Make sure your plan has all the information the investors want to see, and put it where it’s easy to find. I’m amazed at how many would-be investment plans I see that have buried or ignored the key investor concerns. These are:
- How much money you need and how much ownership you expect to give. You may be asked to show the valuation of your business. But if your valuation is unrealistic, you aren’t credible.
- Why you need money. Investors want to invest in growth, not owner peace of mind. Always show how you will use the funds.
- Who else is involved, and to what extent. Specify details of founder shares, employee options, and investor shares. Your plan should show whether you will offer additional rounds of investment and how you will handle equity dilution.
- How they get their money back. Investors make money by putting it into your business and getting a lot more money back out of your business a few years later. They don’t care about your long-term business health. They want to see an exit strategy.
- Who is in charge. Present the management team, with useful information about backgrounds, references, and relevant experience.
Many people think of venture capitalists (VCs) when they think of investors. But in reality, venture capital is limited to a few hundred professional firms investing in a few thousand companies per year. This is rarified air at the very top of the pyramid. And most of that investment goes not to fund new startups, but to add more capital to established companies.
To have a shot at venture capital, you and your business must run quite a gauntlet. Don’t think for a second that sending a business plan with a cover letter gives you a shot at venture capital. While you must have a business plan ready before you start, the process is much more than just the plan. Here are some of the other steps:
- Finish your business plan first, then finish your summary memo, then polish your pitch. Be ready with all three before you start the process.
- Make your business plan readable and concise. Cover the highlights in the executive summary. Include valuation, investment offering, exit strategy, and return on investment. Use charts where appropriate.
- Write a compelling summary memo. This is a 2- to 10-page document offering highlights of your plan. Write it like a news story, putting the most important information in front and then less important in descending order. Make sure the investment opportunity is obvious. Keep lots of white space, and make it easy to read. You’ll send this to a VC after you have an introduction. They will use it to decide whether or not they want to know more.
- When you deliver your pitch, stick to the highlights. It should run 10 to 20 minutes long and should include PowerPoint slides.
- Don’t bother with VCs unless you need at least $3 million, have a proven management team, and can deliver a 500 percent return in three to five years. If you don’t meet all three of these conditions, look for angel investors instead (see below).
- Select your VCs carefully. Most VCs focus on certain technologies, geographies, and stages of business. Don’t waste your time with untargeted VCs. Do your homework first. You can find VC profiles on the Web and in VC directories.
- VCs have way more deals than they have time, so you will need an introduction to even get in the door. Getting introductions is hard, but if you can’t get through this step, you are not a candidate. Be prepared to talk quickly and well. This happens occasionally via email, but that is the exception, not the rule.
- If you get through this first filter, you will probably be asked for a summary memo. If the VCs like the summary memo, they will ask for a pitch and a business plan. If they are still interested after that, make sure you have experienced attorneys.
- Expect VCs may want other VCs in the deal. That’s why the deal has to be $3 million or more: VCs often want to invest in groups of two or more firms, and the work involved isn’t worth investing less than $1 million.
- VCs are rarely comfortable with less than 30 percent ownership. They want to make sure their interests are protected by substantial ownership.
- Don’t let positive-sounding put-offs fool you. VCs will often reject a pitch with a “maybe” instead of a “no.”
Obviously, the vast majority of startups don’t meet venture capitalists’ demanding criteria for investment. Fortunately, there is a lot more investment going on at the second level, done not by VCs but by “angel investors.” They might be wealthy individuals, companies, groups of local people united in a club or association, or some combination thereof. There are tens of thousands of them in the United States. It is hard to find and identify them because there are so many, but Web searches, local business groups, and business schools will help.