Below is an overview of the typical venture capital financing stages and how you can determine which stage your company fits. With this in mind, you can more directly focus your venture capital search for VC firms that specialize in your stage of development.

Seed Stage or Concept Stage

This is the beginning stage of a company. You might consider this stage as the point where an entrepreneur/founder/inventor has a business idea in mind, but has not yet even made a prototype. There is no management team assembled yet.  The company has much product research and market research to perform before it is ready to advance to the “start up” stage.

Funding for this stage is rarely found with venture capital firms. A company needs to have more than just an idea to get close to VC firms. For the most part, seed stage companies find start up financing from friends, family, and possibly angel investors.

Start Up Stage

At the start up stage, a new company has at least the founder/entrepreneur working full time on the company. He or she has other key management personnel filled, but the management team is not yet complete. The product is realized and is at least at a prototype stage. With a product and a focus, the company probably has a legal business entity formed and a business plan.

Start up financing from venture capital firms can happen at this stage, but it is rare. Only a few VC firms usually are interested in an early-stage company financing.

First Stage

The new company at a first stage has a product ready for market and may be earning revenue. The management team is fully assembled and the infrastructure of the company is in place.

Most VC firms will usually get involved with a new company at this stage. Venture capital financing will be used to help boost sales, cut production costs, and perform additional market research.

Second Stage

Second stage companies are in full swing, and their product has penetrated the intended market. Companies at this stage find venture capital to help expand into larger markets, such as national or international markets.

Third Stage or Established Stage

Third stage companies have been operating successfully for at least three years and are poised to capture an even bigger market share. VC financing helps make plant improvements or expansions necessary to create higher production.

Mezzanine Stage or Bridge Stage

This stage is when companies have proven their ability to increase sales and are ready to start the process of going public. Venture capital at this stage helps that process and prepares a company for an IPO.

Turnaround Stage

This stage is not where a company wants to be. A company in a turnaround stage is usually suffering from financial losses and is underperforming. Restructuring is necessary. and venture capital at this stage is used to help get a company with potential back on its feet. Though there are few VC firms who fund the turnaround stage, a company can still find financing help from a VC firm specializing in this stage.

Start up capital is essential for new businesses to succeed.  Unless an entrepreneur has substantial savings to use as start up capital, he or she will need to ask for money. Raising capital for business funding is not easy. It requires a bit of diplomacy, flattery, enthusiasm, vision, as well as a host of other qualities to convince people to part with their money and invest in a new business.

What traits do venture capital firms usually see in successful fundraisers? Here is a list of skills and traits you might need to be a successful venture capital fundraiser.

1. Networking Ability – A successful VC fundraiser needs to have a large pool of potential investors in which to pitch his or her idea. A smart entrepreneur knows the law of averages and will not narrow a fundraising search to just a few possibilities.

1. Targeting Ability – Not only does a successful start up capital fundraiser need a large set of contacts, he or she needs the ability to narrow down a list to the ones who the best candidates. Rather than a ‘scattershot’ fundraising approach, efforts are focused on VC firms who fund new companies similar to the size and scope of his or her new business.

1. Enthusiastic Communication – Finding investors requires an ability to make a pitch to those investors that convinces them of the potential of the new business. An entrepreneur who has passion and enthusiasm in the way he or she communicates to investors will have a better chance of receiving funds.

1. Preparedness – An entrepreneur who expects to receive VC funding never wings a presentation. Every detail of a presentation is practiced and honed until the message is exactly right.

1. Tenacity – Rejection is rampant in the world of VC fundraising. A successful VC fundraiser accepts this as part of the job and begins again when he or she meets a dead end.

1. Patience – No entrepreneur who needs money “now” will succeed. A successful VC fundraiser knows that there is a process to fundraising, including attracting the right venture capital firm, due diligence, and negotiation.

1. Flexible but firm Negotiator – Negotiation requires the ability to be flexible, but also the creativity necessary for the give-and-take of the process. A good negotiator will also recognize a good deal and have the ability to walk away from an unfair deal.

1. Realistic – Though enthusiasm is good, knowing the limitations and risks of the business, and being able to talk about them with venture capital firms, is also essential. A VC firm will easily see through a “smokescreen” of all positives and wants to know that the entrepreneur accepts and is aware of the risks as well.

