A new business looking for startup financing is likely to have the best chance approaching angel investors rather than venture capital. Angel investors help provide seed money for businesses not yet in the “prime time” of their operations, meaning they are still in product development and have not yet brought their product or service to market.

However, obtaining start up financing from angel investors is still not an easy task. A young business must convince the investor that their new business idea is market-worthy and potentially profitable.

Thankfully, a young business with these three business cornerstones in their bag will find that gaining the attention of angel investors will be much easier.

A Valid Idea

Not every new business idea is worthy of startup funding. Some big new ideas start out quick out of the gate and are good concepts. However, after research and analysis, the idea may fizzle. By contrast, even a mediocre initial idea can become a home run with the right finessing of the concept and market strategy.

To gain attention of angel investors, your business idea must be past any concept stage. You must present the idea with plenty of solid background about how it matches a market need and show research that customers are interested in buying.

A Solid Presentation

A great business idea cannot get very far without a convincing pitch and presentation to a potential angel. How you sell your story to an angel investor is what will set you apart from the other choices.

A solid presentation will include confidence in the presenter, details behind the scenes of management, and a compelling vision packaged into about 15 to 20 minutes. Also be sure to not only practice your pitch, but have answers ready for any potential question that an investor may ask.

Rational Data

The final lynch pin in securing startup funding from angel investors is having rational and reasonable data to back up financial results and projections.

Remember that angel investors are going to choose to invest in businesses with valid data backed up by research. Any “concepts” and “what ifs” do not work in instilling the confidence to send you investing dollars. Be sure that even if you have no previous transaction or income history, you perform the necessary market research and business modeling to prepare a rational projection of sales, income, and expenses.

If you have viewed the Oscar Best Picture nominated film, The Social Network, you may remember the powerful scene when Facebook founder, Mark Zuckerberg’s friend, Eduardo learned he was practically ‘diluted’ out of any substantial ownership of the new company. This was after a number of rounds of venture capital start up financing. The scene is powerful because Eduardo knew that with every stage of new investment, the founders’ equity in the company got smaller and smaller. Ultimately, his ownership share was diluted to less than 1%.

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.

It is essential for venture capital firms to believe that your small or startup business is hitting the right and size of market.  While a management team or new product can be created, a market opportunity cannot, as it must exist.  And if a sizable market does exist, then venture capital firms start salivating.

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.

Entrepreneurs looking for venture funding for their small business or start up are often approaching venture capital firms. And there is no wonder - venture capital firms can offer a staggering amount of money for expansion, marketing, and even IPO preparation.

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.

For entrepreneurs and small business owners with dreams of becoming a large, nationally recognized technology company, venture capital is often an option for acquiring small business funding.

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.

In your quest to obtain startup capital for your new business, you will certainly have plenty of opportunities to present your pitch in front of venture capital firms. However, make no mistake - meetings with venture capital firms are not a 20-questions kind of interview. Venture capital firms expect you to present them with a brief yet detailed exposition about how you will make them make money.

What must you do to design a compelling presentation? Here are a few tips to keep in mind.

Design Your Slides

Your presentation will stand out with visual aids. The most common visual aid is a slide presentation using PowerPoint software. Amateur presenters will be tempted to create a plethora of slides using all the cool animated bells and whistles included with PowerPoint. But refrain from this temptation. Keep slides to a minimum, and don’t go overboard on the “effects.”

Here are a few additional tips for slides:

Stay with the main elements - Your slides should cover the main elements of your business presentation, including: use of proceeds, any special trademark, patent, or proprietary technology, market opportunities, marketing strategy, management team, financial projections, and exit strategy.

No more than 3 points per slide - Too much information one a single slide gets convoluted and confusing. Make your main point on a slide and use not more than 3 bullet points. 

Remember, a successful venture capital pitch is one where the investors remember you.  Chances are they won’t remember your PowerPoint, so think of the slides as just a simple supplementation to the main show: you!

Prepare for Technical Glitches

You want to be absolutely sure that your presentation runs smoothly. Time spent troubleshooting your computer and connecting cables is time you lose with VC decision makers. Like any Boy Scout, you must be prepared for any situation. Bring backup computers, cables, projectors, or any equipment that may break down. 

Practice For Time

Beginner entrepreneur presenters are often gung ho about their business idea, and many of them can talk for hours about their plans, dreams, opportunities, and projections.

