Are you an entrepreneur with a business idea?  If you need access to large funding amounts to start or grow your entrepreneurial endeavor, you may look to a venture capital firm for seed money.   To increase your chances of securing funding, it is important to understand what venture capitalists seek.    

1. Enthusiasm and Passion

Beyond a great business plan and business idea is the person(s) behind it.  VC firms don’t just lend money to a business.  They invest in a person or team who can make the business work. 

Of course, it helps to have a pedigree of business experience and trail of success.  Showing that you have succeeded in the past or extensively understand your industry is a good starting point.   However, venture capitalists know that the entrepreneurial ventures that succeed are the ones with a leader who is enthusiastic.   You and your leadership team need to be passionate about your business idea and growing your little company to great heights – and have an ability to clearly show that passion to your VC firm.

2. Dedicated Focus

Your experience and passion should also translate into a commitment.  An entrepreneur who is committed to his or her business watches the evening news and determines how events may affect the business.  With commitment comes pinpoint focus and a plan to make it work.  Show your venture capital firm that you have a plan and are focused in achieving your goals.

3. An Exemplary Team

One person does not a business make.  A great leadership team is needed to help lead the entrepreneurial venture in all areas, including finance, marketing, and human resources.  Assemble a team who has proven experience and success in their area of expertise.  A good team will also share your enthusiasm and focus in making the business succeed.

4. Unique Innovation

Highlight your innovative difference to VC’s.  Aside from the people who run the business, venture capitalists also look for innovative issues that make your product or service stand out.  Don’t just create another proverbial mousetrap.  Develop a business product that is not currently on the market or has unique qualities compared to existing products.  You could also develop innovative production techniques or marketing strategies. 

5. An Outstanding Product

Finally, a venture capital firm will want to invest in a business with a great product or service idea – one that will grow into a big hit with consumers.  Only with tremendous growth can a VC firm expect to make their return on their investment.  Make sure you develop a product or service that has big potential for large markets if you want VC funding.

The economy is gloomy – but not so gloomy that venture capital firms are holding off from making investments!  Entering a market segment may be tough to acquire new consumers who are saving more than spending, but VC firms are saying that a good business idea is always a good investment option for them, even in tough economic times.

Experienced VC firms know that there is always consumer interest in a great product or service.  However, a startup company may have a tougher time acquiring VC funding due to the larger amounts of capital needed.   In today’s economy, venture capital firms are choosing fewer startups and focusing only on those who have the best chance at survival.  Many VC firms are widening the gap from startups and investing more in Series A or Series B stage companies that have a proven track record of success.  

Why Business Stage Matters

Startup companies are still in development, adding members to the leadership team, performing market research, and performing product development and testing.  Usually there is no revenue coming in, but large amounts of capital are needed from VC firms to continue the business launch.  Due to the risk of failure or delayed success, and the higher potential of loss on a large investment, VC firms look more toward Series A or Series B financing.

Smart and savvy entrepreneurs should be able to build a team, develop a product or service, and launch their business without the need for VC funds.  Even if it means bootstrapping and raising capital from friends, family, and partners, there are ways to acquire funding to get a business off the ground.

Once a business launches and gets initial traction, there is better potential for success.  Management is in place and employees are working.  Business is coming in, but profit may not yet be experienced.  It is at this Series-A stage that many VC’s will take a look at new businesses and invest with less risk than a true startup.

Series-A vs. Series-B Funding

What do you need in your Series-A business to acquire VC funding in contrast to a more experienced Series-B business?  Hope!  In a Series-A stage, companies have not yet reached their full potential, and therefore, hope for significant profits and growth still exists.    

Series-A funding can help a business take off into breakeven territory and even profitability.  Funds from Series-A financing are generally used to increase productivity, cut costs, build infrastructure, and push distribution and sales. 

With a growing company, a VC firm can receive a greater return on their investment than with an already profitable Series-B company.  If you have hope, you can gain respect by building a company from the ground up and keep the momentum going.  And that hope can translate into a successful VC financing effort.

Your search for venture capital should be focused and directed at particular venture capital firms that stand the greatest chance of helping your business succeed.  Thousands of VC firms exists and are located all over the country.  Each one has specific elements they look for when distributing their VC funds.   How do you choose a potential group of venture capitalists who are most likely candidates for accepting your business proposal?