Should you do this alone? Or should you have someone trained and experienced in legal business entities and capitalization on your side?  Most entrepreneurs are not experienced in business partnership negotiations and are new at obtaining capital. It would reason, therefore, that having an attorney on your side during your venture capital negotiations would serve you best.

Why would hiring an attorney be beneficial? After all, it’s just another expense – and not a cheap one. However, an investment in an attorney may be worthwhile, as he or she will look out for your interests and attempt to negotiate the best terms for you.   

However, this does not mean that you must have an attorney sit with you at the negotiation table. Although some entrepreneurs might choose this option, simply having an attorney available to review the proposed term sheet and offer negotiation advice would work as well.

Here is what an attorney might help you with:

Compliance

One of the most important jobs an attorney will perform for you is to assure that every term you and your venture capital firm decide upon is within state and federal regulations and securities laws.

Realistic goals

Your attorney will help you see reality through your dreams. Most entrepreneurs want to keep full control over their start up company, but start up funding requires that some control be given away to the venture capital investor. An attorney will help advise you of your choices for outside capitalization and keep your feet grounded.

Fairness

An attorney will ask, “is this transaction fair?” An experienced litigator might be able to spot an unfair deal and advise you of your possible reactions.

Explanations

Do you know what an antidilution clause is? Or a conversion provision? An attorney will help explain the terms with which you are unfamiliar and their implications to your business.

Are the rewards of an attorney worth the cost? Most likely. Having an attorney on your side can help you get the best deal possible. Whether an attorney is at your side during negotiations or just available to review and offer advice, this legal specialist is a good investment for your start up company.

1. Management is Everything

In a poll conducted by the authors of Inside Secrets to Venture Capital, venture capital firms were asked to rate the factors they use to determine the value of a potential investment. By far, the top rated factor was the quality of management.

VC firms were asked to rate the factors on a scale of 1 to 5, with 5 being the highest importance. The numbers were overwhelmingly in favor of the management team, with nine out of every ten VC firms rating this factor a 4 or 5. Seven out of ten rated this top factor a maximum of 5. The average rating for management team was 4.5, and no other factor even came close.

What does this tell you? Make the effort to recruit and attract the best possible people for your company. VC firms know the value of a management team who can weather storms and guide a small business to big success.

2. Size of Market

The next most important factor in the poll was the size of the market. The average rating for this factor was 3.8 out of 5.  30 percent of venture capital firms rated this as the highest importance. Thus, it is important for you as an entrepreneur seeking start up capital to find a market that is sizable, yet penetrable.

3. Product Qualities

Product quality was actually third on the list of top importance to venture capital firms. Only 25 percent of respondents said this was top importance, and the average rating (out of 5) was 3.7.

Along with product quality, venture capital firms look at the product’s uniqueness, the brand strength, and potential patent and intellectual property assets.

With these factors in mind, now you have an inside look at what venture capital firms are seeking. Be sure you design your new company with these top factors, and you will stand a better chance of getting a “yes” for venture capital.

Negotiating a venture capital deal can look daunting, especially to a new entrepreneur who has not “gone through the ropes” of the entire venture funding process. Most VC firms realize this fact and subsequently have an upper hand in most deals. However, you can succeed in VC firm negotiations if you follow these helpful tips:

1. Never Negotiate When You’re Desperate for Capital

If you need money NOW, you are at a steep disadvantage at the negotiating table. When you are desperate, you may be willing to give up too much in the negotiations, which means you will be left with a deal that doesn’t benefit your new company as well as you had hoped.

2. Know the Quality of VC Firm You Are Dealing With

You should always ask yourself, “Are these the type of people with whom I want to partner?”  Keep in mind that a quality VC firm provides much more than just funding, and a good partner may be worth giving up some points during the negotiations. A VC firm that can help guide the business growth process is worth its weight in the coins they invest. Ask other startup companies, and check references (they check yours…why shouldn’t you check theirs?).

3. Retain a Good Lawyer

Having a legal specialist in your corner is always a wise choice. Find an attorney who has had previous experience with venture funding. Your attorney will be able to point out potential hazards in a deal and suggest negotiating points.

4. Keep the Big Picture in Mind

It is easy to get caught up fighting for relatively unimportant negotiating elements.  Know which brides you are willing to die on, as well as the ones where you can let the water run their way.  Choose your battles, and keep the big picture in mind – and that is getting the funding you need from an investor you trust.

