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.

Women entrepreneurs have been steadily decreasing the percentage gap found between females and predominantly male entrepreneurs.  Even as the 20^th century came to a close, only 9% of institutional investments were given to women entrepreneurs.  However, within the last decade, women-owned businesses have become a prominent mark in the venture capital scene.

Networking Through the “Boys’ Club”

Why has it taken women entrepreneurs so long to gain their share of venture capital?  Even though women business owners are excellent at networking, they have historically lacked the contacts in the financial community.  The financial industry has been predominantly run by men who provide financing to others in their “good ol’ boy” network of friends and business acquaintances.

But as networking through the internet became more prominent, and as more women received VC funding, the financial network has expanded further into women entrepreneurial ventures in the 21^st century.  Businesses owned by women are as financially secure and profitable as any average U.S. business firm.  But yet, women still have difficulty securing VC for their new business ideas.

How can a woman entrepreneur shore up the networking holes and find their place in front of a VC firm?

Network the Financial Industry

Women must be able to network not only among other women business owners, but with all who are involved in the financial market.  Expand networking possibilities with other entrepreneurs, men or women, who have successfully won venture capital funding.  Talk with others who are connected with the VC industry.  A local entrepreneur club may be a great way to share ideas and get venture capital contacts for financing your business.

Study the Main VC Industries

VCs invest heavily in technology businesses.  Many women entrepreneurs have a great retail business idea, but find it difficult to obtain VC funding when there is no model for large scale expansion and sales.  If you want to get a business kick started with venture capital funds, be sure to study the industry of your business idea and discover if it is likely to be viewed favorably among VC firms.

Strengthen Your Idea

As with any entrepreneur or company vying for VC funding, your business idea must be solidly defined, marketable, and in demand.  Discover a niche for your business idea that will allow your company to experience potentially huge sales.  This may take time, trial, and error to narrow and focus your business idea to where it is attractive to venture capital firms.

Assemble a Winning Team

In order to give your business an edge in getting accepted for VC funding, you must have a winning team in place before you approach VC firms.  Take the time to assemble a list of potential managers, directors and executives of your company that have the right experience in their industry and preferably in other startup companies as well.

To win in the venture capital funding game, women must play by the rules set by men.  Most startups that make proposals to VC firms were recommended by other contacts in the financial industry or by other portfolio investment companies.  Once you solidify your high-potential business idea and management team, get in the network and find your place in front of a VC committee.

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.

Venture capital members consistently note how frequently they are contacted by entrepreneurs looking to raise capital for their small or startup business, but are reticent to provide details about the business.  Why?  The main reason seems that some first-time and amateur entrepreneurs fear that their “big” business ideas will be stolen if they are not approved for the requested capital.

Not surprisingly, holding back on business details makes it very difficult for a VC to decide whether to invest in the business or not.  In order to make a well-informed decision to invest, a VC firm needs to know important details about the business to which they may transfer millions of dollars.  Therefore, it is extremely important for entrepreneurs like yourself to be ready to share information that is requested by a VC firm.

Rather than holding back your business secrets and proprietary information, it is wise to go ahead and share with VCs for a number of reasons:

A VC Firm’s Business is Making Money

VC firms are in the business of investing in businesses and making money, not stealing ideas and starting their own companies.  They are far too busy managing their current and future investments to be taking good ideas and making them their own.  They leave that to the entrepreneurs.

Venture Capitalists Are Privy to Many Ideas

Every week, venture capitalists are reviewing requests for capital investments from new and existing businesses.  That means they hear a great many new and innovative ideas that may not be on the market yet.  Venture capitalists know the importance of proprietary information and want to maintain their ethical reputation. 

Your Idea May Not Be All That Innovative

Believe it or not, many entrepreneurs believe their business idea is the best thing since the invention of the automobile.  In reality, their idea may lack real innovation to penetrate the market, or it may already be saturating the market by other businesses.

Giving to Receive Feedback

One of the biggest advantages to sharing your business information is that venture capital firms successfully invest in a great range of businesses.  They can offer much in the form of feedback on improving your idea(s) such as:

• Developing marketing and sales strategies
• Suggesting better business models
• Pointing out the key challenges based on experience
• Recommending potential partnerships

Venture capital is a great strategy that can help take your innovative business idea to great levels.  Don’t hesitate to share your business strategies, innovative ideas, and proprietary secrets to a VC firm who may be interested in lending you millions.