1. Location

Location may be an important key element for a VC firm.  A VC firm may only invest in companies that are within proximity of the VC headquarters.  It may be 100 miles or perhaps 500 miles.  If proximity is not relevant to a particular VC firm, they may also choose potential new businesses that are only located in larger metropolitan areas.  Know the geographical limitations of your potential VC firm before submitting a business plan for perusal.

2. Sector

What is your business type and what sector will you serve?  Many VC firms have specific business sectors that they will invest in, such as high-technology or healthcare.  When looking at a pool of potential venture capital firms that you would like to pitch, narrow your pool to those that invest in your business arena. 

3. Business Stage

In what stage is your business?  Startup?  Expansion?  VC firms will often specify that they only invest funds in startups, or maybe just in companies who need a money bridge before an IPO. 

A startup company puts the VC firm in greater risk for loss due to the potential for failure.  However, the returns and rewards are better when they do succeed.  Conversely, some VC firms will invest conservatively in already existing businesses with a proven track record, but is ready to make a large growth effort.  Know which stage your business is in and seek VC funding from groups that focus on your stage of growth.

4. VC Partners

Most venture capital firms are financed by investing partners.  Know who the partners are and which areas of experience each has.  By choosing a VC firm with partners who have experience in your business idea, you may have a better chance at getting accepted for funding.

5. Portfolio

Take a look at the investment portfolio of a VC firm.  You may find that they are diversified in a number of different market segments, but some may have primary sectors in which they invest.  Try to find a firm who has invested in businesses similar to yours and were successful.  Good experience in an industry could determine that they will continue investing in that industry with your business.

6. Assets

If you are an entrepreneur with a startup business who needs many cycles of capital funding, take a look at VC firms with adequate assets themselves.  You may need early stage technology development, marketing research funding, startup funding, and then progress onto first or second stage funding.  Make sure your potential VC firm will be able to follow your business along its path of success.

Where will your business be located?  This decision is one that must be made carefully.  The geography of your business headquarters, as well as the state of the legal business entity’s registration, may make the difference in whether your company will receive VC funding.

Many VC firms have specific guidelines and policies that not only determine in whom they invest, but also where they want to invest money.  And it may have nothing to do with your business idea.  A quality business that fits VC guidelines, but not the geography, may not be chosen as a funding option.  Therefore, you should always know in advance whether a VC firm has specific geographical guidelines.

Why is location so important?  Below are some of the typical reasons VC’s have geographical limitations.

The Cluster Effect

Why is it that most software or technology companies are located in the Silicon Valley in California?  Since the late 1990s, tech firms have clustered around the Silicon Valley area.  Giants like Apple and Google are headquartered there.  Some say that the locale provides the best talent, and thus, tech firms have the best chance to succeed in that area.  A VC firm may determine that if they invest in tech or software business, it will be only in the northern California area.

A Balanced Investor Portfolio

Venture capital firms also have investors to whom they must answer.  Investors that contribute money to a venture capital firm want security in knowing that not all their proverbial eggs are in one basket.  Subsequently, a VC firm will balance a portfolio over a geographical range.  If one region of the country hits on hard economic times, other businesses in different areas will pull the slack from disappointing results elsewhere.

State Laws and Regulations

Have you ever wondered why so many financial and credit companies are located in Delaware?  The corporation laws of that state are the most relaxed in the country, and they allow financial firms much flexibility in managing corporate policies and interest rates.  Since interest rate limits that a company may charge are based on the legal state entity status, many financial companies choose Delaware in order to charge higher rates.

The state you chose to register your business can be a key decision.  Like the example above, a financial firm will have greater options if they become a Delaware corporation.  You should determine how your business operations will best succeed in a perfect world of little regulation.  If you discover that the state you currently reside in does not offer the flexibility you require for your business, consider registering it in another state.

Venture capital firms can be picky about what businesses they chose to invest in and in what states they operate.  Usually a VC firm will know the best regions for a particular business.  Take a look at your potential set of venture capital firms and research each one to know what regions they prefer and by what type of business.  Your state headquarters could make the difference in obtaining much needed venture capital funds.

Venture capital is one of the few financial resources a startup or small company can access to obtain large scale funding for growth and expansion.  However, attracting a VC firm and convincing them to invest in your business venture is not easy.  In fact, only the best business ideas with the best people will be lucky enough to receive a nod from a venture capital firm.

Having a great business idea and plan is not always enough.  Entrepreneurs may have a knack for creativity and developing business ideas, but communication and sales may not be their strong point.  An entrepreneur who recognizes this fact will be wise to hire a public relations and communications expert to be the front person for the company.

