in the snow and it’s going to really suck. But I swear it’s going to be fun," and still manage to snap up talent, Mike Abbott says he’d be sold. As a partner at KPCB focusing on digital investments, Abbott draws from his experience as VP of engineering at Twitter and entrepreneurial past hiring hundreds of engineers and a CEO to single out the founder "who can lead a team, attract and recruit people. They have to have enough charisma to convince others to come along on this journey."

You don’t need to come from central casting or flash a winning smile, either. Abbott says, "There’s not one size that fits this," describing a team of two engineers he met recently. What attracted Abbott was that they were working on "interesting problems that would make an impact," something he knows will attract other engineers to sign on to their vision.

There’s another component to this that’s not always evident in the first meeting, Abbott says. Building a company is a "pretty intense experience," he says, so he needs to feel comfortable enough with a founder to join them in a relationship that could last for a decade or longer.

Forget the Formal Presentation; Focus on the Demo
Chi-Hua Chien says that one of the best pitches he ever saw was one that he requested. Chien had been reading about Bo Fishback’s startup local marketplace Zaarly and sent him an email with an invitation to meet. "He starts by demoing the product right on the spot," Chien remembers. "I think I requested a treehouse," he says, and from there he was immediately connected anonymously to a seller. "Without any slides or financial projections, I wanted to invest." Chien says he was taken by surprise when he discovered Fishback had flown in from Kansas City, leaving his then 3-week-old child at home with his wife. "I was so blown away in the first meeting, even though the company was only a few months old," Chien says. "The software was really impressive." So impressive that it only took 20 minutes to agree to invest $8 million.

Trae Vassallo

Write an Ad
"I love to tell people they need to be memorable," says KPCB partner Trae Vassallo. Though she understands that entrepreneurs are immersed in their idea 24/7, Vassallo says they need to be a be able to articulate it, too. "It’s not just about the technology, it’s about being able to put yourself in the shoes of the customer and tell a compelling story," she says. Vassallo recommends that founders focus on the problem they want to solve and "write the one-page ad for it." People don’t want to buy technology, so Vassallo says she looks for a team that brings more than just technical insight to the pitch. "They need to sell me on their sales pitch," she says. That can be accomplished through prototypes or a demo of the product or service, she says—anything that helps investors, who are often bouncing from meeting to meeting, to visualize it. Even step-by-step static pictures of what the entrepreneur wants the experience to be gives the investor "a sense of where they are going," Vassallo says.

Have Conviction
Chien says sometimes even savvy investors miss opportunities, like the time he passed on Klout. When founder Joe Fernandez was introduced by a friend of Chien’s, he spent an hour trying to explain how the world of influence would be measurable. Chien says this was before Twitter really had traction, and he "made a total mistake." All was not lost, though. Chien made an investment the next year, along with one in Dave Morin’s Path. "He [Fernandez] was an example of an entrepreneur who knew where the world was headed," says Chien. "I believed in the vision. I am looking at the person and the market opportunity."

Own Your Failure
Vassallo says a successful entrepreneur needs to be "schizophrenic on some level. They have to have an incredible inspirational vision and the ability to be a leader and attract people. They also need to be incredibly paranoid about the what-ifs." She says founders should pre-think through everything that might go wrong. "My favorite companies are super excited [about their idea] and also know the reasons why it might go south, and all the reasons to prevent it from happening." Some failures are inevitable, she says, but in this way, founders can show the investor they’ll be able to manage the risks out of the business sooner.

What Not To Do: VC Pet Peeves
"There’s a guy who emails me probably every six months and blind copies half of the investors on Sand Hill Road," says Chien. An unworthy idea notwithstanding, Chien points out that this person says in his note that he’s been sending this email since 1999. "I replied and politely declined the opportunity the first time," says Chien. Now he just deletes them, unopened.

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[Image: Flickr user D. Sharon Pruitt]