Raising the large amounts of capital needed to grow a new technology company is one of the hardest challenges faced by entrepreneurs.  Though financing can be acquired through angel investors, traditional bank loans, and other private investors, the large amounts of capital and resources needed for fast-paced growth are usually only found among venture capital groups. 

What can you do to increase your chances of VC funding?  Here are some questions to ask of yourself and your business to be sure you are ready to approach and present to VC firms.

1. Do I Need VC Funding Yet?

Many startup companies are not yet ready for VC funding.  Though there are small numbers of VC firms who provide seed investments in smaller startups, if you need first round capital financing, you may want to hold off on approaching VC firms until your company is past the market research and product testing phase. 

Most new companies go through three different sources of raising capital, which includes seed money, 2^nd round, and 3^rd round financing.  Seed capital can be found among angel investors and other private investors.

2. Do I Have the Right Leadership Team?

VC firms are hard-nosed when it comes to investing large amounts of capital in new and high-growth businesses.  They want experienced leadership in the company that will lead it to successful profits and possible IPO status.  Be sure you have the best and most experienced management team you can assemble before you approach venture capital firms.

3. Have I Studied My Competition?

Many entrepreneurs do not pay enough attention to the existing and potential competition in the industry or niche in which they want to enter.  However, you can be sure that venture capitalists will want to know all about your competition and how you plan to beat them, or at least gain a substantial market share to become profitable.  And that leads to asking yourself…

4. Have I Studied My Market?

A great idea goes nowhere without a market to buy it.  VC firms want to know that your business idea fills a niche within an established industry or market.  Many entrepreneurs fail to completely and fully research their market, especially in terms of a national or global scale expected of VC portfolio companies.

5. Have I Fully Revised My Executive Summary?

Your business plan is the document that will get your in front of a VC firm.  However, in order for venture capitalists to ask for your business plan, they will usually look first at your executive summary, which is a short version of your entire plan.  A well-written and many-times-revised executive summary has a better chance of getting the attention of VC directors.  Write and re-write your executive summary until it reads smoothly, is succinct, and provides the intriguing details of your business.

Entrepreneurs are often chomping at the proverbial bit to get in front of venture capitalists to ask for large amounts of capital.  However, the ones who are successful and receive a VC firm’s consideration will be the cool-headed business owners who ask the right questions before approaching venture capitalists.

In March of 2009, the tech stock trading group, NASDAQ, approached the SEC to request rule changes that would allow them to open an unregistered venture capital market.  The new unregistered market would allow qualified institutional buyers (QIBs) and accredited investors to trade ownership stakes in startup and fledgling pre-IPO companies. 

The rule that that NASDAQ is attempting to modify would open safe-harbor exceptions to accredited investors as well as QIBs.  Currently, accredited investors may trade on an unregistered market, but may not resell for six to twelve months, creating potential liquidity hardship.  The safe-harbor rule extension to accredited investors would provide better liquidity and transparency to venture capital markets.

Where Did All the IPOs Go?

The last few years have proven to be a detriment to the IPO market.  Since many startup and seed companies backed by venture capital have an IPO exit strategy, the VC industry has suffered in this vital U.S. economic industry.  In fact, only one venture-backed company has made an initial public offering on the NASDAQ over the last 12 months!

Some experts say that many VC firms are still investing in startup companies but avoiding an IPO by simply selling them to already established and larger public companies.  That may not be what many entrepreneurs and business startups had in mind when they approached the VC firm for capital financing, but with most VC firms taking a majority stake in startups, entrepreneurs usually have no choice. 

What NASDAQ is Attempting to Accomplish

With the rule change in the unregistered market, accredited investors, such as VC firms, could have more freedom in exchanging securities and have much more liquidity help.  It does not, however, fix the problem of attracting retail investors needed for small cap market stocks. 

The SEC has shown to be receptive to changes in regulatory rules in order to improve the market for smaller companies.  During the last few years, the SEC has adopted changes in trade rules that were recommended by smaller business and the small business trading community.

