The ability to successfully obtain venture capital funding depends a great deal on the management team assembled in a startup company. Entrepreneurs may have big dreams and big ideas, but no one attempts a large business venture alone. That is why it is so important to empower your management team if you want to obtain VC funding.

The Value of Management for Venture Capitalists

One of the most important qualities a VC firm looks for in a startup business is the management team. The VC firm wants to know that the team has quality leaders who are experienced in their field of expertise. Their experience will become invaluable in making decisions for the startup company as it meets challenges, especially if management team members have previously gone through the experience of a startup company.

However, what good is expert management team advice if an entrepreneur doesn’t empower them to make decisions? Many times an entrepreneur has assembled a powerful management team for the sake of obtaining VC financing. But ego and the allure of power prevented them from taking valuable advice and resulted in poor decisions for the company.

Empowering Your Management Team

What can you do to empower your management team and be in a better position for VC funding?

• Trust – Learn to trust the experience of your management team. You will have a better chance at VC funding if you trust your team to pull from their education and experience.

• Ask – Don’t be afraid to ask your management team for advice and help. Entrepreneurs are the leaders of new startup companies. However, a good leader knows when to take advice from a qualified team member.

• Encourage – Don’t forget that even experienced managers need encouragement too. Learn to encourage their input, and reward managers for great ideas and winning decisions.

• Provide Resources – A manager who has the resources he or she needs is more likely to help your company get VC financing. Make sure you provide money, technology, and even human resources that will help a manager help your company look great for VC firms.

It takes a village of qualified people from a wide angle of fields to make a startup company work. VC firms know this fact, and your funding depends on a company having the right management team. Be sure you empower your team to get the highest results.

What you state in your business plan says a lot about the future success of your business.  Venture capital firms have witnessed plenty of successful new businesses that started with a sound business plan.  VC firms know what should be included in a business plan – and what should not.  They also know the qualities that a business plan should possess if it is worthy of their time and money.

What are the qualities that VC firms like to see?  Here are 10 that should be in your business plan:

1. A Brilliant Idea

No plan is complete without a nugget of a great idea.  The idea is what sparks the interest of a VC firm.  The rest will solidify their interest, but it all starts with an exciting idea.

2. Brevity

VC firms don’t have time to review every business plan that is put in front of them.  Make sure yours is brief and succinct and contains the main compelling points that are of interest to a VC firm.

3. Clarity

Be absolutely clear about what your idea is and how it will achieve success.

4. Know Your Market

Do you know who will buy your product?  What are the demographics? How will you market to them?  Let your potential VC funding firm know that you completely understand your market.

5. Show a Large Market

VC firms will invest in startup companies with a potential for big earnings – which means having a big target market.  Show VC firms that your product will fit into a large market.

6. Your Competitive Advantage

Why will your target market buy your product rather than the competition?  This needs to be addressed honestly and with crystal clear focus so VC firms know why you set apart.

7. Existing Contacts

Have you already established potential partnerships with other successful businesses?  Do you have a top industry business ready to buy your product?  VC firms like to know that you already have potential help and customers waiting.

8. Management Team

The quality of your management team will be a top priority for VC firms.  Show that you have a team assembled with the best experience and qualifications.

9. Demonstrated Product Success

If your product has already been developed and shown sales potential, prominently display your sales success. 

10. Avoid Anonymity or ‘Hiding’

Don’t try to hide information a VC firm.  Your plan will more likely be rejected.

When an entrepreneur thinks of capital funding, the first thing that comes to mind is venture capital.  However, depending on the stage and growth plans of the new company, an entrepreneur may be better suited to pursue an angel investor. 

Many venture capitalists receive proposals for capital financing from companies that just do not meet their requirements for scaling, industry, or funding amounts.  This happens frequently when entrepreneurs fail to properly research the role or expectation of a VC firm in comparison to an angel investor.

An angel investor is an individual or private company that may wish to invest capital into new businesses that need help getting off the ground.  A previously successful entrepreneur may become an angel investor as a way to help new entrepreneurs get past the self-funded stage.  Typically, angel investors will fund companies that need financing in amounts anywhere between $150,000 and $1.5 million.  Though angel investors are easier to acquire than VC, they still require higher return amounts than traditional bank loans.

