By Richard D. Harroch*
Entrepreneurs who want to obtain venture capital financing to grow their business must have an understanding of the venture capital process. The venture capital industry has billions of dollars ready to invest in promising startup and later-stage companies, but it is neither easy nor fast to be able to tap into this opportunity. Here are the five key steps to get the interest of venture capitalists.
- Target the right venture funds. Venture capital funds have different investment criteria and investment focus. Some funds focus on early-stage startups. Some focus on late-stage companies that need money for expansion of sales and marketing efforts. And most funds focus on particular industries and sectors. So, for example, you might find funds interested in only biotech, software, communications, Internet, semiconductors, or health care. Before you try to contact a venture fund, check out its Web site to see what it focuses its efforts on and what investments it has made.
- Get an introduction. Don’t bother cold calling or cold e-mailing venture capitalists. Venture funds get tons of deals “over the transom,” and they are routinely ignored or dismissed out of hand. It’s best to get an introduction with your target venture capitalist. Through a referral source, you can significantly increase your chances of at least getting a meeting. Introductions from entrepreneurs, lawyers, and accountants who know the venture fund tend to be the most useful.
- Have a great Executive Summary and Business Plan. Venture capitalists are busy people. You have to grab their attention early with a concise but compelling Executive Summary describing your business. The Executive Summary should be two or three pages. You want to convey the business, the opportunity, the management team, the market size, and other relevant information. If the venture capitalist is interested, he or she will expect a more detailed business plan describing the business and opportunity in much greater depth, together with pertinent financial projections.
- Show a compelling product or service targeting a large market opportunity. Venture capitalists are not interested in investing in little ideas. They want the potential grand slam home run. If your idea can never grow to be more than a few million dollars in revenues per year, your chances of being funded are minimal. So, be prepared to show that your product or service has the opportunity to capture a large stake in a big market.
- Have a great management team. Many venture capitalists will say that the most important element in deciding to invest in a company is the quality of its management team. You need to have sophisticated, experienced professionals who can present well.
Once you take those five key steps, you’ll need to go through lots of other issues before you can get a financing round closed, including negotiating a term sheet, surviving due diligence, finalizing legal agreements, and more. To get comprehensive advice on venture capital, check out the AllBusiness.com Practical Guide to Venture Capital Financings.
*Mr. Harroch is the author of various books and publications dealing with startup and emerging compnies. He has assisted in the formation, growth, financing, and operations of numerous companies, and has been involved in over 1,000 venture capital financings, mergers, and acquisitions, strategic alliances, and business contracts. Email him at email@example.com. Copyright Richard D. Harroch. All Rights Reserved.