How the New Rule Could Benefit the Economy

The new trading rule changes could ultimately help the economy.  Since the decline of the IPO market, there have been fewer economic drivers to replace the lost investment engines.  The fact is that in 2008 venture capital returns outperformed both the NASDAQ and S&P 500 indexes.  While the public trading indexes saw losses of around –22%, VC saw positive, though modest, returns in early seed and later stage VC companies.

A freer unregistered market would open up more trading in pre-IPO companies.  Since VC backed companies have historically been a major driver of the NASDAQ market, it is important to maintain ways to continue the capital formation of new companies and enhance trading in capital markets.

The list of entrepreneurs who want to start a business and obtain venture capital financing is almost endless.  And the number of different types of businesses and industries are almost as numerous.  However, a savvy entrepreneur who wants to get a hefty check from a venture capital firm will look closely at the main industries in which these firms like to invest.  Here are the top 4 industries VCs invest in, according to PricewaterhouseCoopers (PWC):

#1 - Software

Even since the dot com boom and bust in the early 21^st century, VC firms continue to be most heavily invested in software companies.  However, no longer are unproven business models the norm, nor are the large amounts of total capital invested.  New and emerging software products, whether internet based or custom installed, must have a niche market or be able to obtain a good share of an established market. 

In addition, according to the PWC study, the tens of billions of dollars invested in the software industry in 1999 and 2000 have dwindled to only $5.5 billion in 2007.  And despite slow and steady growth in VC investments since 2003, it appears that the stagnant economy will present a drop in total 2008 and 2009 investments.  Only $4 billion was invested in software companies by the end of 3^rd quarter 2008. 

#2 – Industrial/Energy

The number two VC invested industry is the only one continuing to grow through a down economy.  $3.2 billion was invested in new energy technologies in 2007, and already before the end of 2008, $3.6 billion was invested in new energy technology companies. 

The growing concern for the economy and the larger demand for “green” products have fueled this industry, and venture capital firms are taking note of the potential profit rainfall with new energy companies. 

#3 – Biotechnology

Although still one of the top four VC industries, biotechnology fell the hardest between 2007 and 2008.  $5.2 billion was invested in biotechnology firms in 2007, but by end of the 3^rd quarter of 2008, only $3.6 billion was invested. 

Biotechnology firms use biological substances to perform specific industrial or manufacturing processes, such as pharmaceuticals, bulk food production, and the bioconversion of organic waste.  Despite the drop in VC financing, the biotechnology industry is still expected to continue its high growth.

#4 – Medical Devices and Equipment

Dropping from 3^rd place in 2007 to 4^th in 2008 is the medical industry.  New technology for medical equipment and devices dropped in demand in 2008.  It appears that the economy has affected existing companies who currently produce new medical technology, with many corporations laying off workers in order to navigate through the struggling economy.   However, even through tough economic times, the medical device and equipment industry still is strong.  Venture capital firms invested about $2.8 billion by end of 3^rd quarter 2008 into the industry.  This amount is far ahead of the next straggling industries of IT Services and Media & Entertainment, with only $1.5 billion invested by 3^rd quarter end 2008.

Entrepreneurs who are most likely to obtain VC funding should take a look at these popular industries.  Venture capital firms invest more in these top four sectors than all other industries combined.  And despite the lagging economy, these industries still look to be the top four for 2009.

Many entrepreneurs have a great business idea, but need some advice and a little encouragement on how and where to get venture capital.  And given that the venture capital community is tight knit, you often need to include venture capitalists in your network to secure funding. 

Where else can a newbie entrepreneur get great advice than at a VC conference?  VC conferences are held around the country, and they are particularly popular in California.  At each conference, hundreds of entrepreneurs show up with their best suits on and copies of their business plans in hand seeking advice on improving their chances at Venture capital.

What kind of valuable information could you obtain at a VC conference?

Seminars and Workshops

At each conference, there will be a wide range of seminars that are usually hosted by VC investors who give advice on certain topics.  Here is just a sample of what you can attend:

• Keynote Addresses – At every VC conference, there is usually one or more keynote speakers from major venture capital companies.  Their speeches can be invigorating and encouraging, offering great advice to attendees.  Hearing the best advice straight from the horse’s mouth is one of the best ways to pinpoint your strategy for approaching a VC firm.