The Obama administration has proposed new taxation methods that could ultimately change the way venture capitalists do business.  The new proposal introduces a tax to “carried interest,” or the stock shares that a VC firm takes as part of their earned income from their investment. 

The Details of the New VC Taxation Plan

Currently, a VC firm’s carried income is considered capital gains and is taxed at the capital gains rate of 15%.  But with the new proposal, the capital gains from carried interest may be taxed at the regular income tax rate of about 35%.

The new tax procedure has been introduced to help raise about $7 billion in additional revenue from VC firms, real estate partnerships, and other financial industry players.  However, venture capitalists argue that a new higher tax rate on carried interest will result in fewer investments made to new and startup companies.

The new tax wouldn’t be placed into effect until 2011 or 2012, and there is still time before the final details are confirmed. 

Could Venture Capital Firms Invest in Fewer Companies? 

However, if the new tax method does go into effect at the regular income tax rate, this means venture capital firms will be taxed double or more than what they are currently.  And considering that much of a VC’s income or return on investment is through carried interest in stock holdings in a company, it could mean big changes in how they form their exit plans.

Indeed, one possibility is that venture capitalists might start investing in fewer companies.  This could be a big detriment to the economy.  Figures provided by a Global Insight study shows that venture backed capital companies contribute over 17% to the national GPS and employ over 9% of private sector employees.  If there are fewer venture backed companies, this means fewer companies would have the means to expand and grow, thus causing a shift in employment numbers and the overall economic strength to the economy.

How Could the Tax Law Impact the Entrepreneur? 

VCs could also begin investing less into each new company.  That means it will be more difficult for startups and newer existing businesses to reach the growth potential since there will be fewer dollars to utilize.  Growth requires capital for expanding production equipment, employees, and aggressive marketing costs.  Without the money for these important growth factors, a business will either have to change its growth estimates or search for capital in other more difficult avenues – especially in today’s tight credit markets. 

In a more dire prediction, more small businesses could fail without the support of venture capital.  If the tax change is passed, we could see a drop in startups and particularly in innovative new businesses and business models, as venture capital firms will invest more in companies with an already proven business model.  Given that their tax responsibilities will be higher, the firms may look to offset their lower profitability margins by reducing their risk.   

These are just speculations as to how the VC industry may react to a new taxation method.  Ultimately, venture capital firms may just have to bite the proverbial bullet and accept the new tax as a regular part of their business income and little change will be felt by the entrepreneur on the investment side. 

If your startup or small business is ready to make the leaps and bounds into big business with the help of venture capital, review your business for any intellectual property that you should have on file with the proper U.S. government office.  Patents, trademarks, and other copyrights are important legal intellectual property and may be vital to the success of your business, especially if your enterprise consists of invented or creative works.

Here are the main types of intellectual property and where they can be registered:

Securing Patents

A patent may be granted to you, the inventor, by the Patent and Trademark Office.  Patent terms are 20 years from the filing date and are only effective within the U.S.  A patent protects the inventor, or whomever files for the patent, by granting the legal right to prevent or exclude others from “making, using, offering for sale, or selling” the invention in the United States or “importing” the invention into the United States.”

If your business idea is an invention that you have conceived and developed, and you plan to take your business invention to market, apply for a patent as soon as you can.  You may need the assistance of an attorney specializing in intellectual property.  However, having the patent filed before you meet with a VC group shows them that you have the legal right to prevent others from stealing your idea.

Obtaining Trademarks

A trademark is a word, a name, a symbol, or a device which is used to distinguish the source of goods in trade with goods.  McDonalds™, Neiman Marcus™, and Target™ all are distinguished by trademarks that prevent others from using their name and symbol in the trade of goods. 

Trademark rights may also be used to prevent others from using a confusingly similar names or marks, but it does not prevent others from making or selling the same goods under a definite separate mark.

