Obtaining start up capital for a new business idea is one of the first priority goals to simply get the business off the ground and rolling at full speed. Bank loans and family investors can help, but an entrepreneur who can finance his or her own way is extremely rare. Venture capital funding can infuse not only money, but valuable strategy advice for success.

Convincing a venture capital firm to fund your new business is a tough task indeed. VC firms are highly selective, but the right strategy to help sell your business idea will give you an edge in convincing those with the money to lend some to you. Here are a few ideas:

Business Plan

Without a doubt, a focused and refined business plan is essential to get the attention of venture capital firms. The business plan is a concise document that is the blueprint of how a business will move forward and succeed. It includes management profiles, sound marketing strategies, and reasonable financial projections.

Business Proposal

Selling a new business idea to venture capital firms requires not just a solid business plan, but also a brief business proposal. The business proposal is also a concise document that acts as the initial “pitch” to a potential venture capital firm.

The business proposal must present an educated request for capital based on sound research, experience, and prior studies. The proposal absolutely cannot be a request for money simply because your business idea is the “next best thing”. A venture capital firm will look for backing evidence that an idea is marketable, statistics on customer acceptance, and a realistic competitive strategy.

Presentation

If you are one of the chosen few who pass the initial venture capital proposal stage, you will then be asked to present your idea in person to the firm’s decision makers. Be advised that a live presentation should include a highly edited and concise PowerPoint presentation slide show and a polished verbal pitch with preparation to answer tough and direct questions.

You can convince venture capital firms that your business deserves their financial backing. However, to do so requires your attention to the details of your business idea, and how you present your ideas to the VC firm. Get your metaphorical ducks in a row, polish your presentation, and you will have a much better chance of getting the attention of VC firms.

What does it take for a business to make the narrow cut and find themselves on the short list for angel funding? Here are a few important status milestones you

A Dream Team

Even an average business idea can be wildly successful with the right leadership team behind it. Angel funding groups and venture capital funding will scrutinize the management team on their prospects. They will look at the quality of the team in terms of years of experience, industry track record, and particularly other experience with successful startup businesses.

The Right Market

A fundable startup company will have the details of the market to prove to angel funding groups or venture capital funding that a market exists, and that it is not too big or too small. The market projections should be found within both the business plan and the business model so investors can see details of market research and how the market will be reached.

Industry and Geography

Before you submit any type of proposal for angel funding or venture capital funding, check the details of the venture capital or angel funding group to be sure of what types of companies they are interested in. These specs can normally be found on widespread venture capital or angel funding data bases, on their websites, and on their printed materials.

Start up funding groups tend to narrow their scope by industry and/or geography. If your start up business is not in either category for the funding group, don’t bother wasting their time or yours.

Believable Financial Projections

Angel funding groups and venture capital funding firms have seen enough loosely based financial projections to spot the unreasonable and even laughable ones right away. Your income projections should be based on past experience, or at least on a reasonably similar business model within the industry. It should clearly state reasonable gross margins of at least 50% and rational profit projections. Don’t display outrageous net profits of 20% or more – it will get your proposal tossed out immediately.

A new start up business can get financial backing from angel funding or venture capital funding. Following the above four milestones is a must in order to be considered a “fundable” company.

Venture capital also experiences trends with certain investment markets. Experienced venture capital firms are wise to take note of which businesses and industries are more likely to succeed, and which investment opportunities are the best places to place their available funds.

2011 was a big year for venture capital. Since 2008, venture capital funds dwindled due to a shrinking economy. However, results of 2011 showed a 22% growth of total funds invested compared to 2010. And 2012 looks to be a banner year for investment opportunities in new businesses.

What are the hottest trends for venture capital funding in 2012? Here is a look at three of the top industries venture capital funds are looking at.

Software as a Service (SaaS)

Software is still hot, but instead of the old traditional method of buying software from a box at Office Depot, or even downloading code from an internet source, software companies are delivering their “product” through their own servers.

SaaS has been a growing sub industry of technology sub-industry ever since the advancement of lighting-speed internet. Clients can simply log on to a software vendor’s site, create an account, and experience the benefits of the software function.