• Early Stage Capital – You might find that a workshop on early stage or startup financing can be very helpful.  If you’re an entrepreneur with a startup business and are unsure of your next steps you need to take before approaching a VC firm, attend one of these workshops and get some valuable advice.

• Pitch Coaching – VCs receive a lot of pitches from an infinite amount of entrepreneurs.  They know what works best and what they want to see.  Find out how you can formulate your pitch strategy in a workshop that offers coaching on your pitch presentation.

• Panels – Oftentimes VC conferences will have a professional VC panel Q & A where you can ask and hear other entrepreneurs ask important questions about Venture capital.  These panels not only are a great way to get answers, but a perfect place to network with other entrepreneurs and VC investors.

Network with VC Investors

Your time at a VC conference could lead to face time with important VC contacts.  There is usually time built in to a VC conference for hobnobbing and schmoozing.  Get in and introduce yourself to VC attendees.  This is a perfect time to practice your “elevator pitch,” where you introduce yourself and a 60-second or less pitch about your business.  Get advice, get contacts, and get remembered.  But don’t get remembered as that pushy guy who hogged all the time with VC representatives.  Be professional and considerate.

Low Cost

The best thing about VC conferences is that they are extremely affordable for the information and contacts you could gather.  For around $75 to a few hundred dollars, you can get access to valuable information that could lead to millions invested in your company.  Plus, the cost of attending is tax deductible!

If you’re like many entrepreneurs who have a great business idea, you may have approached a venture capital firm with a proposal for additional capital financing.  And like many entrepreneurs before you, you may have been rejected before you even met face-to-face with the people at the VC firm.  Getting a rejection from a VC firm is not necessarily the end of road, nor should it stop you from continuing to pursue venture capital.

Your rejection can lead to keen insights in what you and your business need to do to improve chances of receiving a “yes” vote from another VC firm.  But in order to get access to those insights, you need to approach the rejecting VC firm and ask for feedback.

Why Ask For Feedback?

A VC firm typically has deep experience in knowing what business models work and what doesn’t.  After all, they are in the business of helping companies succeed.  Their experience can provide valuable information to you in how to present your idea in a better light, or at least on how to improve your business model so that it will look attractive to VC firms in the future.

A venture capital firm’s reason for passing on your proposal may help you discover how your perspective differs from other professionals.  You may find out that your “great” business idea is not so great after all, or it has already be tried, tested and saturated by other entrepreneurs before you.  You may want to re-evaluate your business idea and find other ways to make it innovative and fill a niche.

You also could find out that your business strategy does not align or match up with that particular VC firm’s investment portfolio.  In that case, you may want to review your list of potential venture capital firms and re-evaluate which ones to approach next.

Ultimately, you may learn that your business idea and business growth strategy does not fit with the high expectations of a VC firm.  You may want to re-evaluate other capitalization options other than VC firms in that case.

How to Ask

You need to approach the firm and tell them you are interested in their feedback.  VC firms are not in the habit of providing feedback and constructive criticism to rejected entrepreneurs.  For one thing, they are far too busy.  Another reason is that they know that entrepreneurs may not take rejection and criticism well, and subsequently, they do not make a practice of providing it.

However, it is likely that you can get some positive and constructive information if you only ask.  Be sure to be polite and always remain businesslike.  Your attitude will be a key in whether a VC provides feedback or not.  You can ask by email, a business letter, or a phone call if you feel it is appropriate.

What Not to Do

What you should avoid is being rude to a VC firm that has rejected you.  Remember, it’s nothing personal.  It’s just business.  Leave your pride behind you.  And don’t continually bother or pester a VC firm if they do not respond or have refused to give you feedback.

Your business idea is your brainchild, and you should be ready to nurture it into the business that you dreamed.  Asking for feedback in order to make better decisions and improvements is never a bad business idea.

Congratulations!  You’ve been chosen to meet with a venture capital firm based on your business plan and proposal.  Getting that face-to-face meeting is a critical step in securing venture capital to fund your business.  When you meet with a group of venture capitalists, remember that first impressions are important.  How should you introduce you and your team to a VC firm?

Be Prepared

First, be sure that you and your team are prepped before meeting with a VC firm.  That means practicing your individual pitches with each other, getting the timing down, and answering all anticipated questions.  You don’t want to waste the time of the people at the VC firm.