5. Treat Negotiations as a Partnership

In negotiations, treating your venture capital firm like a partner will have better results than treating them like an adversary. Negotiations should be friendly, but with your points stated firmly. Know that there is some give and take with negotiations. Reaching an agreement will be more satisfying when you consider that the VC firm is there to help you and your company succeed – not to take over your company.

During a recession, skittish stock investors tend to act conservatively with their money, selling stock to put funds into more safe investments that will help retain value, such as gold or government issued securities. Putting money into a new, untested stock company is just another risk that investors are not willing to take.

What 2010 Will Bring

However, according to a recent article from the Wall Street Journal, 2010 looks promising for newer, small company valuations. In fact, the end of 2009 showed a more fair valuation in stock prices than over the last two years.

What does that mean for stock investors?  Stocks are realizing a more accurate valuation, which means that investors are placing their trust and funds back into equities.  Thus, with a higher risk tolerance this year, stock investors may be more attracted to buying stock in new VC-backed IPOs, especially since IPO stocks are typically discounted as a compensation for investor risk.

In addition, venture-backed companies who issue an IPO are typically considered small or mid-cap investments. There is a wide range of investors who do want to invest in these types of stock categories, including mutual funds and larger corporate investors like insurance companies. Small to mid cap venture-backed companies will be of interest to them as they seek to increase the value of their stock portfolios in 2010.

The Growth in IPOs This Year

Just how many new venture capital-backed IPOs could we see in 2010? 2009 saw only 8 such IPOs, according to information from Dow Jones VentureSource. But according to the WSJ article, one expert projects 30 to 50 new IPOs could happen this year. In fact, the Dow Jones VentureSource already has 33 venture capital-backed IPOs filed with the SEC.

So far in 2010 no venture capital-backed companies have made an IPO showing. However, if the data is correct, 2010 could actually see the return of the IPO for venture capital investment companies.

The Reality of 2009

The report shows that investors are becoming less interested in funding new venture capital deals. VC firms raised a total of only $15.2 billion from 120 funds in 2009, down 47% from $28.5 billion from 223 funds raised in 2008.  This was down 58% from 2007 when a total of $36.1 billion was raised from 250 funds for venture capital.

In terms of actual investments made by private investors such as venture capitalists, in 2009, only 2,795 deals were made, with a total business funding of $17.6 billion. Compared to 2008, that number is down 37% when 3.985 deals were made for a total investment of $27.9 billion.

Why Venture Capital Shriveled in 2009

Why has the number of venture capital deals spiraled downward? The economy is a major concern, and investors have certainly reduced their risk tolerance levels. New businesses, despite whether they have a great idea and top-notch management team, are slated to fail with dwindling markets. While few venture capital firms did invest in new businesses in 2009, many voluntarily stayed out of obtaining new investments completely.

Looking to the Future

However, the outlook is promising. According to Mark Heesen, president of the NVCA, “most of these firms will not be afforded the luxury of continuing to wait for market conditions to improve in 2010.” Heesen goes on to project that 2010 “promises to be a defining period as we will gain a better sense as to what the venture capital industry will resemble in the next decade. All signs point to a leaner, more capital efficient asset class comprised of firms with proven track records of delivering value to limited partners. Not all firms will make that cut, but the ones that do will be very well positioned to invest.”

And according to a poll of venture capitalists about the outlook for 2010, the respondents said they expect to see gradual increases in the total amount of investment levels. Areas of expected increase are in “green” technology companies, as well as more venture capital investment in growth companies and later stage companies.

The Profile of VC Funding Today

According to a report published by MoneyTree from PricewaterhouseCoopers, LLC and the National Venture Capital Association (NVCA), the 3^rd quarter of 2009 saw an increase in venture capital funding driven by the clean technology sector. One of the clean tech deals was the ninth largest venture capital deal since 1995.

Not only is clean technology getting more deals, but they are receiving business funding over the long-haul. Mark Heeson, president of the NVCA says that this type of funding is “a gradual and deliberate industry shift towards a longer term venture capital investment strategy.”