Benefits of a Public Relations Expert

• Contacts - Experienced PR people have a long list of contacts and networking resources.  They know what media sources to contact when attempting to make a promotional announcement, and may also know the right contacts who may know somebody who knows somebody in a venture capital firm.  Having a wide stretch of network contacts can be a great benefit for a new business.

• Media Coverage – Your PR person can secure beneficial media attention before your business makes a presentation to a venture capital firm.  A PR specialist will have the ability to write attention grabbing press releases that could result in free publicity from news sources.  Positive clips from newspaper interviews or feature stories, or even videos from broadcasted news, can grab the attention of VCs.  

• Great Presentation Skills – The right PR person will make the perfect spokesperson for your group.  Their smile, cheerful attitude, and ability to communicate clearly and answer questions can thrust your business brand and reputation into the right VC hands.  In many new business cases, the entrepreneur is a great central figure for the business model and development, but not always the best choice to make a presentation to potential investors.  Make sure that when you get the chance to present to a VC firm that you choose the right person to perform the main speaking role.

Choosing a PR consultant or hiring a full-time PR spokesperson should be done carefully.  Your PR choice could result in big savings in advertising costs with the right free publicity received from news outlets.  Take a look at PR consulting firms and see if that is the right option.  Sometimes the right choice is to hire a freelance PR specialist who can devote more time to learning your business and have a better understanding when making presentations. 

Insist that you review a potential PR person’s experience and success.  Your PR person should have experience and verifiable results in the areas you need, whether it is in presentations or media publicity. 

Taking your business to the next level may require large funding from venture capitalists.  Consider the possibility of hiring an experienced PR consultant to be your front person and helping make your company look its best.

Part of a good business plan is a plan for exiting the business.  Indeed, even you, the entrepreneur, should have a plan for your business where you will no longer be running it.  If you are looking for venture capital funding, having an exit strategy is even more critical.  Remember, venture capitalists receive the most profits when an exit strategy is realized, such as an IPO or acquisition. 

But what is an exit strategy, and how does one conceive of a sound and strategic exit strategy?

An exit strategy is the plan for an entrepreneur or business owner to exit the business.  An exit could take one of many forms.  The business could be sold, all assets could be liquidated, or the business could go the public investor route with a public stock offering.

Liquidate the Business

Some entrepreneurs form a business with the intention of short term gain rather than a lifetime job and income.  Growing a business to end up with a large equity balance on the balance sheet may be the right strategy for a young entrepreneur who has bigger dreams and ideas.  Once the business hits the equity goal, all assets could be sold and debts paid, leaving a nice profit for the entrepreneur.

Likewise, a business that fails is likely to go this route as well.  If an entrepreneur exhausts all means of trying to keep the business breathing to no avail, the liquidation option may be the best exit strategy to get out without further losses.

Sell the Business

Rather than calling it quits and selling the business assets, an entrepreneur could make an exit strategy to sell the business to an interested party.  This strategy may be good for an entrepreneur who also does not want a long-term commitment to the business, but desires to make a profit from his or her efforts.

Selling a business could either be to another entrepreneur who wants to run a business for himself.  Or it could be a strategy to become acquired by a larger business.  Many small business entrepreneurs have gone this route.  YouTube, for example, was formed by former PayPal employees and was subsequently acquired by Google for $1.6 billion – which is not a bad exit strategy.

Opt for an IPO

The initial public offering (IPO) of a company is what many entrepreneurs aspire to accomplish.  A successful private business that has shown growth and revenue expansion can be highly desired by investors.  By offering the business as a public stock company, the entrepreneur releases his or her ultimate hold on the company and puts it in the hands of a board of directors.  The entrepreneur could stay on as CEO or simply cash out his share of stock options.

Whatever the exit option, a successful entrepreneur will have a plan.  The exit strategy is particularly important if an entrepreneur wishes to obtain seed money from a venture capital firm.  The VC wants to know the ultimate plan for the entrepreneur before investing large sums of money.  Thus, it is important that you develop a sound exit strategy plan for your business.  Though it may not be the ultimate result, it still gives an entrepreneur an alternate goal with the business.

Entrepreneurs who are starting a new business have a big challenge ahead.  It’s not enough to have a great business idea and a perceived market, but a keen entrepreneur will spend a great deal of time evaluating and sizing up the competition.  Having a clear picture of your competition’s business process and product marketing not only will help you develop your own, but also will help in setting your business apart if you are looking for venture capital financing.

