Raising the large amounts of capital needed to grow a new technology company is one of the hardest challenges faced by entrepreneurs.  Though financing can be acquired through angel investors, traditional bank loans, and other private investors, the large amounts of capital and resources needed for fast-paced growth are usually only found among venture capital groups. 

What can you do to increase your chances of VC funding?  Here are some questions to ask of yourself and your business to be sure you are ready to approach and present to VC firms.

1. Do I Need VC Funding Yet?

Many startup companies are not yet ready for VC funding.  Though there are small numbers of VC firms who provide seed investments in smaller startups, if you need first round capital financing, you may want to hold off on approaching VC firms until your company is past the market research and product testing phase. 

Most new companies go through three different sources of raising capital, which includes seed money, 2^nd round, and 3^rd round financing.  Seed capital can be found among angel investors and other private investors.

2. Do I Have the Right Leadership Team?

VC firms are hard-nosed when it comes to investing large amounts of capital in new and high-growth businesses.  They want experienced leadership in the company that will lead it to successful profits and possible IPO status.  Be sure you have the best and most experienced management team you can assemble before you approach venture capital firms.

3. Have I Studied My Competition?

Many entrepreneurs do not pay enough attention to the existing and potential competition in the industry or niche in which they want to enter.  However, you can be sure that venture capitalists will want to know all about your competition and how you plan to beat them, or at least gain a substantial market share to become profitable.  And that leads to asking yourself…

4. Have I Studied My Market?

A great idea goes nowhere without a market to buy it.  VC firms want to know that your business idea fills a niche within an established industry or market.  Many entrepreneurs fail to completely and fully research their market, especially in terms of a national or global scale expected of VC portfolio companies.

5. Have I Fully Revised My Executive Summary?

Your business plan is the document that will get your in front of a VC firm.  However, in order for venture capitalists to ask for your business plan, they will usually look first at your executive summary, which is a short version of your entire plan.  A well-written and many-times-revised executive summary has a better chance of getting the attention of VC directors.  Write and re-write your executive summary until it reads smoothly, is succinct, and provides the intriguing details of your business.

Entrepreneurs are often chomping at the proverbial bit to get in front of venture capitalists to ask for large amounts of capital.  However, the ones who are successful and receive a VC firm’s consideration will be the cool-headed business owners who ask the right questions before approaching venture capitalists.

In March of 2009, the tech stock trading group, NASDAQ, approached the SEC to request rule changes that would allow them to open an unregistered venture capital market.  The new unregistered market would allow qualified institutional buyers (QIBs) and accredited investors to trade ownership stakes in startup and fledgling pre-IPO companies. 

The rule that that NASDAQ is attempting to modify would open safe-harbor exceptions to accredited investors as well as QIBs.  Currently, accredited investors may trade on an unregistered market, but may not resell for six to twelve months, creating potential liquidity hardship.  The safe-harbor rule extension to accredited investors would provide better liquidity and transparency to venture capital markets.

Where Did All the IPOs Go?

The last few years have proven to be a detriment to the IPO market.  Since many startup and seed companies backed by venture capital have an IPO exit strategy, the VC industry has suffered in this vital U.S. economic industry.  In fact, only one venture-backed company has made an initial public offering on the NASDAQ over the last 12 months!

Some experts say that many VC firms are still investing in startup companies but avoiding an IPO by simply selling them to already established and larger public companies.  That may not be what many entrepreneurs and business startups had in mind when they approached the VC firm for capital financing, but with most VC firms taking a majority stake in startups, entrepreneurs usually have no choice. 

What NASDAQ is Attempting to Accomplish

With the rule change in the unregistered market, accredited investors, such as VC firms, could have more freedom in exchanging securities and have much more liquidity help.  It does not, however, fix the problem of attracting retail investors needed for small cap market stocks. 

The SEC has shown to be receptive to changes in regulatory rules in order to improve the market for smaller companies.  During the last few years, the SEC has adopted changes in trade rules that were recommended by smaller business and the small business trading community.

How the New Rule Could Benefit the Economy

The new trading rule changes could ultimately help the economy.  Since the decline of the IPO market, there have been fewer economic drivers to replace the lost investment engines.  The fact is that in 2008 venture capital returns outperformed both the NASDAQ and S&P 500 indexes.  While the public trading indexes saw losses of around –22%, VC saw positive, though modest, returns in early seed and later stage VC companies.

A freer unregistered market would open up more trading in pre-IPO companies.  Since VC backed companies have historically been a major driver of the NASDAQ market, it is important to maintain ways to continue the capital formation of new companies and enhance trading in capital markets.

The job of obtaining much needed capital from a venture capital firm can be long and arduous.  With this in mind, could hiring a venture capital consultant help you obtain the best possible chance in front of a VC firm?

VC consultants are those who have had experience in the venture capital industry.  A consultant may be a former venture capitalist himself, a previously successful entrepreneur, or someone with many contacts in the VC field.  Through the help of a VC consultant, a small or startup business may get the guidance it needs to become a hit with a VC firm.

VC Consultant Costs

What is the potential cost of a VC consultant?  Some consultants charge as much as $1,000 per day for their proven experience and contacts.  However, when a company is looking to raise $5 million for capital leveraging, $1,000 a day is a small investment indeed. 

Along the lines of VC consultants are rumors and reports of those who want an ownership stake in a business in lieu of a fee.  It is best to avoid paying a consultant this way, as you know in advance that a VC will also want a large ownership stake in your company if successful.  A trustworthy VC consultant knows this and would not ask a startup for this type of compensation.

What a Venture Capital Consultant Can Do for Your Startup

An experienced and good VC consultant can help your business obtain VC funding in many ways.  Here are the main areas that could help you:

• Contacts – VC consultants usually have many contacts in the industry.  They can recommend the right list of potential venture capital firms for your industry, or find the right ones if not known right offhand.

• Business Plan Review – The business plan is the main document that gets you in the door of a VC firm.  A consultant will work with you to revise and re-write your plan so that it will be most attractive to a VC firm.

• Market Research – If your business is a startup and you need market research to firm up statistics and market potential, a VC consultant will help you down that road.

The Bad and the Ugly

Within any industry are vultures who wish to take advantage of unsuspecting or desperate people.  The startup and VC industry is no exception.  Naïve entrepreneurs and small business owners who are desperate to obtain large amounts of capital funding may get the “blown away” routine from an unethical consultant, even if the business idea is bad.  That means a consultant will look at a potential business plan and idea and tell the entrepreneur that they are “blown away” by the idea.  These consultants will go on to virtually guarantee VC success. 

If you, as an entrepreneur, wish to go the route of hiring a VC consultant, be sure to remain savvy.  Research potential consultants.  Check references.  Verify previous success.  You want to find a consultant who will not blow smoke and give you false hope.  A consultant who is honest and forthright may be the best investment on the journey to obtaining venture capital.  Even if the result is “you don’t have a chance,” it still saves a lot of potential money spent pursuing the false hope of VC success.

Since venture capital is not easy to obtain, it can be helpful to hire a consultant to give you the guiding map toward successful capitalization.  However, be sure to research every potential consultant and hire the one best suited for your business.