This tells us that venture capital companies are looking more toward sectors like clean technology, biotechnology and life sciences, where business funding occurs over an extended period, sometimes 10 to 12 years. These companies often have multiple rounds of venture capital financing over that time period, and they have a longer average time to accomplish its exit strategy.

This is not to say that shorter-term small business investment opportunities will be overlooked. Heesen goes on to say that the mix of sectors that VC firms invest in will become more balanced between shorter-term IT companies, as well as longer-term bio- and clean technology companies.

The Promise of Clean Tech

Clean technology includes companies that specialize in alternative and renewable energy sources, pollution and recycling, power supplies, conservation, and green transportation. These types of companies are founded to produce more energy efficient methods of producing and using electricity, as well as create fuels and electricity with fewer carbon footprints.

Clean technology is seeing an increase in the number of firms due to a variety of reasons. One is the simple fact that most people are interested in clean fuel technology and methods that help save the planet, thus creating a market for these products. Second, the U.S. government also is encouraging clean technology, with tax incentives and guaranteed loans for clean technology companies.

Clean technology is still emerging and is at a young stage. With the help of government backed financial aid and increased business funding from venture capital firms, clean technology may become the most sought-after VC investments.

Although your mission for your startup business doesn’t have to be impossible, it should inspire venture capitalists to learn more. 

Understanding the Mission Statement

A mission statement is often overdone and misunderstood.  Some businesses tend to focus on rhetoric and bullet-point statements that try to state every value and objective of the company.  Unfortunately, a poorly written mission statement does very little to help a company and does even less in helping obtain VC financing.  A business without a mission statement, or a poorly written one, will have a more difficult time convincing VC firms that they are on a mission to make money.

Rather, you should have a mission statement, but one that is succinct and states your company’s main objective or goal.  Your mission statement should be no longer than one or two sentences, which is no easy task. 

The Value of the Mission Statement to Venture Capitalists

Why do VC firms consider well-written mission statements important?  First and foremost, the mission statement succinctly summarizes the ideas contained within the business plan.  Reading these few sentences can prompt the venture capitalists to read more or simply move onto the next company.   

In addition, developing a powerful mission statement can be very beneficial to the entrepreneur and the management team.  In obtaining VC funding, having a clear goal is of the ultimate importance, and a mission statement can help you refine your ambitions into a profitable, achievable endeavor. 

Make sure your mission statement is incredibly clear.  A business who wants to “penetrate the medical technology industry” does not adequately describe how it will serve the industry or its customers.  A broad mission statement will not only bore venture capitalists, but will close the doors to your funding potential.   

Make it easy for VC firms to know what your business hopes to accomplish.  Write and re-write a constructive mission statement that highlights the main point of your business. 

Use your mission statement as a hook for gaining the attention of VC firms. 

Integrity is very influential.  It is at the heart of a company’s culture and values, and VC firms know that a company with high integrity has a better chance at success.

What is integrity?  And how can it influence your chances at VC funding?  Here are some reasons why.

Respect

Entrepreneurs with integrity show respect to others.  Whether or not an entrepreneur is experienced, integrity shows in how he or she respects the opinions, questions, and standpoints of VC firms.  A person of integrity will value differences and engage in constructive debate.  He or she will treat others with respect and courtesy at all times, regardless of age, sex, or business position.  Learn to show respect and you will be respected yourself for your integrity.

Trust

Know that others will want to be in business with people they trust – which holds true for customers, as well as business partners and contacts.  If you have a large network of people who fully trust your business judgment, ethics and policies, be sure to highlight this fact for VC firms.  Your trustworthiness can result in VC financing for your business.

Money Matters

Ever since the Enron debacle, every business and everyone in business is expected to have a higher integrity in regard to bookkeeping.  When approaching VC firms, be sure you have shown your integrity when showing actual sales and expenses, as well as pro forma statements. 

Be Open to Ideas

Integrity sometimes means following a goal to its end.  However, it also means being open to new ideas and suggestions.  An entrepreneur who believes his way is the only strategy to reach his goal is not likely to see any VC financing.  In contrast, one who is open to criticism and guidance based on past experience will have a much better chance at receiving VC funding.

Integrity is often an overlooked character trait, but it is a valuable one that VC firms recognize and want in their investment portfolio companies.  In your quest to obtain VC financing, be sure you prominently display your business integrity to gain the trust of a VC firm.