Most people in America are familiar with reality TV game shows. Survivor is probably the oldest and most common reality game show that still retains popularity today. In Survivor, the contestants are put to the test in a remote part of the world.  To eliminate the competition and get further in the contest, alliances are formed usually between two or more people.

Using this kind of comparison, you can see how an alliance with a key business may be useful to obtaining venture capital funding. While your alliances will probably not be as cut-throat as a contestant game show with $1 million on the line, a key alliance or two may be the element you need to attract venture capital as an investment opportunity.

Advantages of Alliances

What are some of the advantages to alliances? Imagine finding greater success and building more revenue to attract venture capital through:

• Additional sales channels – Utilize your alliances to penetrate additional markets and reach more sales channels you could not do on your own.

• Shared technology – Through strategic alliances, you can get access to technology you wouldn’t otherwise have. Instead of investing heavily in new expensive equipment, an alliance may be the way to utilize that technology without burning through all your seed money.

• Credibility – A strategic alliance with a very prominent or visible partner could mean added credibility to your business idea. Imagine presenting venture capital firms with your idea that includes Disney characters, McDonalds logos, or 3M technology.

Tips on Forming Alliances

You can never dream too big when it comes to finding the right alliances.  As an example, Mello Smello, a small mom and pop sticker company, partnered with 3M and Disney to create scratch-and-sniff stickers that propelled the small company into national status. 

There are different strategies you can take to form alliances, including:

·         Joint Ventures – Talk to the top management in a business with whom you want to align yourself. Sell them on your business idea, and show them the benefits they will receive by joining you in a business venture. If you can get a few good alliances on your side, it may win over venture capital firms. 

·         Go National – Don’t just think locally for your potential alliances. Think national. As mentioned, the more high-profile your alliances are, the more credibility you get with venture capital firms. 

Don’t be shy or reticent about forming an alliance or two before you approach venture capital firms. Get these types of key strategic business relationships on your side and face the unique challenge of impressing venture capital with your partnership abilities.

Obtaining start up financing from venture capital firms is never a breeze. In fact, many new entrepreneurs and inventors face rejection after rejection when they approach venture capital firms with their new business ideas.  

Getting a “yes” from a VC firm may be a question of approaching them at the right time of your product development.

How do you know when your product is “ripe” for showing a venture capital firm? Here are a few tips:

Innovative New Business Ideas

Venture capital firms like to see innovation in the startups they finance. Brilliant new business ideas that have innovative solutions are a step ahead of someone who is simply reinventing the proverbial mousetrap.

Product Development

How long will it take for your product to get to the market?  For venture capital firms, the faster your product can launch, the better. 

Of course, this doesn’t mean you should race through research and development. However, if you still need many more years of research to turn a new idea into a marketable product, a venture capital firm may give you the “pass” instead of “fund” stamp.

By the same token, don’t be afraid to show your product-in-development to a venture capital firm in order to obtain start up financing. Your product doesn’t have to be perfect. Simply prepare your product to the point where it represents a good prototype that will give venture capital firms a reasonable idea of its use and purpose.

Proprietary Status

Does your product have potential intellectual property rights? Have you filed patents? Or registered copyrights?

The proprietary status of your product or idea can have a large impact on a venture capital firm’s decision. New business ideas that obviously require patent filing, such as unique inventions or improvements on an existing product, should have a patent filed or pending before you approach a venture capital firm. Let them know you have done your due diligence in keeping innovative ideas proprietary and safe from competitors “leapfrogging” your idea.

Don’t let the details of product development be a reason to avoid venture capital consideration, nor let it be the reason for rejection. Get your product ready for presentation, and you’ll have a distinct advantage with your venture capital presentations.

Before you go in front of a venture capital firm, are you ready to explain your exit strategy with them? Venture capital firms are particularly interested in this portion of your long term plan. The exit strategy is simply the way that the venture capital firm will “cash out” its investment at the end of the investment term.

Venture capital firms know that start up financing is not a short-term investment. It is a high-risk, long-term venture, but the rewards are also high if the venture is a success. Indeed, venture capital companies know that they could lose their capital investment in a company as many as seven out of ten times.  However, the few start ups who make it are worth the payoff.

How will your start up’s exist strategy pay off for the venture capital firm?  They already expect to wait between five and 10 years to get their money out, but after that time, the venture capital firm will want to receive money or marketable securities for their trouble.

Subsequently, if you do not have a viable exit strategy, a venture capital firm is not likely interested in making the investment.

What are possible exit strategies? Here are the most common:

• IPO – An Initial Public Offering, or IPO, is the point where a new start up company takes their business public on the stock market. They offer marketable securities in the form of preferred and common stock. The venture capital firm will usually be a major part of an IPO, with a preferred stock holding in your company.

• Merger or Acquisition – An IPO is not always an option. Instead, a small start up may look to be acquired or merged with an existing larger corporation. The buyout will supply the funds to pay back the venture capital firm.

• Reorganization and Recapitalization – Sometimes a small business start up may take longer to achieve success, but the VC still wants its money back.  Therefore, in some cases, it may be necessary to reorganize and recapitalize through other investments in order to pay back the VC and continue with the product research or market saturation process.

• Liquidation – In actuality, the majority of new businesses that receive venture capital start up funding will fail. Your exit strategy, though hopeful for the best, should also plan for the worst with a liquidation plan if the venture does not succeed.

Venture capitalists are not interested in slow-growing businesses. Take heed of their advice and be ready to present a viable exit strategy when you approach a venture capital firm for funding.