Venture Capitalist vs. Angel Investor

How can you, as an entrepreneur and business owner looking for capital growth, know which investor to approach?  Here are some guidelines:

Type of company

Venture capitalists have a preference for certain industries, particularly those with high growth, such as biotechnology or software with large expansion potential.  Though angel investors like high growth industries as well, they are more apt to be a capital source for other smaller growth industries. 

Size of company

The growth potential of the company is a tremendous factor in VC funding decisions.  They expect big returns when a startup company goes national or global, is acquired by a major corporation, or offers an IPO as a larger corporation.  Angel investors, however, will look at smaller companies that do not require as much capital for initial startup or capital growth.

Experience

VC firms are notorious for picking and choosing startup companies that are lead by experienced entrepreneurs.  Experience may be within the industry they are entering or through other successful entrepreneurial ventures.  Angel investors, on the other hand, will more likely help a first-time entrepreneur.

Amount of capital needed

Whether you need only one round of capital financing or a series of rounds, if you need more than $3 million for your capital needs, you should seek VC funding.  VC firms will usually not consider startup or small companies needing less than $1 million, unless the VC firm specializes in seed capital for startups. 

Generally, if the total capital required to create a positive cash flow in just a few years is less than $3 million, an angel investor is the way to go.

If you are an entrepreneur who wants to get an innovative business off the ground with a capital inflow, consider your options carefully.  Think of how big you want to take your business, your experience, and your ultimate capital financial needs.  You may find that a VC firm is not what you’re looking for after all. 

If you’ve successfully walked through the door of a VC firm and given a presentation, your next step may be having the VC firm perform a valuation on your business.  A successful presentation is indeed a commendable feat, but before you receive a check from a VC firm, they will do their due diligence and valuate the true potential of your business.

Some call the process of valuating a business an art rather than a science.  The results can be highly subjective rather than objective when considering the value of an untested business idea or process.  Particularly the entrepreneur’s opinion of his business may be inflated due to the enthusiasm that clouds better judgment.  But conversely, a VC may undervalue a business to be ultra-conservative in estimating potential losses.

Valuation Factors

A VC business valuation must take many factors, including:

• Risk vs. Reward – A VC firm must evaluate a company from the viewpoint that it is risking its own capital to capitalize another company.  And for that risk and use of money, they deserve a reward.  The higher the risk of financial loss, the more reward will likely be asked of a potential portfolio investment company.

• How Much Capital is Needed? – A VC firm will try to assess the amount of capital that a business needs in order to succeed.  Too little capital and the business risks failing.  Invest too much capital, and the VC firm has tied up more money than it needed, thus losing other potential investment earnings.

• How Fast Will Revenues Grow? – Another factor that venture capitalists must consider is the rate at which revenues are predicted to increase until they can take out their “reward” or financial return.  Some companies may take up to five years or more before they even see a profit and are able to incorporate with an IPO.  The longer that VC money will be tied up, the more return they will ask for at their exit point.

Valuation Methods

There are many methods a venture capital firm may employ to valuate a startup business.  Most of these methods are subjective since the future is always unknown.  Here are a few of the most common methods:

• Cost Approach – This is also known as book value.  The cost approach tries to determine the future book value of a business at the exit point after liabilities are subtracted from assets. 

• Market Approach – A market approach to business valuation would try to determine what the business would be sold for on the actual market.  Sometimes this means comparing the actual recent sale price of a similar sized business in the same industry. 

• Income Approach – An income approach uses a capitalization rate, or cap rate, to determine a subjective valuation.  The cap rate is divided by the net income of a business at a particular point in the future to calculate the valuation.  For instance, if a startup company expects to have net earnings of $10 million at the projected exit point in eight years, and a 10% cap rate is used, the business valuation would be $100 million.

Business valuation is an important step for VC firms and entrepreneurs.  It must be completed to reconcile the valuation between what the business owner thinks the company is worth, and the conservative estimates of a VC firm.  If you’ve reached this stage, you’re well on your way to receiving VC funding, but be prepared to cooperate fully with a VC firm in their requests for valuation information.

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 job of obtaining much needed capital from a venture capital firm can be long and arduous.  With this in mind, could hiring a venture capital consultant help you obtain the best possible chance in front of a VC firm?

VC consultants are those who have had experience in the venture capital industry.  A consultant may be a former venture capitalist himself, a previously successful entrepreneur, or someone with many contacts in the VC field.  Through the help of a VC consultant, a small or startup business may get the guidance it needs to become a hit with a VC firm.

