As the energy industry cautiously emerges from one of the worst recessions in years, we are finally seeing headlines about rising venture capital (VC) investment. VC can be an invaluable tool for a start-up looking to bring a new technology into the energy market. However, it is not without risks.

Here are 10 commandments to live by for entrepreneurs seeking VC funding.

1 VC is a Formula One race car

The chief executive officer of a company that profited from VC investment made this analogy years ago. Like a Formula One race car, VC funding will get you where you want to go faster than almost any other means—but you have to know what you are doing to avoid a crash.

Just as a Formula One race car isn’t the best choice for running errands, not all businesses are suited for VC funding. VC might not be the best choice for a family bus­iness, where the main purpose is to provide employment for the current group; a business whose major goal is to make a difference in the local community; or entrepreneurs primarily looking to make a name for themselves.

But an entrepreneur seeking to change an entire business segment by introducing a new product or service on a global scale is ripe for VC funding. An example is Direct Drive Systems (DDS), a recently exited Energy Ventures portfolio company. DDS has developed a high-speed, high-power permanent magnet motor technology that operates faster and more efficiently than conventional motors.

While the technology originally was developed for traditional industrial uses, the oil and gas sector has turned out to be its most attractive segment. DDS developed a strategy to position itself as a vendor to several of the largest manufacturers of oil and gas equipment worldwide. Since several competitors were working on similar offerings, the company brought on VC investors to maintain its lead. Growing slowly, brick by brick, would not have been a good option. It needed a Formula One pace, and the results ring true. DDS was recently sold to FMC Technologies Inc., a leading global provider of technologies to the oil and gas business, in a transaction valued at $120 million.

2 Money is not just money

There is an old truism in the VC world: assistance with networking and business development is as important as the capital itself. Yet, a lot of entrepreneurs seem to forget this. For a small start-up, particularly those looking to break into a new sector, tapping into an existing industry network and expertise is extremely valuable.

For example, we have developed a worldwide network of experts in our niche—exploration and production technologies. These individuals have spent their careers specializing in this relatively narrow field. Their knowledge of the challenges the energy industry faces, gaps in service offerings, and connections at major industry players, have proven invaluable in developing our portfolio companies’ technologies.

Typically, these individuals have worked within a client organization in the past and can bring detailed knowledge of the challenges faced by the organization’s existing products and services, thoughts on how to put together a compelling value proposition, and advice on how to price a new product or service—all valuable pieces of information for young technology companies.

A VC firm should provide help in key dimensions, including leads for new hires and clients, as well as industry intelligence.

This is where entrepreneurs can do their own due diligence. Any business leader who has investigated VC funding has undoubtedly been subject to scrutiny by a VC firm. Turn the tables. Ask for references from chief executive officers in former portfolio companies. They are much more likely to give entrepreneurs a balanced view.

3 “New” is risky

“… and we expect to deliver $100 million in earnings four years after start-up. By the way, that is a very conservative estimate.”

From time to time, people present business plans to us that make similarly audacious claims. All an investor can do is humbly point out that such performance is rare, and ask if they have considered the risks associated with developing a new product, recruiting new management and entering a new market with a new business model.

For an entrepreneur, risk comes in many forms. Put yourself in the shoes of your potential clients. What happens if the technology fails? Is there a health, safety or environmental issue? Could the well be lost? Could failure be career-ending for the champion in the client organization? Reducing risk through extensive testing and validation is critical to winning clients over.

Another “new” risk: Does this product or service require clients to work and think in brand new ways? If so, you might have a steeper hill to climb than a vendor offering a product or service that increases the efficiency of existing technologies.

4 Introduce offerings that solve big problems

The oil and gas business has one characteristic that many entrepreneurs find daunting: Despite its long history of innovation, the industry is slow to adapt to change.

In many instances, there are good reasons for this reluctance. For a drilling engineer to risk an expensive well to test out new equipment may not make sense unless the upside is commensurate with the cost. Similarly, a process engineer might not care if you cut the cost of gaskets by 50% if the new product jeopardizes the regularity of production from his facility.

The economics of disrupting a field or installation that produces even as little as 10,000 barrels per day—small by North Sea standards and tiny by Middle East standards—can be difficult to justify.