Knowing your competition isn’t about squashing them.  The days of industrial revolution monopolies, where killing or buying out the competition in order to be the last business standing, are a thing of the past.  Today, knowing your competition is learning about their message, their product, and their business process so that you can develop a product that sets you apart.  Your business should be able to penetrate the market and work harmoniously along with the competition. 

Becoming familiar with competition not only helps you design your business process, but it also allows you to find ways to form potential partnerships with your competition.  Collaborating on joint ventures is a great way to expand customer base and revenues for both businesses.

Starting with Your Research

Your competition research should begin with the prominent business in your region or even on a national level that sells a product or service almost identical to yours.  Acquire their marketing materials like brochures, catalogs, and website content.  You could even make a purchase from the competition as a “mystery shopper” to gain intelligence on how their customer service functions and the quality of sales service. 

Find the Message

Once you’ve gathered as much data possible, take a look at how your competition delivers their message.  Do they use fancy graphics?  Flowery words?  What is it about the marketing material that attracts a customer to make a call or visit their store? 

If you have data from a number of different businesses, look at how many may have similar messages.  Some businesses try to compete simply by imitating their competition rather than trying to stand out.  Look at the messages from each and determine what works best and what is ineffective. 

Spin Your Own Message

Evaluate how your message can be delivered more efficiently and effectively.  Can you provide better customer service?  Does your product or service have features above and beyond what the competition sells?  Find ways to set yourself apart.  You don’t have to create material that is identical.  Rather, find ways to incorporate what works into your own message that will attract the same type of customer.

Chances are that your business idea is not completely unique.  You will have competition in some form.  If you are an entrepreneur who is looking to expand business with venture capital, you should perform a complete evaluation of your competition so that you know where you stand within your niche – which will allow you to demonstrate to venture capitalists how you will stand apart.

Most entrepreneurs have a very slim chance of obtaining the attention of a venture capital firm.  A VC firm may have up to 5,000 business plans sent to them every year.  In fact, only about 2% of the thousands of businesses who contact venture capitalists ever get a chance to interview and make a presentation.  With this in mind, how can your business be one of the few and the proud that VC firms will ask to present to them?

Getting the attention of VC’s is not as difficult as it may seem.  Just like book publishers want the next #1 bestseller or a movie studio wants the next blockbuster, the same holds true for venture capitalists.  A VC firm wants to lend out money and be part of the next big business idea.  The trick is organizing all your proverbial ducks in a row, having all the “T’s” crossed and “I’s” dotted, and of course, presenting a fabulous business idea.

Have a Stellar Team Lined Up

Your leadership team for your new business needs to have a stellar set of resumes.  Venture capital firms will want to back up a business with a seasoned team of leaders who are experienced and leaders of their respective industries.  It also helps to have leaders on your team who have successful experience in start-up or new businesses.  

Not everyone on your leadership team should have the same background.  Your business needs managers who can generate sales, manage finances, develop new ideas, and handle all the administration of a business.  Assemble a management team that can cover the spectrum of business needs.  Before they feel confident in lending money to your business, they need to feel confident that your leaders can handle the ongoing struggles of growing a new business.

Formulate Solid Financials

If a VC firm will notice your business, they need to see that your financial data is well thought out with solid backup to support projected revenues and expenses.  If your business can show through market research and other data that the demand will grow and revenues will increase, you’ve already secured their attention. 

Your financial data should also be presented so that it is easy to understand and view.  Spreadsheets are nice and organized, but don’t ignore the effectiveness of graphic design.  Use bar and pie graphs.  Make spreadsheet numbers easy to read.  Use bold headings, solid lines between data sets, and keep the matrix relatively small.  No one wants to decipher a chart with 20 or more lines. 

Demonstrate Your Passion

Venture capitalists want to back new businesses that will work and succeed.  If they can see that you and your team are committed and passionate about making your business succeed, they will want to speak to you.  Your passion for your new business will show in the care you take in forming your business plan, your market research and financial data, and the well thought out business idea and niche you will fill.  Show them you have the right assets, and the venture capitalists will give you their attention.

You’ve spent days, even weeks, writing, rewriting and firming up your business plan so that it will shine in the eyes of a venture capital firm.  Even though your executive summary is not the longest section of your business plan, it does warrant a great amount of your attention.  Remember, it is your executive summary that will attract the attention of the reader.

