| By Dee Power and Brian E. Hill
If there is a secret to obtaining venture capital it is simply: Preparation, Positioning and Perseverance.
Preparation
You need to prepare yourself and your company for your search for capital. Develop a clear, concise, realistic business plan that gets the reader excited about the opportunity your company presents. The plan must not only cover what you are going to do but how you are going to do it.
Venture Capitalists say the most critical mistake entrepreneurs make in their business plan is failing to clearly identify the opportunity. In second place was unrealistic projections, followed by simplistic assumptions, and finally lack of competitive information.
Hone your market research and analysis skills. Systematically gather information on your competitors, so that you can make a credible case for why your product/service offering will be better.
And, don't make simple mistakes in spelling, grammar or math. Let other experienced business people read and critique your plan, testing it for clarity and reasonableness. Never send a first draft to the venture capitalists. Proofread it a number of times.
Put together a strong, experienced management team, with people who have been successful in the past. The importance of a strong management team can not be overstressed. Lack of a strong management team is the number one reason why VCs decline to invest. Management is also their most important factor in valuing a transaction.
A strong management team is defined as experienced with a proven track record. Only 17 percent of the VCs did not include experienced or a proven track record in their definition. But what if you just have a great idea?—only 7 percent said they would consider a great idea in lieu of strong management.
Positioning
Research the investment criteria of the venture capitalists to ensure that what you offer is what they are looking for. The second most common reason venture capitalists decline to invest is the company doesn't match their investment criteria. This mistake can easily be avoided. Most venture capital firms have a web site and that web site not only states their investment parameters but also will list companies that they have previously invested in. Make sure that your company is at the stage the VC wants, in the geographic area they prefer to remain in, the industry they prefer and finally that the amount of funding you require is what they prefer.
Use every method you can think of to reach potential investors. Many entrepreneurs believe that a referral is mandatory to be taken seriously by a VC. No personal introduction means no consideration. But that's not necessarily true. While some VCs insist that they won't give you the time of day unless you're referred, direct contact by the entrepreneur is the second most common way (30 percent) VCs find the companies they actually invest in. This was true in 1998 in our first survey and in late 2000.
The most common way VCs find the deals is referrals by other venture capital firms (34 percent). In third place is referrals by intermediaries (17 percent), followed by referrals by accountants (7 percent) and attorneys (7 percent). Interestingly, entrepreneurs thought that the most common way was referral by an intermediary (64 percent).
If you can get a referral, get one. Those VCs who recommend a referral are usually adamant on the point. One VC told us "If they cannot get a referral, they probably do not have a plan that would interest anyone." Another said "Referrals are the only way." And "Only referred deals are reviewed."
Expand your personal network, see if you can find someone that knows the VC and can make that personal referral. But don't use a lack of a referral as an excuse. We asked the VCs what an entrepreneur could do if he/she didn't have a referral. 23 percent said make sure the entrepreneur had an excellent business plan, or executive summary 21 percent.
Perseverance
Keep trying, don't give up. Continually widen your network of contacts to give you more avenues of approach to investors. Refine your business model. Believe in your company and your passion about your company.
Venture Capitalists told us:
"Also follow up your plan submission with a single call several
weeks later."
"If possible, follow up your fax or email with a phone call."
"Call the VCs every day. Be persistent."
The capital is out there!
Copyright 2001 all rights reserved worldwide.
Brian E. Hill and Dee Power are co-authors of Inside Secrets To Venture Capital
John Wiley & Sons 2001
www.InsideSecretsToVentureCapital.com
Attracting Capital From Angels: How Their Money and
Experience Can Help You Build a Successful Company
John Wiley & Sons, February 2002
www.AttractingCapitalFromAngels.com
Brian and Dee can be reached through their web site: www.capital-connection.com
Or by e-mail: business@capital-connection.com
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