A company that has been successful in gaining acceptance of its new product is Houston-based Ingrain. It has developed a revolutionary way of computing permeability from cores or drill cuttings. This enables its clients to obtain a richer dataset of formation parameters much faster than by traditional methods. The risk for clients is relatively low, because the technology has been validated in a broad range of formations and reservoir types.

5 Work with people you like

All business undertakings have their ups and downs. For example, it commonly takes longer than expected to achieve major milestones such as proof of concept or completion of field testing. Such times can be extremely stressful for management, employees and the company’s board. In tough times start-ups need the “social capital” they get from working with people they like and respect to continue moving forward. If there is a rift in the organization to begin with, the mildest breeze can turn it into an unmanageable conflict that rips a company apart.

6 Don’t leave home without

a good CFO

Most people understand the importance of financial control and knowing their numbers. Fewer people understand the critical role the finance discipline plays in a business venture.

Young companies often say they will hire a chief financial officer in their second year, after they have revenue. This confuses finance with accounting, and the CFO with the controller. Accounting will tell you what happened last month, last quarter and last year. A good CFO can help the CEO plan the company’s financial future, negotiate commercial contracts and ensure proper governance and controls, as well as help to raise funding. In fact, the CFO might be able to negotiate better funding terms with a VC company.

7 Build it and they might come

In his book Diffusion of Innovations, Everett Rodgers tells a great story about how the cure for scurvy spread around the world.

In the early days of long sea voyages, scurvy killed more sailors than warfare, accidents and other causes. In 1601, English sea captain James Lancaster conducted an experiment to evaluate the effectiveness of lemon juice in preventing scurvy. As the story goes, the captain commanded that sailors consume three teaspoonfuls of juice every day on one of his ships. This significantly reduced the sickness on his ship. On the other three ships, 110 of 278 sailors died halfway into the journey.

So, after that success, was scurvy eradicated? Not quite. Treating scurvy with citrus fruit did not become commonplace for almost 200 years.

There is an important lesson here. Diffusion does not happen just because a solution to a problem is found. Penetrating the market requires knowledge, skill and resilience. Entrepreneurs often believe the job is done when the first prototype undergoes its first successful field test. In reality, the hard work has just begun.

8 Focus on sales, sales

and more sales

Getting that first significant purchase order is a major milestone for any company. Sales success depends on many factors, including the client’s perceived risk of using the new product or service, the client’s perceived added value, the company’s reputation, and more.

Yet the sales process is often the least structured function in a small start-up. While the R&D program is often impressive and the financials may be ship-shape, sales may be haphazard. Our portfolio company staff uses a training program we developed called “The Art of Sales Execution,” focusing on technology sales in the oil and gas sector. One key tool is teaching inventors and academics to map out their customer’s profile—including motivation, influencers, risks and values—to guide the sales effort. This, combined with an investor who can connect them personally with a potential buyer, can provide a major advantage.

9 Know thy competitor

“I don’t care what the competition is doing, we are superior.” This attitude is occasionally seen among entrepreneurs. While such self-confidence is a good thing, without a solid understanding of the competition they will have no chance of succeeding in the real world. Furthermore, following the competition allows them to judge their business’s full potential.

10 Alignment is key

Does the entrepreneur only make money after the VC firm has made $100 million or a 100% IRR? Or does the entrepreneur make money even if the VC loses money?

If your company is valued at $30 million after the share issue, the management might feel fine seeing it sold for the same price after three years if it still owns two-thirds. After all, $20 million is a chunk of change for most people. But from the VC firm’s perspective, it has lost money, because often it has to pay its investors a hurdle rate on their money.

An entrepreneur should attempt to negotiate the best possible deal, but if it does not firmly believe in the forecast and plans on which the investment in the company is based, it should not take the money.

The same ground rule holds true for the VC organization. Is the company founder the only party who will benefit from a sale of the company, while everyone else will be faced with an uncertain future under new leadership? Is the advisor the entrepreneur has hired only interested in raking in big fees or is it truly incentivized to push for a good outcome? Incentives work—make sure they work for you and not against you.

As the economy continues to recover, we expect to see increasing VC investment. The investment community and technology entrepreneurs can move the energy industry forward into a productive and profitable future. Giving and taking investment is not a decision to be taken lightly, but with careful thought it can be a profitable relationship for all.

Helge Tveit is a founding partner with Energy Ventures, a Norwegian venture capital firm, with offices in Houston. It provides capital and energy industry expertise to high-growth oil and gas technology companies.