The executive summary is the opening section of your business plan, providing a high level view of your business idea and strategy.  It is what venture capitalists will read first.  Based upon the summary, most venture capitalist firms will decide if they want to know more about a company or simply toss the plan based upon this short introduction.  Subsequently, you should take special care in perfecting the details of your executive summary. 

The details of your executive summary should include:

Mission Statement – Summarize this statement into one or two very clear and succinct sentences.  Every word you use should be chosen carefully so that you present not only the business mission, but the emotion of succeeding in that mission.

Product or Service Overview – What is your business?  Provide a brief overview of what your product or service is and why customers will want to buy it.  Expand the overview to include how your product or service fills a particular niche.

Your Market – Who will buy your product or service?  Let your potential venture capitalist investor know exactly what market segment will be interested in your product or service and why they will buy yours over the competition.

Achievements to Date – If your business has been operating successfully for a period of time, or if you have successfully raised other startup capital, list these achievements in the executive summary as well.  A VC firm will like to know that you have taken initiative in obtaining other sources of capital and that the business has been steadily operating and growing up to this point.

The Obstacles – Every business needs to have a clear and realistic view of the obstacles it may encounter.  That means listing the competition and how you plan to succeed in joining the market segment.  You should also list other barriers to entering the business arena, such as technology patents or economies of scale.

Financial Summary – Briefly entice venture capitalists to read the full financial section.  Chose a few key graphs or charts that show your profit and revenue growth over time.

Management Team – Also briefly introduce the top management team (including yourself) who will be growing the business and making it succeed.  In a sentence or two, explain why they are the best choice to fill their position.

Your meeting with a venture capital firm depends on a clean and well written business plan.  The only way to get a VC firm to read your plan is to make sure they get past the initial business summary.  Spend the time to edit and re-edit your executive summary so that it is the highlight of the business plan. 

So much is written about how to secure the attention of a venture capital firm: how to write the perfect business plan, how to narrow a VC search, and how to assemble a winning team. However, not enough information exists on how an entrepreneur can dissuade a potential venture capital firm’s backing.  To successfully secure venture capital, make sure you do not commit any of the five surefire ways to lose a VC firm’s attention.

1.  Big Ego

Let’s face it: entrepreneurs have to be self confident to bring their dreams to fruition.  However, having plenty of confidence does not mean growing an ego the size of Texas.  Some entrepreneurs actually try to bully VC firms with their presentations, attempting to make the investors feel incompetent if they do not dole out the funds. 

It is important to dance the fine line between being confident and egotistical.  Letting a big ego rear its ugly head will surely signal to the venture capitalists that conflict could be in the future. 

2. Inflexibility

Along with an oversized ego is a trait of inflexibility.  VC firms are in the business of lending money and helping new and ongoing businesses succeed.  They have the experience to know what business processes may or may not work, and venture capitalists certainly have the right to recommend changes to companies to whom they lend money.  An entrepreneur who is unwilling to take direction or suggestion will likely not be on a VC roster.

3. Too Cerebral

It pays to be smart.  However, some entrepreneurs focus too much on the intelligence of their business plan theory and not enough on the practical side of business.  This sometimes happens to fresh MBA grads that hit the world with degree in hand, but lack the real-life experience to understand the practicality of market theories.   Your credentials may all look good on paper, but venture capitalists want to know that an entrepreneur has practical experience and a realistic and flexible outlook.

4. Bad Lineup

Your management team is the group of people who will lead the business to success.  They must each have the resume to instill confidence with a venture capital firm who may want to fund your business. 

VC firms have revealed that one major faux pas entrepreneurs commit is creating a HR roster filled with family and friends who lack the experience necessary to build a company from the ground up.  Be sure that your management team lineup consists of experts in their field, and keep in mind that experience with start-up companies is a great bonus.

5. Too Shy

An entrepreneur with a great business idea will most likely not succeed if he or she cannot effectively promote the idea.  Great entrepreneurs have stellar communication skills and can speak directly to a venture capital group about how their business idea will succeed.  If you’re the shy type who crumbles under pressure, you might want to hire a PR spokesperson as part of your management team.

Successful entrepreneurs must have a shopping cart full of qualities needed to convince a venture capital firm of their potential success.  It’s wise to know your strengths and weaknesses – and a wise entrepreneur will know when and how to make up for weaknesses in front of a VC meeting.