Trademarks are generally used with established businesses that use their name and/or logo as a brand for selling.  Most startups will not have the need for a trademark, but if your small company has been conducting business for a period of time and has a recognizable name or logo, it would be wise to register it with the Patent and Trademark Office.

Using Copyrights

A copyright is a form of protection granted by the Copyright Office of the Library of Congress to the creators of “original works of authorship.”  These include “literary, dramatic, musical, artistic, and other certain intellectual works, both published and unpublished.”  The 1976 Copyright Act gives the owner of copyright the exclusive rights “to reproduce the copyrighted work, to prepare derivative works, to distribute copies of the copyrighted work, to perform the copyrighted work publicly, or to display the copyrighted work publicly.”

The copyright protects only the “form of expression” and not the actual topic matter of the creative work.  As an example, a magazine article could be copyrighted, but it would only prevent others from copying the actual wording of the guide.  It would not stop others from writing and publishing an article on the same topic.

By having your patents, trademarks, and copyrights protected, you show venture capital firms that your ideas are well protected from competitors. 

Producing a new product is not like building a baseball field.  The adage “If I build it, they will come” does not happen in the free market.  While you may have a great product idea, so do thousands of other entrepreneurs who are looking for venture capital backing.  To stand apart from the crowd, consider building your product before meeting with a venture capital firm. 

VC firms are highly particular about the companies in which they invest.  Unless you have a homerun product idea that will obliterate the competition, you will likely face the following attitude:  “It sounds like a good idea.  Why don’t you come back when you have the details fleshed out?” 

Why waste time trying to move forward with your entrepreneurial business venture with just an idea?  Get your idea made and ready to produce for market, and you will have an edge when you go before a VC committee with a concept that’s ready to make money.

Meet Market Needs

If your innovative product or service will be a hit with VC firms, it first needs to meet a current market need.  Do you have a great software idea that will fit an empty business niche?   Perhaps your idea is a gadget that makes cleaning up after babies a cinch. 

If you have a great business idea but do not know where it fits in the market, you need to spend time researching consumer demands.  Do the market research.  Know what consumers will buy your product, and what target demographics it will serve.  You must refine your idea until it becomes one that targeted consumers will want to purchase. 

Prototype Your Product

If you have a product idea, build a prototype that can be used as a demonstration model or sample.  You may be able to build it yourself if you’re handy with tools in the garage, or you may need to spend the money on a professional fabrication outfit to get a prototype made. 

Use the prototype(s) for your market research.  Show it to potential customers.  Get feedback.  Find out what improvements can be made.  A prototype will be one of the most helpful models of what works and what needs further improvement.

Conduct Beta Testing

Particular to software, beta testing is important for refining your product.  Once you have coded and developed your software product to the point where it is ready to be evaluated by consumers, you should implement beta testing to obtain valuable feedback.    

This phase is akin to an advanced prototype that can be used to determine the usability and malfunctions of the product.  If you have a software idea, be sure to get a good number of beta testers, ones who are qualified to provide logical and technical recommendations for improvement.

Using Free Samples

A good way to get market feedback is to produce a large quantity of your product, if production costs allow, and get it into the hands of your target consumer.  People will gladly give you feedback if you give them something for free.  Here you can further find improvement options and bring a ready-to-make product to your potential VC funding firm.

Having a market-ready product takes work, research, and money.  It may mean bootstrapping your startup business and getting by with loans from family and your friendly corner bank.  However, if your idea will be a hit with consumers, the prototype money will be well spent when it comes time for acquiring millions from a VC firm to get your product mass-produced and marketed.

A startup company, like a small child, needs years of steady nurturing, encouragement, and discovery of what the final product will become.  Unfortunately, there’s no training for first-time parents.  However, a startup company has the benefit of getting nurtured by an experienced set of managers and decision makers – ones who can use their years of experience to steer a small business on the right course.

Do you think a venture capital firm would want to invest hundreds of thousands, possibly millions, into a small startup company with inexperienced managers?  You may as well have a landlover entrepreneur build a cruise vessel, exclaim himself as captain, and have his ditch digging colleagues come on as his crew.  Clearly, the outcome for that venture is not favorable.