Venture capital firms are finding that SaaS is a hot investment opportunity. If you are a new business in software development, consider SaaS as a possible option to catch the eye of venture capitalists.

Big Data in Information Technology

Information technology and security companies are receiving a lot of attention from venture capital firms. In the second decade of the 21^st century, the collection and storage of electronic data is more important than ever.

Industries such as health care and social media are big users of data. Companies that develop newer and more efficient database management tools that help with the collection, storage, and retrieval of large amounts of data will find their way into the good graces of venture capital firms.

Social Mobile Technology

Facebook has announced it will go public with a $5 billion IPO. Who says social media doesn’t pay? With the hundreds of millions of smart phones in users’ hands, and the myriad of new Android phones and Apple iPhone Siri, phone clients are looking to go mobile and stay there.

If you have a company that is able to tap into the mobile social media application market, you will be a hot player for venture capital in 2012.

It is no secret that venture capital firms invested much less in 2009 and 2010 than they did in prior years. This was largely due to the economic climate change. However, 2011 proved to be a year of growth and prosperity for venture capital firms. Here are a few interesting statistics about the year in review, as published by the National Venture Capital Association (nvca.org).

Investing Trajectory Examined

While 2011 did not see a large increase in the total number of deals (3,673 compared to 3,526 in 2010), the amount of total VC investment increased 19% from $23.2 billion in 2010 to $28.4 billion in 2011. That is more total investment that even in 2006, when the economic climate was booming.

Of those deals, 96% of venture capital funding went to businesses that were past the “seed” stage and into early stage, expansion, or later stage of their development. This was a change from previous years when VC firms planted almost twice as much seed money in new businesses in 2010.

With this trend, it seems likely that new businesses that are still in the “concept” stage will have tough competition for VC dollars. However, if your business is beyond first base, then you are more likely to hit a home run in raising VC.

First Time Deals on the Rise

Companies that are looking for first time venture capital funding can smile at the news that first-time deals rose 12% from the previous year to $5.0 billion. Looking ahead to 2012, new businesses with a solid record and an optimistic future can certainly catch the eye of venture capital firms.

The top three industries that received venture capital funding in 2011 were Software (with 24% of total funding), Biotechnology (17%), and Industrial/Energy (12%). These industries, along with medical devices and equipment, IT services, and media and entertainment, look to be continuing hot investment opportunities for venture capital firms.

Geographic Hot Spots for Venture Capital

Finally, where does the money go? California is still the hot spot for venture capital funding, with the Golden State raking in 48% of total VC investment funds. While CA is known for technology and software out of Silicon Valley, New York is now #2 with 10% of total funds. The trend in NY state is new internet companies who have found a welcome home base on the East coast.

2011’s numbers prove promising for companies who are growing, and we think 2012 will prove to bring good tidings as well for entrepreneurs.

1. Prepare a Comprehensive and Well-Researched Business Plan

2. Establish Your ‘Dream Team’

3. Prepare for Your Interview(s)

A business plan and proposal letter are only the means to getting an invitation for a comprehensive interview. Be prepared to ‘wow’ a VC firm with your preparation. That means designing a 5-10 minute presentation that you have practiced over and over.  It also means being prepared with answers to tough questions about your business venture. An unprepared entrepreneur will quickly see a closed door.

4. Identify The Proper Venture Capital Firms

What is dilution and how can you avoid getting ‘diluted’ out of your proper share of a start-up company? Consider a cup of water with a few drops of food coloring. You can easily see the coloring in the water. However, after adding three more gallons of water, the color of the water is diluted so much that you can hardly discern it at all.

The same thing happens when more and more money is invested in a start-up company. The more a venture capital invests start up financing in a business, the more equity they will claim in the company and dilute the founders to a less substantial position.

What can you do to assure that you and your co-founders of a start-up company are not completely diluted? Here are a few tips.

Ask How Much Dilution is Likely to Occur

When working with venture capital firm for your start up financing, be completely upfront and ask how much dilution may occur. This is especially important if you expect at least three rounds of start up financing.

