Many new entrepreneurs have a skewed view about venture capital funding. Some believe that a great idea and lots of passion and enthusiasm are all one needs to convince a VC firm to become partners in a new business venture. However, VCs particularly scrutinize fresh entrepreneurs – especially if you don’t have funding and a track record already.  

To separate fact from fiction, a VC firm will not lend any money to a new company that does not already have some form of small business funding.

If you read that correctly, then yes, you need money before you can get money. VCs want to know that you are taking a financial risk yourself.  Of course, all entrepreneurs start by bootstrapping, but you still need more business capital before you approach a VC to ask for more money. 

Self-Funded Capital

Where can you get it? There are many forms of startup business capital. The top three self-funding capital types are:

• 401(k) – Either through your 401(k) or other types of retirement fund, you can take loans against the funds to invest in your start up.  Though it’s not recommended, you could even withdraw a portion or all of your fund to get startup capital.

• Savings – If you have substantial savings, this is a good way to show investors you believe in your business idea.

• Friendly Loans – Also known as “Friends and Family,” or F&F loans, these are also a common way for start ups to get their seed money.  If you can encourage the people close to you to get onboard, VCs might take a second look at your idea.

Third Party Funding

Other forms of small business funding may come from other outside sources before you approach a VC firm. Here are the top three you might consider:

·      Corporations – Though the last few years have been modest, corporations are known for investing money into startups. They know that VCs can make a substantial return on their projects – and so can corporations if they invest wisely. Approach corporations in the industry of your new startup. For instance, if you have a technology idea, you might talk to Dell, Cisco, or Microsoft for a stake in your new business.

·     Angel Investors  - “Angels” are similar to VC firms, except they are typically wealthy individuals who make it a point at helping startups. Angel funding can certainly be a good step toward obtaining venture capital funding, especially since angel investors are well suited for funding smaller amounts of capital. 

·     Incubators – This type of initial investor is one who may not invest cash, per se.  However, you could get valuable technical or business consulting, bookkeeping or accounting services, donations of office or research space, and even networking help.

To get to the next step of business capitalization, you need to have investors and/or your own money on board. Get to these types of initial business funding and then take your new venture to the VC firm.

Most entrepreneurs who pitch their great ideas to venture capital firms miss an important step along the way – they do not hire a top management team. No matter how good an idea may be, no entrepreneur can handle all the business functions alone.

A good management team is necessary not only to get specialists in certain areas, such as accounting and finance, research, and marketing, but also to show a venture capital firm that the company is worth start up funding.

How do you go about finding, evaluating, hiring, and retaining the right people for your top management team?

Recruiting Your Management Team         

·  Start with people you know – Many entrepreneurs who start a new business venture and want to find investors ask their current friends and contacts to join them. Even a casual business acquaintance who you know to be an expert is a good start. Present your contacts with your idea, share your enthusiasm, and get them on board with your venture.

·  Ask your contacts for references – Finding the right people may be easier than you think. The best place to look is with your current contacts. Ask around about people who might be interested in joining a new business venture at the ground level. Despite an ailing economy, many executives and higher management may be itching to get out of their current jobs and do something that has “meaning,” rather than just a nice paycheck every two weeks.

·     Get experts to recruit for you – There is everything to gain if you approach a professional recruiting firm to find the right people to join your team. Using their help will get you in contact with some of the best people in the industry you are seeking. The money spent may well be worth it.

Retaining Your Management Team

It’s not just the idea that keeps a management team at your start up’s side.  Considering that you can’t offer the highest salaries and 401(k) plans, how do you keep you team in your company?

• Bonuses – A bonus may be a promised amount at a future date (deferred compensation), or money awarded based on performance.

• Stock Options – Don’t forget to offer generous stock options to your management team if you plan to go public.

• Greater Job Authority – As your new company grows, so will the responsibilities. Be sure your management team is aware that they are expected to take on the greater authority, as well as the rewards and challenges that go along with it.

Your start up venture is only as strong as your management team.  Build a solid team from the ground up, and it will be easier for you to find investors for venture capital.