Why do venture capital firms and entrepreneurs have such conflicting views about each other?  It could be experience or reputation.  Venture capital firms have seen all types of entrepreneurs and think they can spot a “type” in an instant.  On the other hand, entrepreneurs may hold negative viewpoints about a venture capital firm because of its reputation.  However, all these expectations cause potential conflict between a VC firm and an entrepreneur. 

If you want to avoid this type of negative imaging that may cause a loss of venture capital funding, here are two ways you can change your viewpoint.

Entrepreneurs Want Money…VCs Want Partners

Many times, conflict arises when an entrepreneur has an egotistical desire to retain control of his or her business.  They seek capital funding for millions of dollars from a venture capital firm, but then expect the VC firm to keep their “hands off” the company.

From the venture capital firm’s viewpoint, they have invested millions of dollars in a startup company.  They want to assure that their investment is nurtured and moves in the right direction for maximum profit potential.  Therefore, their perspective is that they are a partner in the business and not an arms-length lender.

New entrepreneurs would be wise to take the advice of a VC firm.  Input from a VC firm is based on experience and previous knowledge.  An entrepreneur may hold on to a specific idea, but if the VC firm is insistent that it will not work, it’s best to take that advice and move onto other parts of operating your business.

Softening Greed and Ego

It is true that many venture capital firms have been started by rich investment bankers who saw a “gold mine” in certain industries or particular geographical areas.  Those who reach financial success sometimes forget how persistence, determination, and luck are needed to become a success.  Instead, these rich new VC investors believe their way and experience is the only way to make money.  They do not give new entrepreneurs any leeway in making decisions or exploring creative options. 

If a start up business will succeed, it needs not only capital investment, but careful nurturing and guidance.  New entrepreneurs would be wise to heed the guidance of wiser venture capital investors.  And VC investors need to know that even though they do hold the money strings, it is important that ingenuity and innovation are free to take a startup company toward the riches it deserves.

Who are the successful entrepreneurs who have been awarded venture capital funding?  Are they just lucky?  Did they hit on a timely idea?  Were they well connected?  Was it a combination of all three?  

Neither luck, a great idea, nor networking is dependable enough to set an entrepreneur apart from the rest of the pack.  Instead, here are three “p” qualities that an entrepreneur needs to assure at least a modest chance of acquiring venture capital funding.

Preparation

How will you get your startup company ready to be shown to venture capital firms?  The most likely candidate for VC funding is an entrepreneur that is well prepared.  That means getting everything in order to make an investment choice easy for start up financing. 

Get your business plan written and polished.  Show that your market is poised and receptive to your new product.  Practice your VC funding presentation over and over so it’s ready to go at any time.  And most of all, prepare to be committed to your own project.  Entrepreneurs who have an attitude of, “let’s just see if it works” will not be very successful at securing venture capital funding.

Positioning

A smart entrepreneur will have a strategy for positioning his or her start up business for the right venture capital firm.  You must understand that there are thousands of venture capital firms ready to invest in thousands of different types of start up businesses.  That means you must have a product that is tested and primed for a receptive market.  You must assemble a top-class management team.  And you must know which VC firms who are good candidates for your type of business.  Get your start up positioned correctly, and finding a VC funding firm will be much easier.

Perseverance

Those entrepreneurs who give up after the first rejection will not succeed.  However, those who persevere and understand that the next opportunity might be the right one will be the ones to take home the VC funding.  You must be willing to put in the time and energy necessary to get everything just right.  Make adjustments.  Reposition.  Re-assemble management teams.  Do what you need to do to persevere and make your start up the right choice for a VC firm.

Venture capital funding is not an exact science.  However, past experience shows that entrepreneurs who possess these qualities have a better chance at venture capital funding success.

Entrepreneurs often complain about how much trouble it is to find venture capital funding.  Many venture capital firms are very strict about the geographical area in which they invest – which leaves entrepreneurs with great ideas and potentially successful business plans with fewer startup capital options if they are not in a “hot” region. 

So why do venture capital firms get choosy about location?  There are many reasons, and some venture capital firms may only choose one good reason to stay locally.  Here are the three main reasons a venture capital firm will choose certain areas:

Visiting Investments

If a venture capital firm invests only in local or regional startup companies, it is easier to visit and work with them.  Venture capital firms spend a great deal of time overseeing and taking an equity stake in their startup companies.  When a startup company office is driving distance, or at least a short plane ride away, a venture capital firm can be at hand to help develop the startup company more easily.

Fertile Investing Area

Some venture capital firms choose a certain area or region because it is a fertile ground for startup companies.  The best example is Silicon Valley in California.  There are more venture capital firms there per capita than anywhere else in the country.  These firms are right in the middle of one of the hottest technology regions in the world. 