Keep It Short and Concise

You will probably be asked about your background, as well as the rest of your team’s experience.  Each of you should be ready to give a short but concise summary of your expertise and background.  Tell them your name, your position in the company, and give brief but important one liners from your previous positions. 

For example, you might say, “I’m Steve Jacobson and I’m the founder and CEO of our startup.  Previously I was VP and head of development at TechWare Software, where I spearheaded the development of a database program that led to more than $500 million in sales.” 

Though you want to keep your background short and concise, you still want to highlight the major achievements you’ve made.  Feel free to take more than 30 seconds, but no more than a few minutes, to point out why you’re the best person for the job.  Your quick, high-level background will give the venture capitalists a bearing on your qualifications.  They will also be judging you based upon how you interact with them and your team throughout the presentation. 

And remember, though you are there to convince a VC group that you are qualified to lead your business idea to great success, your main objective is pointing out the business itself.  Be accurate and highlight your accomplishments in your introductions, but move on ahead with the business.

Be Yourself

Although it may make some people uncomfortable standing before a group who will ultimately judge whether you make the grade or not, you and your team all still need to be yourself.  It’s tough to be scrutinized and judged by others, especially in a situation where a lot is at stake, such as the future of your business.  But learn techniques to control your anxiety so that your natural personality comes through.

Also, don’t try to pull off becoming a “game show host,” giving cheesy smiles and making “come on down” type comments.  Taking on another personality to hide your own anxiety leads to false impressions and insincerity.  Simply talk calmly and normally in your own voice and pace.

Meeting with a VC group can cause anxiety.  However, with practice and preparation, you can tackle the challenge and come out a winner with your VC proposal.

Within your business plan is an important set of projected financial documents about your company’s future revenues.  But who can really tell the future?   Just how accurate should you make your financial projections in order to impress a potential venture capital firm?  The answer may surprise you.

Which Financials Venture Capitalists Care About

The fact is that VC groups are not concerned with your short term financial gain.  Though this may seem contradictory to a VC firm’s strategy to make money, the fact is that investors are more interested in a small business’ future shareholder value rather than the short term profit potential. 

Venture capitalists make money at the exit point in an investment, or when it’s time to “cash out” of their part of the deal.  In many cases, this is the point when a business goes public on the stock market with an IPO, or when the business is purchased by a larger entity.

To that effect, venture capital firms will invest in companies with high-growth potential, where larger profits down the road translate into greater shareholder value after the infusion of Venture capital.  A capital investment from a VC group into a small business is mainly used to grow the company with the purchase of additional equipment, marketing, and skilled workers.  If the small business does see even small positive revenues in the early years, it is expected that the business will re-invest in additional capital development and stimulate further growth. 

What to Include in Your Financial Projects

Therefore, knowing that your future revenue projections are nothing more than an educated guess, venture capitalists will always take that into consideration.  However, that doesn’t mean that you should skimp on the effort to produce well-formed opinions about your company’s expected revenues.  You still need to make the effort to show expected revenues and expenses based on previous experience, or if your company is new, on the past experience of similar companies in your industry. 

A VC firm will be looking at three things with your financial projections:

1. They want to know that you have made reasonable assumptions.  Your assumptions in your revenue growth will help a VC firm establish whether your company can become a rapid-growth company, or if it will take some time before larger returns are noted.
2. The financial math is important as well.  Your revenue growth percentage and other financial ratios, such as your liquidity, profitability, and debt ratios, will provide the VC firm with additional confidence in a potential investment.  Make sure these numbers are solid.
3. And finally, VC firms want to know your strategic plan for growth and how you will build your company.  If your strategies are solid, you could be rewarded with capital investment from a VC firm.

Though you can only make guesses about the future, be prepared to show educated projections and be ready to discuss key financial issues with a VC firm.  With solid math behind the numbers and a good strategy, you could make your predictions a reality.

For many young entrepreneurs, age can be a detrimental factor.  What firm would want to invest in a young person, fresh out of college with no “real world” experience, who thinks he has the biggest idea since the telephone?  Though young entrepreneurs may have negative stereotypes pitched against them, there are still benefits to being young, and using those advantages can help reap venture capital for a great business idea.

