Venture Capital - What The Proposal / Executive Summary Looks Like

Make it so that your mother or grandmother can understand it. Entrepreneurs too often fill their business plans with of acronyms, tech terms, and buzz words. Intermediaries can usually tell after the first paragraph how difficult it will be to raise capital for your business.

Condense what you do and what you want into a statement that you can make very promptly in seconds or minutes. If you cannot communicate quickly, you will lose the investor’s interest.

You need to have a logical persuasion chain. You must persuade the venture capitalist to invest in your company just as you would persuade a customer to buy your product or service.

If you cannot explain your business on the back of an envelope, you will not get financed. You need to grab the investor’s attention in the first 3 to 5 minutes. If you cannot get their basic interest, you will not get their money.

Venture capitalists see 2 to 3 deals per day and will say no most of the time. You need to distinguish yourself through clarity.

Prepare an elevator pitch. Imagine getting on an elevator at the 20 th floor of a building with the venture capitalists and getting a commitment by the time you reach the lobby.

Harold Ross’ first prospective for the New Yorker was no more than couple hundred words. It was so clearly laid out that you could read it today, 80 years later and still recognize that it describes the New Yorker.

The venture capitalists will also look to the people behind the company. They are looking to see what the reputations of your chairman and board of directors are. This will help create credibility and trust.

Venture Capital - Why The Venture Capitalist Is Interested In You

Venture capitalists want to make money. They will either see you as an entry point into a new industry that that has potential or one where they are already invested in but you provide an exceptional case.

The venture capitalist makes their decision on two variables: greed and the probability of failure or success. If your company presents a great deal but is accompanied by extraordinarily high risks, the venture capitalist will not invest.

Venture Capital - How To Handle Confidentiality

An intermediary should always sign a confidentiality or non-disclosure agreement (NDA). It is a 1 to 5 page document that acknowledges you have sensitive information that if released could harm your business and it should not be shared.

Venture capitalists, however, will not normally sign a confidentiality agreement. They see so many companies in the same industry that they cannot sign one agreement and risk not being able to invest in other potential good deals.

Venture Capital - What Venture Capitalists Are Looking For

Venture capitalists are in business to make money. They have to have the ability to select companies that will make more money than their rivals.

There are 2 types of companies. The first is a lifestyle business. These types of companies are centered around the lifestyle of the entrepreneurs. The owners will use the business to drive expensive cars and purchase big houses. These are not businesses that attract venture capital.

The second type of company is a gazelle. These companies are run by entrepreneurs who want to build world-class organizations.

There are three ways for a venture capitalist to exit from your business: acquisition, public offering or management buyout. Half of the decision to invest in your company is derived from if the venture capitalist can see a clear exit.

An example of a gazelle is Hewlett-Packard. Mr. Hewlett and Mr. Packard wanted to build a world class company. They recognized that they did not have the necessary skills so they hired professional management and became mentors and the elderly statesmen for the company. They were able to exit from the company and it became a huge success.

Venture Capital - How Many Venture Capitalists You Should Contact

If you approach them on your own, your personal time constraints will dictate how many you can contact.

It is an intermediary’s job to determine how many to approach. The intermediary will take you to a larger number of venture capitalists because you cannot guarantee that all of them will be interested. A further number will provide unattractive term sheets. The end goal is to get a reasonable offer on the table from a reputable venture capitalist.

If the venture capitalist has lots of funds and is looking for deals, it is easier to raise capital. In today’s market, venture capitalists are saddled with too many problems from their current portfolio companies.

It is the job of the intermediaries to know which venture capitalists are tapped out and which are looking to invest. They must have a knowledge of the market and know who to take your proposal to.

There is a danger of “over shopping” the deal if you go to too many venture capital companies.

If you are turned down by 4 to 5 highly targeted venture capitalists, something is wrong. Either your company has fundamental flaws, your terms are unreasonable, or your business does not reflect current market trends.

Evan Carmichael

Evan Carmichael
YoungEntrepreneur.com Blog Manager

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