The Silicon Valley attracts the smartest, the brightest, and the most ambitious entrepreneurs.  New ideas for startup companies are discussed and finalized over lunch there.  So why not establish a venture capital firm office right in the middle of that action?  With so many potential booming new businesses, a venture capital has its pick of the best.

Best Managers

Another reason venture capital firms choose a specific region is because they like startup companies with experienced and talented management teams.  If an area is hot for new startup business, it attracts workers because of the challenging job opportunities, as well as the very lucrative salaries and stock options.  A startup company will have access to these bright managers, who in turn are attractive to venture capital firms seeking start ups with experienced managers.

If you find yourself in a city with limited venture capital activity, consider relocating your startup or focusing on venture capital firms without geographical constraints to make your startup funding endeavors easier. 

How do VC firms decide to provide start up financing to one company and not another?  There is no single element that sets a startup company apart, but usually a combination of factors.  If you are looking for start up financing, here are five important ways you can position your company in front of VC firms to get a better chance at “yes.”

1. Have an All-Star Management Team

VC firms are interested in providing start up financing to new companies with experienced management.  Too often a young entrepreneur comes along with a great idea, but no experience in the industry or marketplace.  A smart entrepreneur will surround himself with experienced managers in all arenas, including sales and marketing, accounting and finance, HR, product development, and administration.  And better yet, VC firms like to see management team members who have previously been a part of a successful start up company.

2. Have a Quality Product

A VC firm will more likely invest in a startup company with a new, unique, and strong product idea.  Innovation is the key.  However, your idea doesn’t have to be a product.  A service idea with ingenuity and quality benefits can carry weight with VC firms as well.  If a VC firm believes your product or service will sell, you’re more likely to gain their interest.

3. Appeal to a Large Market

One thing that entrepreneurs must remember is that VC firms want to invest in companies with very large earnings potential.  A startup company with a great idea but only a niche market may only have potential for a few million in earnings each year.  If you want VC funding, expect that your product will eventually earn hundreds of millions or even billions on the market.

4. Have Growth Potential

As stated, VC firms like companies with large earnings potential.  Your startup may be in development and be small.  However, you will need to have the ability to easily expand when the market calls for growth.  Know and state your company’s growth strategy.

5. Large Return for VC Firms

VC firms don’t invest money to get 8% to 12% returns.  They could do that with the stock market or real estate.  Instead, VC firms invest in startup companies to get larger ROI, and certainly the risk-to-reward ratio applies to venture capital investments.  This translates into venture capital firms holding an equity position up to half the company’s value and even large stock options in an IPO.  If you want VC funding, be prepared to offer large returns for the investment you receive.

Entrepreneurs are usually impatient about securing venture capital funding.  They have a great idea and want it to get started NOW. However, it is always best to step back and get yourself ready for the venture capital firm hunt.  Asking these important questions can save you significant time in finding the right VC firm and getting a “yes” answer.

How Much Money Do I Need?

This is an important question to know before you approach a VC firm.  If you have performed your market research and product development research, then you should have a good idea how big your potential market is and how you need to get your product ready for it. 

Movie producers don’t just start making a motion picture at a whim.  They carefully prepare a budget for every step of the way, including pre-production, filming, and post-production.  They know exactly how much a movie will cost to produce.  The same holds true for your start up.  Know how much start up funding you will need to reach your targeted market.

Have I Written My Executive Summary Dozens of Times?

An executive summary is the most important portion of your business plan.  It is the summarized whole of the plan that VC firms will read first to find out whether they want to read more.  Make sure you send your executive summary past the eyes of many advisors.  Have business contacts read it.  Have your lawyer and accountant read it.  Make changes each time with their suggested input.

To Whom Should I Send my Executive Summary?

Rather than just submitting your executive summary to every venture capital firm that shows up on your radar, you need to have a coordinated effort.  A VC firm that specializes in your type of product or industry will more likely read your executive summary and contact you for more information. 

Should I Seek VC Funding from another Region?

In most cases, VC firms are strict about their geographical investment borders.  VC firms tend to invest more locally or regionally for many reasons, including having close contact with their investment portfolio companies. 

However, you can still succeed in getting VC funding from an out-of-state VC firm.  Check every VC firm carefully for their investing guidelines.  Find ones who are open to great investment opportunities outside their normal geographical range.  If your product and company are a good fit, then an out-of-state VC firm should at least give you consideration.

The ability to successfully obtain venture capital funding depends a great deal on the management team assembled in a startup company. Entrepreneurs may have big dreams and big ideas, but no one attempts a large business venture alone. That is why it is so important to empower your management team if you want to obtain VC funding.