If you’re a young entrepreneur, here are some tips that can help you and your business succeed. 

Create a Solid Plan

Venture capitalists may question young entrepreneurs because their ideas may appear lofty, not rooted in “real life” experience.  Overcome this hurdle by translating your idea into a tangible reality.  A solid, well-written business plan will help you demonstrate that you have both the creative sense and rational business skills to bring the enterprise to fruition. 

Use All Resources Available To You

Are you tech savvy?  Do you have wealthy parents?  Do you have a car?  A computer?  A long email mailing list? 

Utilize all the resources available to you to the greatest extent.  Many young entrepreneurs are computer wizards and can create stunning websites.  If you are one, make a great website for your business.  Use your social network to promote the company and receive a viral buzz.   Ask for a small loan from your parents if they are willing to invest in your bootstrap stage.  Use your car to make personal deliveries.  Use your mailing list to market your services.  Anything at your disposal can be creatively used to promote your business. 

When it comes time to meet with the venture capitalists, they will be impressed with your tenacity – and they may find value in the types of “young” and trendy advertising, such as social networks, that you have already successfully accessed. 

Approach a “Youth” Friendly VC Firm

While all venture capital firms are looking for good business ideas, regardless of the age of the entrepreneur, there are some that are “friendlier” to young entrepreneurs than others.  These will be the venture capital firms that have an appreciation for early stage enterprises, such as:

• Draper Fisher Jurveston
• Kleiner Perkins Caufield & Byers
• U.S. Venture Partners
• Band of Angels
• Accel Partners
• BioAdvance
• North Bridge Venture Partners
• Redpoint Ventures

Join Your University’s Venture Capital Organization

If you are still in college, take advantage of the opportunities available through your campus.  Many universities hold VC seminars and forums each semester, inviting industry guest speakers who discuss the current state of VC and how young entrepreneurs can best position themselves for the opportunities. 

Stanford students can join the Stanford Venture Capital Club, as well as the Stanford Venture Lab (VLAB), which is the San Francisco chapter of the MIT Enterprise Forum.  Harvard students can participate in the Harvard College Venture Capital and Private Equity Club.  From the west coast to the east coast, young entrepreneurs in college can begin building their VC repertoire and network through on-campus organizations.  Check with your college’s business school for the VC clubs that you could join.

Even younger students, such as ones currently in middle or high school, can even take advantage of opportunities on college campuses.  Those in the Bay Area can take part of the Young Entrepreneur Venture Capital Competition held at the Haas School of Business, UC Berkeley.  This will not only help build your VC network at a young age, but can offer you funds to attend college. 

Your age can certainly be used to your advantage.  Capitalize upon the resources in your network to demonstrate that your age is no match for your business savvy.

Venture capitalists like to invest in companies who can control their cash flow.  Many entrepreneurs with businesses that have poor or negative cash flow come looking for Venture capital in hopes of plugging the hole and finally generating profits.  Unsurprisingly, these entrepreneurs are likely to be rejected for a VC proposal.  Who wants to invest in a company that already isn’t making money?

If you have a near break-even cash flow or worse, here are four ways you can get your cash flow in the black before you approach a VC firm for capital financing:

1. Increase Sales

Of course, the logical positive cash flow is to increase sales.  However, there are more ways to do this than just trying to sell more. 

1. Sell less of a poor sales product line.  If you have a product or service that does not sell particularly well, cut back or eliminate it altogether.  This will allow you to reduce your costs for the alligator that is eating away at your bottom line.
2. Focus more on your popular product(s).  The alternate to the above statement is to make a sales push for your most requested items or services.  Capitalize upon the strength that your company has while minimizing the weakness. 
3. Increase prices.  Another way to increase sales is to raise prices.  How long has it been since you adjusted your sales prices in relation to costs?  You could start making more money and enjoy a better cash flow with even a 10% price increase.
4. Increase marketing.  And of course, you could make a marketing push.  Spend a little more on the marketing tracks that work for you to secure additional exposure.  If your budget is severely limited, consider working with a joint venture marketing partner or bringing on affiliate marketers.  With these partners, you can instantly increase your target audience without spending a dime.   