The more successful your start up company is, and the more value it gains with each stage of start up financing, the better off you’ll be. However, do realize that if your business value remains about the same or even decreases, your amount of dilution will increase at a dramatic rate.

Obtain a Dilution Schedule

It is perfectly within your right to obtain a dilution schedule. A dilution schedule is simply a matrix listing each current ownership interest, including yours, your co-founders, mangers, and the venture capital group(s).

The matrix should also list all the series of start up financing A, B, C, etc, plus any convertible notes, warrants, common stock, and any convertible preferred stock. The total amount of equity interest for each party should add up to 100%. Double check the math and be sure to discuss any dilution that seems out of the ordinary.

Your start up business may not grow at the rate that Facebook did when it first hit the market. However, even so, you need to protect your equity interest and avoid over dilution.

However, don’t get over-zealous and lay down unrealistic market opportunities. Venture capital firms want to see a sizable market, but it must be realistic.

Avoid Overstating Your Intended Market

It is very tempting to say you are entering a “300-billion a year” software industry. And simply stating that even penetrating 1/1000^th of that market will lead to riches. However, that is far from the truth. You must be clear to venture capital firms that within that market, Microsoft applications takes up a great percentage. And after bypassing all the gaming software, financial software, and other popular consumer software, your little database program aimed at the bartending industry is only a very small portion of the overall “software industry.”

Use Published Facts and Figures Pertinent to the Market

Let your venture capital investors know the particulars of your intended market and industry. Don’t be afraid to use statistical reports from reputable research companies and from name brand industry leaders such as the Dow Jones, Forbes, Wall Street Journal, or Bloomberg.

These kinds of business or industry reports can give you leveraged data to help persuade venture capital firms that your market is growing. Cite growth percentages and emphasize actual market numbers. This will help give credibility to your intended market segment.

Identify Changes and Trends

You may be able to persuade venture capital firms that a particular market is trending. By using the above strategy of published statistics and reports, you can use your power of analysis to study trends and make your own educated and professional market projections. And if you have created new business ideas to take advantage of early trends, you could score with venture capital financing.

No matter how good (or improvable) your new business ideas are, you must convince venture capital firms that a market is or will be in place. Use targeted market segments, recent reports, and your own valuable trend identification to help VC firms get the picture of your business success.

Venture capital firms are often contacted first through an introduction letter and an executive summary. If the venture capital firm wants to know more, they will usually ask to see the full business plan and set up a meeting if the plan is attractive.

However, getting that first executive summary past the initial contact stage is never easy. Entrepreneurs should be advised to pay close attention and polish the executive summary to the point that it gleams.  

What are the typical mistakes that can cost the entrepreneur any further meeting with the venture capital?

An Unclear Executive Summary

Both venture capital firms and entrepreneurs agree that the biggest mistake on an executive summary is an unclear one. Many executive summaries are verbose, lengthy, and unfocused.

A venture capital wants a clear understanding of the new startup company, and clarity can be presented in a brief fashion. Entrepreneurs must succinctly articulate their company’s purpose and mission in a few sentences, or risk losing a VC firm immediately.

Too Long

Many executive summaries ramble on through paragraph after paragraph of mental regurgitation. The executive summary is not meant to be a detailed document. By its name alone, you can figure that it should be kept as a brief and concise summary and expanded in the full body of your business plan.

Unrealistic Valuation and Financial Projections

It is easy to imagine a startup company being successful and toss in desired growth statistics to match an entrepreneur’s imagination. However, to acquire venture funding, you must be realistic in your current business valuation and financial projections.

You will lose credibility with venture capital firms with numbers that are too high on expectations, or even too low on current cash needs.

Lack of Management Discussion

Too many entrepreneurs and beginning business owners talk too much about their product, and not enough about their own management team. It may surprise a lot of entrepreneurs, but venture capital firms place a high amount of emphasis on the management team, sometimes over the product itself, as to whether a startup company will succeed.

Your executive summary is the first point of contact with venture capital firms. Make it count. Avoid these costly and critical mistakes and polish your summary so that VCs will be clamoring to learn more.