The Value of Management for Venture Capitalists

One of the most important qualities a VC firm looks for in a startup business is the management team. The VC firm wants to know that the team has quality leaders who are experienced in their field of expertise. Their experience will become invaluable in making decisions for the startup company as it meets challenges, especially if management team members have previously gone through the experience of a startup company.

However, what good is expert management team advice if an entrepreneur doesn’t empower them to make decisions? Many times an entrepreneur has assembled a powerful management team for the sake of obtaining VC financing. But ego and the allure of power prevented them from taking valuable advice and resulted in poor decisions for the company.

Empowering Your Management Team

What can you do to empower your management team and be in a better position for VC funding?

• Trust – Learn to trust the experience of your management team. You will have a better chance at VC funding if you trust your team to pull from their education and experience.

• Ask – Don’t be afraid to ask your management team for advice and help. Entrepreneurs are the leaders of new startup companies. However, a good leader knows when to take advice from a qualified team member.

• Encourage – Don’t forget that even experienced managers need encouragement too. Learn to encourage their input, and reward managers for great ideas and winning decisions.

• Provide Resources – A manager who has the resources he or she needs is more likely to help your company get VC financing. Make sure you provide money, technology, and even human resources that will help a manager help your company look great for VC firms.

It takes a village of qualified people from a wide angle of fields to make a startup company work. VC firms know this fact, and your funding depends on a company having the right management team. Be sure you empower your team to get the highest results.

Many entrepreneurs want to start a new business and think that venture capital funding is the only way to get the capital needed.  Why?  Simply because the term “venture capital” is tossed around so frequently.  It is associated with capital for new companies.  The thought is, “if you’re venturing out on a new business, venture capital financing is the way to go.”

Although this is partially true, there is much more involved with obtaining startup financing from venture capital firms.  Entrepreneurs must know that VC firms have specific guidelines for their portfolio investment companies, and many of those guidelines are universal.  If you are wondering whether your start up business is a good candidate for VC funding, here are a few good ways to know:

You’ll Be Serving a Large Market

You may have heard the term, “find your niche.”  Niche businesses are those that find a particular market or customer segment and fill a need that is not already there.  Unfortunately for these types of businesses, they may be successful as a niche business, but not a good candidate for VC funding.  Why?  They simply will not pull the revenue numbers expected of a VC funded business. 

Successful niche companies are sure to earn millions.  However, VC funded start ups are expected to eventually earn billions.  Thus, if you want VC start up funding, your new business must serve the needs of the masses.

You Need a Large Amount of Capital

Many new startup companies need only a relatively small amount of financing to get off the ground.  A few hundred thousand dollars or even a million or two will do the job adequately.  Unfortunately, venture capital firms are more interested in investments that require millions, and sometimes tens of millions, in capital needs.  A $500,000 investment simply will not give the VC firm the return it requires.

You Need Many Rounds of Financing

VC firms are looking to invest in startup companies from the ground up, which means potentially many rounds of financing.  For instance, a startup company may require seed financing and then many subsequent stages of funding until the business is ready to even introduce a product to market.  If your company does not need heavy market analysis, product development, and market testing, you may not be a good candidate for VC funding.

Entrepreneurs need to know where the best places to look for startup capital.  If you are a wise entrepreneur, you will carefully evaluate your new business to see if it is a good fit for VC funding.  If not, you would be best to focus your efforts on other sources.

What you state in your business plan says a lot about the future success of your business.  Venture capital firms have witnessed plenty of successful new businesses that started with a sound business plan.  VC firms know what should be included in a business plan – and what should not.  They also know the qualities that a business plan should possess if it is worthy of their time and money.

What are the qualities that VC firms like to see?  Here are 10 that should be in your business plan:

1. A Brilliant Idea

No plan is complete without a nugget of a great idea.  The idea is what sparks the interest of a VC firm.  The rest will solidify their interest, but it all starts with an exciting idea.

2. Brevity

VC firms don’t have time to review every business plan that is put in front of them.  Make sure yours is brief and succinct and contains the main compelling points that are of interest to a VC firm.

3. Clarity

Be absolutely clear about what your idea is and how it will achieve success.

4. Know Your Market

Do you know who will buy your product?  What are the demographics? How will you market to them?  Let your potential VC funding firm know that you completely understand your market.

5. Show a Large Market

VC firms will invest in startup companies with a potential for big earnings – which means having a big target market.  Show VC firms that your product will fit into a large market.

6. Your Competitive Advantage

Why will your target market buy your product rather than the competition?  This needs to be addressed honestly and with crystal clear focus so VC firms know why you set apart.

7. Existing Contacts

Have you already established potential partnerships with other successful businesses?  Do you have a top industry business ready to buy your product?  VC firms like to know that you already have potential help and customers waiting.

8. Management Team

The quality of your management team will be a top priority for VC firms.  Show that you have a team assembled with the best experience and qualifications.