VC Consultant Costs

What is the potential cost of a VC consultant?  Some consultants charge as much as $1,000 per day for their proven experience and contacts.  However, when a company is looking to raise $5 million for capital leveraging, $1,000 a day is a small investment indeed. 

Along the lines of VC consultants are rumors and reports of those who want an ownership stake in a business in lieu of a fee.  It is best to avoid paying a consultant this way, as you know in advance that a VC will also want a large ownership stake in your company if successful.  A trustworthy VC consultant knows this and would not ask a startup for this type of compensation.

What a Venture Capital Consultant Can Do for Your Startup

An experienced and good VC consultant can help your business obtain VC funding in many ways.  Here are the main areas that could help you:

• Contacts – VC consultants usually have many contacts in the industry.  They can recommend the right list of potential venture capital firms for your industry, or find the right ones if not known right offhand.

• Business Plan Review – The business plan is the main document that gets you in the door of a VC firm.  A consultant will work with you to revise and re-write your plan so that it will be most attractive to a VC firm.

• Market Research – If your business is a startup and you need market research to firm up statistics and market potential, a VC consultant will help you down that road.

The Bad and the Ugly

Within any industry are vultures who wish to take advantage of unsuspecting or desperate people.  The startup and VC industry is no exception.  Naïve entrepreneurs and small business owners who are desperate to obtain large amounts of capital funding may get the “blown away” routine from an unethical consultant, even if the business idea is bad.  That means a consultant will look at a potential business plan and idea and tell the entrepreneur that they are “blown away” by the idea.  These consultants will go on to virtually guarantee VC success. 

If you, as an entrepreneur, wish to go the route of hiring a VC consultant, be sure to remain savvy.  Research potential consultants.  Check references.  Verify previous success.  You want to find a consultant who will not blow smoke and give you false hope.  A consultant who is honest and forthright may be the best investment on the journey to obtaining venture capital.  Even if the result is “you don’t have a chance,” it still saves a lot of potential money spent pursuing the false hope of VC success.

Since venture capital is not easy to obtain, it can be helpful to hire a consultant to give you the guiding map toward successful capitalization.  However, be sure to research every potential consultant and hire the one best suited for your business.

As an entrepreneur, you know that “cash is king.”   A proper working cash flow is a vital key element for any business owner.  If you are an entrepreneur operating or starting a business, you will need to effectively manage your cash flow operations, especially if you are seeking venture capital growth funding.

All businesses, large or small, must have an adequate supply of on-hand cash to pay for supplies, payroll, lease, utilities, and any other regular operating costs.  If you fail to pay your employees or cannot pay a creditor for products already delivered, you face serious business issues that could lead to bankruptcy. 

How do you keep adequate cash on hand?

Be liquid

Although cash is the most liquid when paying debts, you could also have capital invested in other liquid forms, such as money market accounts or CDs.  The key with these types of investments is to make a little interest on your liquidity.  If you have a good supply of cash, consider keeping a portion in these types of small investments to generate a small return.  Make sure the accounts will still allow you to easily and quickly access the cash when needed.

Have adequate funding sources

Where can you get access to cash when you need it?  Having an adequate line of credit through a bank can be a business life saver.  A line of credit is an open credit source where your business can access cash only when needed and pay back over time.  The line of credit is reusable and does not close after borrowing. 

Use purchase order and invoicing

If you purchase goods for resale or further processing, try to open an invoicing system with your vendors.  Through this system, you order supplies with a purchase order from your company.  The supplies are delivered and invoiced for payment later from the vendor.  An invoice generally will have a “net 30” term where the full balance is due 30 days from the date of invoice.  That gives you about a month where you can keep cash for liquidity purposes and increase your cash flow from sales you make during the month. 

Borrow for capital improvements when necessary

Sometimes your business needs capital improvements in order to function better and more efficiently.  An efficient operation is a cash saving operation.  Whether it is for a new computer, new equipment, or a new building, you may need to borrow capital to pay for the improvements.  Be sure your company will be able to repay the loan with interest and borrow only enough to acquire the improvement(s) and stay liquid during business operations.

Stay on top of your business cash flow.  If your business manages cash effectively, you will also be well suited for potential venture capital investing in the future.

Congratulations!  You’ve submitted a pinpoint precise business plan.  Your presentation to the VC firm was outstanding, well-rehearsed, and provided all the right answers to questions.  And the venture capital firm says they want your business as part of their portfolio.  What happens next?

