Editor’s note: Venture Watch is a regular feature on Tuesdays.

RESEARCH TRIANGLE PARK … “Venture Capitalists are chickens,” says Fred Beste III, a managing partner with Mid-Atlantic Venture Funds, introducing his “12 (Almost) Sure-fire Secrets to Entrepreneurial Success.”

Local Tech Wire readers may recall that Beste also created a list of “25 Entrepreneurial Deathtraps,” which we have written about. His firm, Mid-Atlantic, has invested in several North Carolina companies, including Trinity Convergence and TapRoot Systems. (Durham-based Intersouth Partners co-invested in both deals and Kitty Hawk Capital, Charlotte invested in Trinity.) Mid-Atlantic manages funds just under $200 million.

Beste’s snappy articles give entrepreneurs an insight into how venture capitalists think and how to get their money based on his four decades as a venture capitalist. In “12 Secrets” he says that “Compared to entrepreneurs, venture capitalists are spectators in the great game of small business hardball.”

Beste says that while VCs “work long hours and sift through more garbage than a trash collector, they have to get used to disappointing 99 entrepreneurs for each one they please.” Beste says that he’s screened thousands of entrepreneurs over the last four decades who were “certain of future success. Most were literally kidding themselves.”

Most of all, while VCs are “veteran roller-coaster riders,” Beste says, “They never get used to those big drops. They are above all else, risk reducers.”

The 12 steps

While his learning curve is still steep, he does know what he looks for in an entrepreneur, those “12 Sure-Fire Secrets.” Here they are:

  • They have a sound knowledge of the marketplace. “They know specifics,” Beste tells Local Tech Wire. Most entrepreneurs do too little market research, he says. Instead, they say things such as, “We’re part of the $220 billion electronics industry and if we get just one one-hundredth of it, we’ll be a $22 million company.”

    Statements such as that “lead to the conclusion that the team’s whole fabric is shallow and rhetorical,” Beste says. He says he knows a team has dead aim at their target when they have segmented the market to isolate their specific opportunity.

  • They have a sound knowledge of their competition. Beste says the often heard phrase, “We have no competition,” is a near certain predictor of performance shellshock later on. “They’re sincere, but when they get out their in the real world they’ll find all sorts of firms eating their lunch. Companies that say things like that don’t get funded.”

  • They have a sound knowledge of the financial dynamics of their companies. Beste says they need to focus on key results areas such as gross margins, fixed costs, and sales to budget, whichever factors drive cash flow and profitability in their particular business.

  • They have a true understanding of the importance of cash flow. Beste writes that, “A fellow venture capitalist I know describes a start-up as ‘a race against insolvency,’ and he is right. The best entrepreneurs equate cash with blood.”

  • They have internal loci of control, (true entrepreneurs take things personally and don’t make excuses).

  • They have inner confidence.

  • They plan and execute their plans.

  • They inject reality into their attacks, recognizing there are risks associated with their endeavors and forces hostile to their success. They have taken every possible step to minimize these risks and have fallback plans and fallback cash even when everything goes well.

  • They hire smart –even people smarter than themselves.

  • They hit it hard. Beste says one of his favorite motivation speakers sometimes notes “It’s a dog-eat-dog world out there–for 40 hours a week. When you get to 50, there aren’t as many dogs and when you get to 60, it’s downright lonely.”

  • They make it fun.

  • They have fires in their bellies. Winning each market battle becomes a compulsive need.
  • Beste tells LTW that too many entrepreneurs say things such as, ” We have a nine-month lead on the competition’. There’s no way they could know that. Another company could come out with a product twice as good at half the price that afternoon.”

    He notes that fuzzy-thinking entrepreneurs do get funded sometimes by private angel investors who don’t make informed choices about where to put their money, “But it’s hard to raise sophisticated money from VCs without a solid business plan that demonstrates real market knowledge.

    Most important is —

    Beste says that if he had to pick one of the 12 secrets as most important, it would be having an internal locus of control in which the entrepreneur accepts full responsibility not only for success but also for failure. “Otherwise, you’re dead on arrival,” Beste says. “When things start to go bad, instead of redoubling efforts to find a solution, they’re inclined to find scapegoats.”

    Ed Weems, co-director of consulting firm Venture Management Inc., Raleigh, who reviewed Beste’s list, tells LTW, “In order to meet those 12 demands, you have to have a complete, well thought-out business plan.

    “The difference between a complete plan and a mediocre plan is identical to the difference between a brochure advertising a house and a blueprint for building a house,” he says.

    “Both show the house from the outside, both show the layout of the rooms, what the lawn and grounds look like. But you could never build the house with the brochure.”

    Weems says it amazes him that some people will mortgage their home to start a business with no more of a plan than a brochure when “They wouldn’t think of building a house without a blueprint.”

    Traps To Avoid: www.localtechwire.com/article.cfm?u=8542

    Mid-Atlantic Venture Funds: www.mavf.com

    Venture Management Inc.: www.Venturemanagementinc.com