However, if the landlover entrepreneur were enterprising and convinced 25-yr veteran cruise captain, along with other experienced engineers, hotel and entertainment staff, to join him in his innovative cruise idea, there is a likely chance that it will succeed and a VC firm would want part of that action.

No matter how good your business idea is, your leadership team will be the essential chemistry that instills confidence in your financial backers.  Venture capitalists want to know about the core people who are the company.  The right mix of experience, personality, and passion in your team can set your startup apart from the rest.

From a venture capitalists’ perspective, what are some important elements that your leadership team should possess?

Experience, Experience, Experience!

Akin to how important location is to real estate, for a startup company, the most crucial factor is “experience, experience, experience.”  Assemble a leadership team who has proven experience.  Of course, the ideal candidates will have been successful in the same roles in a similar startup company. 

However, if you cannot find a candidate with the exact same experience in a startup endeavor, find team members who are experts in their respective fields, such as a CPA for your CFO, an engineer for your chief product technician, and a head marketer with proven success in promotions. 

Business Smarts

Sometimes smarts and intelligence can be a better substitute than experience.  If you can find members of your leadership team who are creative, smart, and full of ideas that can work for your business, then you further strengthen your endeavor in the eyes of a VC firm.

Passion and Drive

Venture capital firms like to back startup companies that have people with resolute passion for the endeavor.  Do you believe in your innovative product with all your heart and are able to convince others of its virtues?  Does your CFO love maximizing the internal rate of return and possessing Ghandi-like ethics?  Has your chief software developer been writing computer programs since his old Commodore 64 in junior high?  These are the people you want standing before a VC committee.

Resounding Commitment

And lastly, is your team committed to your business venture?  Some people, believe it or not, have an alternative motive for joining startups.  It may be just to get out of their current company and career, or simply the chance at more money if your business succeeds. However, the true test of your team is if they are passionate about your entrepreneurial venture and are committed to seeing it through to success.

You, as an entrepreneur, have a monumental job of finding and convincing the right people to join you onboard your metaphorical ship before it sets sail.  But if you have chosen carefully and wisely, your potential VC backing may just say “yes.”

With the list of US venture capitalists growing year by year, it can seem like an impossible task to find the right ones that are a potential match for your business.  Acquiring venture capital requires a tremendous volume of patience, research, and effort before you finally arrive with money in the bank from a granting VC firm. 

How do you narrow the prospective list of venture capital firms so that you can focus your business idea presentation most effectively?  There are many ways to narrow criteria to find a viable VC list.  Here are the most commonly used focus techniques:

1. Match Criteria

Each VC firm will publish investment criteria that exposes the firm’s desire for certain types of business, tolerance for risk, and average amounts of investment in each business they choose.  If you are looking for $1 or $2 million for growth and expansion, don’t approach a VC firm that only disburses $5 million or more to already established businesses.

By looking at a venture capital firm’s criteria, you can narrow your potential list from hundreds to perhaps a couple of dozen choices.  Read these criteria carefully, and you will have a viable list of potential VC firms.

2. Sector Preference

Many venture capital firms prefer to invest in certain industries, such as software or consumer electronics technology.  Know your potential VC’s preference for their portfolio investments.  Don’t waste your and their valuable time by submitting a business plan for your fashion design business to VC preferring software companies.

3. Stage Preference

Is your business a startup?   Are you an established business now looking to grow nationally?  Many VC firms will state what stage of business they prefer to invest in, whether it is startup, seed capital, or expansion.  Match your stage of business with a potential VC’s preference.

4. Avoid Conflicts

When you have a good and narrow list of potential VC firms, look at each carefully and check for potential conflicts with other companies that the VC has in their investment portfolio.  A VC firm will most likely not want to invest in your company if you are a competitor to one of their portfolio holdings. 

5. Narrow a Location

Most VC firms like to invest in companies that are local to them.  Locally could mean the same metropolitan area, state, or region.  Find out where your potential VC firm prefers to invest its funds and approach the ones in your “local” area.

6. Ask

There is no harm in asking a firm that has declined your business for other venture capital firm suggestions.  VC firms are very familiar with the venture capital community and may know other firms that may be a better match.  Always ask politely and be genuine with your request.  There is usually no reason that members of a VC firm would not want to help your business if you are truly passionate about succeeding.