In his recent op-ed in the Wall Street Journal, Tom Perkins claims that “Too often, there is confusion between investment banking and venture capital.” It’s hard to argue with that statement, but it’s investors like Tom Perkins that deserve the bulk of the blame for this confusion. Perkins says the difference between VC and Investment Banking (IB) is that “venture capitalists work with entrepreneurs to start new companies from the ground up”. I’m not sure how Perkins defines “the ground”, but I’m pretty sure I’d need to take an elevator to get up there.

Perkins’ firm Kleiner Perkins Caufield & Byers has certainly done its fair share of early investing. They became famous for being early investors in homerun deals like Amazon and Google, but even in those cases, they weren’t in ‘from the ground’. When they invested in Google, for example, Google already had 11 employees. That may seem really early considering the number of employees Google has today, but it’s really late compared to Andy Bechtolsheim’s investment a year earlier. He wrote a $100,000 check before there were any employees and before the entity was even filed!. That’s ground level investing.

More importantly, KPCB (and most of the other Sand Hill Road crowd) get most of their exposure from the massive returns they generate when one of their portfolio companies IPO’s. The returns are phenomenal (KPCB’s Amazon investment produced about a 55,000% return), so I can’t blame them for focusing intently on these opportunities. But, please don’t whine about the confusion with IB when taking companies public is your MO. For more evidence of this attitude, look no further than Sand Hill Road’s disappointment in the measly 5x return that Aaron Patzer produced for his mint.com investors.

The confusion is furthered by VC’s who openly offer ‘Founder Liquidity Stage Investments”. I’ve received calls this year from some of the most recognizable VC’s on both coasts telling me about these types of offerings, but apparently it’s been happening for a while. This is a really awesome thing for founders, because it allows them to realize a payday without dealing with the nightmare of taking a company public. But these VC ‘investments’ are nothing more than a clever way to buy options in an imminent IPO. Gee, I wonder why that would cause confusion.

Every investor loves the ‘no-brainers’ that produce certain returns, and every investor loves revenue and clear exit opportunities. Even traditional banks will finance many of these types of opportunities.  If some of us don’t step up and make pre-revenue investments based solely on our faith in the idea and the people involved, the bankers won’t have any ‘no-brainers’ to consider. Unfortunately, this banker-mentality investing has infected more than just the big VC’s. In Part 2, I’ll talk about how some prominent angel investors are giddy about later-stage, fixed-return, low-risk, loans. Some of these guys should call themselves ‘Angel Loan Originators’.

Interview with Proposable Founder James Kappen from SproutBox on Vimeo.

I recently interviewed Proposable founder James Kappen about the upcoming launch of Proposable, the current Sprout-in-development. Proposable is a web-based proposal system that will soon be revolutionizing the way sales people interact with their partners, co-workers, and prospects. For updates and more info about the launch, visit http://www.proposable.com.

In my role in business development for Sproutbox I see a lot of entrepreneurs and business plans – some good, some not-so-good. Rather than give entrepreneurs a laundry list of suggestions on how to make a good application, I figured I’d borrow questions from one of my favorite authors on entrepreneurship, Amar Bhide.

Bhide believes(and I agree) that there are really three major questions that every entrepreneur must answer:

1. Are my goals well defined? This is the biggest thing I look at when I’m looking at a business plan, and also the place where I often see major mistakes. If you haven’t clearly defined your goals, even in broad terms, then you aren’t there yet with your business. We use our unique application process for new sprouts to review how an entrepreneur has thought about their goals. When I read a business plan or talk to an entrepreneur I’m usually looking for a few highlighted points under this question. For example, does the entrepreneur show that they have their heart in their business, but do they balance that with the need to earn revenue? Does the entrepreneur have a tolerance for risk? Does the entrepreneur know what it means to be scrappy to focus on the goals at hand? At Sproutbox we look for highly dedicated entrepreneurs who want to make money and will stay focused on the goals of their business in order to keep moving forward.

2. Do I have the right strategy? This is really one of my biggest jobs at the box. When an entrepreneur gets going they often haven’t been able to clearly define what the strategy is, how they’re going to grow the business and how they intend to sustain that growth. Sure, I’m biased, but this is one of the best things that Sproutbox offers our Sprouts. Once selected, we take long hard looks at the businesses, their market opportunities, the costs of customer retention and acquisition, and how, based on our experience, they can experience off-the-charts growth. We want our Sprouts to not just succeed, but to dominate their markets, so getting this right is unbelievably important.

3. Can I execute the strategy? At our foundation this is how we work with our Sprouts. There aren’t many good ideas that can be executed without a great team. We realize that our Sprouts don’t have the resources to build and launch their software on their own, and that’s the central service we provide in exchange for equity. Once the product is built, do you have the skills to build an organization and grow market share? If you can’t confidently answer this question, you may want to think about adding a co-founder with complimentary skills. At Sproutbox, our job is to look at an entrepreneur’s answers to these questions and to help them achieve their dreams via their responses. We’re here to help build, guide, and shape businesses for success.

So, have you thought about these questions? More importantly, do you have what it takes to make a new business grow? We hope so, and we hope you’ll apply to build your business with us. Applications are online at http://www.sproutbox.com/apply and will be open until December 5, 2009.