It is tempting to use a “shotgun” approach to finding venture capital firms by shooting your business plan to every VC firm in every directory. But you would do better for your new fledgling company by researching and prequalifying venture capital firms before you send them your winning business plan.

What method should you use to target the right list of business investors for your company? Here are some common ways to properly prequalify VC firms.

By Industry

While there are a few VC firms who have a broad range of diversification, most will specialize their investments in specific industries.

Why do most venture capital firms avoid diversification when conventional wisdom calls for investments in many different areas? Business investors are not like stock investors. They find that their investments do better when they specialize in certain industrial niches.

What are the more popular VC firm industries? According to the 2010 MoneyTree Report, the most venture capital money was invested in the following top 5 industries:

1. Software
2. Biotechnology
3. Industrial/Energy
4. Medical Devices and equipment
5. IT Services

But don’t let this get you down if your new company doesn’t fit in one of these segments. The report also listed the following industries popular for business investors:

By Region

Many business investors find that investing in new business in their region work well for them, especially in regions where major business development takes place. Consider the Silicon Valley where literally thousands of software and technology companies have started. Other popular regions include New York, New England, and the Southeast.

But don’t despair if your new business isn’t in one of these regions. There are plenty of venture capital firms in all other regions who like to invest locally. Research the ones in your area and find those that may be interested in your business idea.

By Stage of Business

Many VC firms like to invest in companies in a certain stage of development. Consider these stages:

• Seed financing – Companies needing to perform market research
• Start-up financing – Companies looking to begin production
• First, Second, or Third Stage – Companies open for business who have little or no revenue (1^st), some revenue and other investment sources (2^nd), or profitable and looking to expand (3^rd).
• Bridge – Companies looking to go public within 12 months

Find where your business fits and look for business investors who specialize in that stage of development.

Finding your ideal venture capital partner can be much easier if you know which ones to look for, and know which ones are looking for you.

However, venture capital firms are not in the technology industry; they are in the finance industry. Thus, a venture capital firm will more likely look at a small business in terms of market potential, executive team, and previous financial management - and not just focus specifically on technology, even if it is superior.

But that doesn’t mean you should avoid identifying and fully disclosing your technology risks with a potential VC firm. They will expect it. So what kind of risks exist? And how do you identify them?

Product Development Stage

Many small technology companies attempt to acquire venture capital way too early in the venture capital process. If your company is still in the beginning stages of product development, there is a much larger risk for both you and the investing venture capital company. On the flip side, the further along in the product development stage, the better off you’ll be.

If you have a prototype that has been tested, and even analyzed and improved an efficient manufacturing process, you will have significantly less risk and be more attractive to venture capital firms.

Product Acceptance

You may have a product with superior technology, but why will customers purchase your product? And if similar products exist, why will they purchase yours over the competition?

These types of questions must be answered. Venture capital firms love superior technology, but they also understand that it must be marketable and have some advantage to acquire a large market base.

Failure to Commercialize

If you already have a product on the market, a tremendous risk exists if you are unable to fully penetrate the market. Your product must be marketable to the point where you generate enough revenue to exceed fixed costs and earn a large enough gross margin to make a profit. And commercialization is the way in which you capitalize on your superior technology with customers.

Proprietary Measures

Do you have proprietary technology? If so, if could be at risk of competitive espionage, or simply of commoditization when other companies try to copy your superior technology.

Be sure you take all measure to protect your proprietary and intellectual property. That includes:

?  Patents - Be sure to patent and protect your technology from copycats. Register your products with the US Patent Office.

?  Copyrights and Trademarks - If you have intellectual property, be sure to protect your property and trademarks with copyrights. For instance, the Walt Disney Company vehemently protects its intellectual property. Don’t even think of placing the famous mouse or any other protected character on any of your products. And be just as vigilant with your own. No one should use your intellectual property to make money without your permission.

?  Non-disclosure agreements - If you are afraid of espionage, don’t hesitate to use non-disclosure agreements with those with whom you share information. The at least gives you some recourse should your proprietary technology be released without your permission.

Identifying your technology risks can be a challenge, but by doing so, you ensure that a venture capital firm is fully aware of the challenges you face.