9. Demonstrated Product Success

If your product has already been developed and shown sales potential, prominently display your sales success. 

10. Avoid Anonymity or ‘Hiding’

Don’t try to hide information a VC firm.  Your plan will more likely be rejected.

New and startup businesses may get their proverbial foot in the door of venture capital firms by securing a joint venture with another established and reputable company.  Venture capital funding is difficult enough to obtain as it is, but with the help of a big business name on your side, your business may walk to the head of the class in a VC firm. 

In most joint ventures, an agreement is drawn up between two companies or business owners to share in a business venture strategy and share the profits resulting from it.  A simple joint venture may be cross promoting a business or bundling products for merchandise sales.  A more complex joint venture might be the formation of a new company to pursue a separate business prospective.

In the case of trying to obtain VC financing, it may be just a simple category joint venture that gets you in the door.  Why?

Instant Credibility

Say you started a business manufacturing a new high-tech coffee or hot beverage holder.  If you approached the coffee giant, Starbucks, with a proposal to sell your innovative container exclusively in their stores and they agreed, you would then gain instant credibility with any venture capital firm by having the Starbucks’ name and reputation at your side. 

Or perhaps you have invented a new or innovative bottling process that has been picked up by PepsiCo.  Knowing the brand and market share that PepsiCo has on the soft drink market, your VC proposal could be a gold mine with the right capitalization.

Access to Large Markets

Though VC firms do not invest as much into retail businesses, you may have a green flag with your joint venture with a big name company.  They know that you would have access to a potentially large market with a company like Starbucks as your product distributor.  With a large market comes the need for expanded production and manufacturing, which would be a prime reason for the need of venture capital. 

An example of instant access to a large market is an innovative idea that could be used in conjunction with licensing agreements with the likes of Disney or comic book characters.  A new, innovative product like glow stickers or action figures could land you a joint venture licensing agreement with Disney or DC Comics.  With that green light for product development and access to an already established market, your chances at VC funding grow substantially.

Time to Market

Expanding into national and global markets takes time.  It takes time to get the marketing word out and time for the customer base and demand to increase.  That time span decreases considerably when you have a big name as a joint venture partner.  With the credibility and customer base already established, you can more easily convince a potential venture capital firm your need for capital expansion. 

When you are ready to take your new or existing business to the next level and want to try raising venture capital, don’t forget the potential and favorable possibilities with joining forces with an already established company. 

When an entrepreneur thinks of capital funding, the first thing that comes to mind is venture capital.  However, depending on the stage and growth plans of the new company, an entrepreneur may be better suited to pursue an angel investor. 

Many venture capitalists receive proposals for capital financing from companies that just do not meet their requirements for scaling, industry, or funding amounts.  This happens frequently when entrepreneurs fail to properly research the role or expectation of a VC firm in comparison to an angel investor.

An angel investor is an individual or private company that may wish to invest capital into new businesses that need help getting off the ground.  A previously successful entrepreneur may become an angel investor as a way to help new entrepreneurs get past the self-funded stage.  Typically, angel investors will fund companies that need financing in amounts anywhere between $150,000 and $1.5 million.  Though angel investors are easier to acquire than VC, they still require higher return amounts than traditional bank loans.

Venture Capitalist vs. Angel Investor

How can you, as an entrepreneur and business owner looking for capital growth, know which investor to approach?  Here are some guidelines:

Type of company

Venture capitalists have a preference for certain industries, particularly those with high growth, such as biotechnology or software with large expansion potential.  Though angel investors like high growth industries as well, they are more apt to be a capital source for other smaller growth industries. 

Size of company

The growth potential of the company is a tremendous factor in VC funding decisions.  They expect big returns when a startup company goes national or global, is acquired by a major corporation, or offers an IPO as a larger corporation.  Angel investors, however, will look at smaller companies that do not require as much capital for initial startup or capital growth.

Experience

VC firms are notorious for picking and choosing startup companies that are lead by experienced entrepreneurs.  Experience may be within the industry they are entering or through other successful entrepreneurial ventures.  Angel investors, on the other hand, will more likely help a first-time entrepreneur.

Amount of capital needed

Whether you need only one round of capital financing or a series of rounds, if you need more than $3 million for your capital needs, you should seek VC funding.  VC firms will usually not consider startup or small companies needing less than $1 million, unless the VC firm specializes in seed capital for startups. 

Generally, if the total capital required to create a positive cash flow in just a few years is less than $3 million, an angel investor is the way to go.

If you are an entrepreneur who wants to get an innovative business off the ground with a capital inflow, consider your options carefully.  Think of how big you want to take your business, your experience, and your ultimate capital financial needs.  You may find that a VC firm is not what you’re looking for after all.