Before your business sees a dime of VC funding, you will be required to allow the VC group to perform due diligence.  If you’ve made it to this stage, your chances of final approval are vastly improved.  However, all information must be in order and accurate as you have promised – or else you may see your VC dream unfulfilled.

Financial books

Venture capitalists will want to see all recent financial statements from the last few years.  If you have a CPA who prepared the statements, then their certification of accuracy is a big plus in the eyes of the VC firm.  If you have kept all books yourself or hired a non-certified accountant to do the bookkeeping, the VC firm may request to review your ledgers for the last few years.  Be prepared and cooperative in all requests for your finances.

Meetings with your current investors

A VC firm may want to speak with any current investors you may have.  If your business is a corporation, a poll may be sent to shareholders.  If you have loans with other private investors or banks, they may want to speak to them about your payment history and how you manage cash flow.  Again, be cooperative with providing contact information as requested.

References

Up to 10 or 15 professional references may be requested by a VC firm.  These could be customers, business partners, personal references, or anyone who can provide the VC firm with insight to your business approaches and the market.

Additional market research

If your business is in an arena that is unfamiliar to the VC firm, they may want additional market research to help them understand the market niche and where your business fits in it. 

Additional meetings

Most likely, the VC firm will have plenty of additional questions for you and your management team.  Expect to be called for extra meetings to answer questions in-depth. 

You may also be confronted with probing questions that deal with negative aspects of your business they have discovered.  Remember to always keep your calm and be professional.  If confronted, answer all questions as best you can.  You may not have a solution to give them immediately, but always agree to tackle any concerns that the venture capital may have.

Observe you, the entrepreneur

Believe it or not, a VC firm may perform extensive probing to fully understand how you manage business situations.  They want to know how you will react to market pressure and uncomfortable business situations.   Your reaction to probes and concerns tells venture capital firm about your ability to manage a company in tough times.

Obtaining venture capital funding is not easy.  To ensure their investment will be entering into capable hands, a VC firm will want to perform due diligence with all groups they fund.  Be prepared to cooperate and manage with any potential situation with professionalism and genuine enthusiasm. 

When starting a business, your endeavors do not always go according to plan.  Although an entrepreneur who is a good planner has a better chance at making his business succeed, if he cannot change plans according to market trends or business needs, the business will certainly fail.  A flexible entrepreneur who can switch gears and “go with the flow” has an even greater success rate.

What are some situations where an entrepreneur may be flexible?  Here are just a few that entrepreneurs typically experience. 

Don’t do it all yourself

An entrepreneur who thinks he can do it all himself is set up for failure.  A good entrepreneur must learn to delegate and let others take control of parts of his business.  Surround yourself with people you feel comfortable working with.  Hire competent help.  And don’t forget to reward your team when the company experiences success!

Be flexible with price

You can’t win them all, even on prices for your goods or services.  Especially in a tough economy where consumers are tightening their wallets, you may need to be flexible in the price of your goods or services.  Be firm on getting what you need for your business services, and don’t get less than you can afford.  However, be willing to offer discounts to clients or customers who order large volumes, and even lower prices in reaction to market demand. 

Be flexible with negotiations

Flexibility with business negotiations is an art form.  In your dealings with business partners or vendors, be professional and not pushy or obstinate.  If you are willing to bend on some issues but ask for their concessions as well, you gain respect as a negotiator and as a business person.

Keep your product options open

Sometimes a great business idea is just that – a great idea.  It may not work in real life application.  Always be willing to be flexible with your product or service development to match market conditions and consumer demands.

Leave your personal life at home

Be flexible with focusing on your business and leaving your personal issues and problems at home.  Personal issues can affect your effectiveness in operating a business.

Train yourself

Be willing to admit that you do not know everything.  An entrepreneur has much to manage when running a business.  Take classes or seminars on business processes.  Even a community college accounting course can help you understand the bookkeeping process.

Admit mistakes

And finally, be willing and flexible to admit mistakes and take responsibility.  Your business is important, and making decisions and standing behind them is the way to keep your business operating.  However, some decisions may not be the best ones.  At times, you may need to change your business direction or offer an apology to your associates or business partners for mistakes you made. 

As an entrepreneur and business owner, you bear the full success and failure of your endeavors.  Ultimately, your business is your responsibility.  Take responsibility and be flexible – and you will find that your business will flourish as well.