However, know that venture capital firms want to get the basic idea of your business, and then they ask questions. Your prepared presentation should last no more than 15 to 30 minutes. Practice your speech and presentation transition so you get the flow perfectly and stay within the expected time frame.

Talk Freely

This doesn’t mean talk without ceasing. It means being prepared with answers to questions presented by venture capital firms. And it means having answers that are honest about your business, including the opportunities and the hurdles you face.

A presenter who has a prepared answer will gain much more respect, and more importantly interest, from VC firms.

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.

You have successfully navigated negotiations with your venture capital firm. Congratulations!

But what happens next? After all the terms have been negotiated, the venture capital firm will draw up a term sheet that summarizes all the important items, as well as the proposed structure of the deal.

A term sheet is simply a summary, and all summarized items will be expanded upon later in the closing documents. While the term sheet is non-binding, it is still used as a document to set forth expectations of both parties until the actual closing.

Included in a term sheet you may find:

o   The total invested dollars provided by the venture capital investors

This may be a single dollar amount, or broken down into separate disbursement amounts at agreed times in the future.

o   The target date for closing the venture deal

The closing for venture capital doesn’t happen overnight. Due diligence is still required. Usually the closing is set on an average of 60 days from the date of the term sheet.

o   The division of capitalization of the company

This is where you will see who will own what part of the company after the closing occurs. For instance, a venture capital deal might require that they own 55 percent of the company, and the founders will retain a 45 percent ownership stake.

o   The type of security the venture capital firm will eventually own

If the goal is an IPO, the venture capital firm will clarify up front whether they desire to own preferred stock, common stock, or perhaps convertible debentures.

o   The number of shares

In addition to the type of stock, the venture capital firm will outline how many shares it requires to purchase up front at the IPO.

o   Dividend distribution

The term sheet may also set forth how future dividends are to be paid to the venture capital firm as stockholders.

o   Distribution of sale proceeds

If the company is sold prior to an IPO, the term sheet also will explain how final sale proceeds will be distributed to both founders and venture capital investors.

Though the term sheet is not a binding document, it is created as a reminder of the terms agreed up on in negotiations. With the term sheet, all parties have a clear understanding, and there are no disagreements up to closing time.

As a matter of need, entrepreneurs with a great business idea and a start up company want money immediately to continue on the journey to success. However, a venture capital firm who is willing to invest in a new start up company also has a need to be thorough in its due diligence. Thus, there exists a division of practicality between the wants of an entrepreneur and the needs of a VC firm.

Entrepreneurs who fail to understand this practical funding timeline also are likely to fail in their business. Budgeting time for venture capital investment funds to arrive to the bank can prevent many mistakes along the road to capitalization. How can a new business survive if existing capital is almost on empty before applying for venture funding?

After getting an approval from the VC firm, how long do you wait before obtaining venture capital funding? The answer is always, “it depends.”  

If you ask an entrepreneur how quickly they expect VC funding to arrive at their bank, the answers are not surprising. According to a poll conducted by the authors of the book, Inside Secrets To Venture Capital, entrepreneurs answered:

Time to Closing       Entrepreneurs’ Response

Under 30 days           22%

30-60 days                  25%

60-90 days                  20%

90-120 days                15%

120 days or more       18%

In contrast to the answers provided by entrepreneurs, the same question was posed to VC firms about how long entrepreneurs should expect the funding process to take. Here are the results of their responses:

             Time to Closing        VC Firm Response

Under 30 days             1%

30-60 days                  18%

60-90 days                  45%

90-120 days                26%

120 days or more       10%

You can see the chasm separating entrepreneurs’ expectations and the VC firms’ closing reality. Almost half of entrepreneurs expect to receive funding in 60 days or less, while the actual average funding time is between 60 and 90 days.

However, when VC firms were asked about their quickest funding time, 80% responded that they were able to fund in less than 60 days, and 41% were able to fund in 30 days or less.

The point is clear. Entrepreneurs should budget plenty of time to obtain venture funding. Never wait to the last minute to approach VC firms. You never know when you’ll receive a “yes” answer, and then you can expect at least 2 months or more before funding arrives.

How far has your start up company developed? Are you ready for an IPO on the stock market, or are you still in a product development and information-gathering stage? Knowing your stage of company development can be beneficial in understanding where to look for venture capital start up financing and raise capital that is needed to advance to the next stage.

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.