2. Reduce Expenses

At the other end of the spectrum is minimizing your expenses.  Take a close look at your budget.  Talk with your department heads.  Find ways you can scale back on expenses.  Perhaps there is a cheaper way to manufacture a product.  Or, if you offer services and do not have a “cost of sales,” look for ways to reduce overhead.  Can you find a cheaper office to rent?  Perhaps you do not need a company car.  And why do you really need that stack of $10 pens when a $.50 pen will do the job?  Cutting expenses can hurt, but the increase in cash flow may be worth the pain.

3. Use A/P Leverage

Do you pay your vendors as soon as you receive an invoice?  Hold off on that invoice until it is due, which is usually 30 days after the date of the invoice.  Why?  If you buy items wholesale and sell at retail, or manufacture a product, you probably haven’t sold it and actually received cash for that item if you pay the invoice within 10 days.  What’s the point of that 10% discount if you don’t have the money in your account yet?  Use the leverage of waiting to pay invoices until they are due.  You might even talk to vendors and ask for an extended waiting period.

4. Collect on A/R

Finally, you need to get paid.  If you have money owed to you, that’s money not included in your cash flow yet.  Make an effort to reduce the amount of your accounts receivable.  Hire a good A/R collection specialist.  They can be worth their weight in coins.  Tightening up your A/P means you need to focus on the following:

• Develop a strict credit policy for those who want to be invoiced.  That means check credit and references.
• Set a credit limit for each of your approved customers.
• Promptly send an invoice on the day the service or product is sold.
• Set up an invoice tracking system that begins collections the day after an invoice is past due.

Focusing on just a few areas around your cash flow system can greatly increase your potential.  It doesn’t take long to review your processes and find ways to improve.  Make the changes today and start seeing more cash (and possibly VC funding) tomorrow.

A new study on venture capital exits has revealed that entrepreneurs are feeling the bite of acquiring big capital.  As a response to changing economic conditions, VC firms are demanding higher payouts at their exit and requiring stricter demands on their exit terms, even before a check is written to a new startup venture. 

The survey, conducted by California law firm Fenwick & West, revealed that VC firms are looking at liquidation preferences as their number one exit strategy.  For the entrepreneur, this means when you make your business such a success that it is acquired by another bigger business, the first to take the cash will be the VC firm. 

What Else Venture Capital Firms are Demanding from Entrepreneurs

According to the study, the stakes even are higher than liquidation preferences.  VC firms are requiring two and sometimes even three times the investment they put into a company.  If a VC invested $5 million in your company and you later sold it to a larger conglomerate, the VC would insist upon a payout of up to $15 million before you even saw a dime.  

Companies that go public through an IPO are also seeing higher stakes.  Usually, a VC firm will ask for preferred stock at the IPO, giving them a non-ownership stake in the company, but first pick on dividends.  However, lately some VC firms are requesting common stock, which gives them voting rights in the company.  A VC firm with a large common stock share can continue to have much influence on a public company.

How to Negotiate with Venture Capitalists

How can entrepreneurs get their fair share and prevent VC firms from taking the lion’s share of profits?   It is important to stake your claim in your company and negotiate appropriately for the initial investment terms.  While venture capital firms may seem to have the upper hand in doling out the funds you need, keep in mind that their industry is very competitive.  If your business idea is truly genius, innovative, and profitable, there are many other VC firms that are waiting to take over the deal – and the VC firm with whom you are negotiating knows this fact too.  Remember, you are the founder of the company, and you should enjoy your fair share of profits once you bring the idea to successful fruition. 

Another way to prevent a massive cash-out to the venture capital firm is to find other ways to capitalize your business.  VCs offer a lot of money to help companies expand, grow, and ultimately gain the market share that makes them successful.  But they require a big payout for that investment.  If you can find other options that are more reasonable, look to them as alternate ways to finance your business.

Of course, you could simply live with the terms that the VC is seeking.  If you plan to be with your company for the long haul, then let the venture capitalists take their money at their exit.  As long as your business continues to be successful after a VC cashes out, you will ultimately see the financial reward for your work.