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. 

If you have previous experience and success as an entrepreneur, then venture capitalists may be looking for you.  Whether you started a local lawn care business or developed a strategic new software application, your savvy entrepreneurial business experience is a plus in the minds of VC firms and could result in securing funding for your next business venture.

Venture capital firms are very particular when it comes to lending money to new businesses.  They expect their money back with exceptional returns, and therefore, only companies that have the potential for great success are at the forefront.  When approaching VC groups, be sure to highlight your previous success.  It could result in getting the funds you need to get your new business flying.

Why do previous entrepreneurs have a better chance with VC firms?  Here’s how you can spotlight your experience:

Innovation

Did you create an innovative new product or develop a new business process?  Your technological creativity can be a key in the success of your new business.  According to the great management expert, Peter F. Drucker, innovation is:

“The specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or a different service.”

Show the venture capital firm how you have revolutionized a business process or exploited change as opportunity.  If you’ve done it before, you likely can do it again.

Management

Drucker also states that, “management is the new technology that is making the American economy into an entrepreneurial economy.”  Previous management experience, particularly in conjunction with a previous entrepreneurial venture, lets venture capitalists know that you can lead successfully.  Give a full account of the success of your previous management, such as how you hired and retained good employees, or saved money by reducing the cost of production. 

Marketing

If you were a previously successful entrepreneur, then you must have found a market somehow.  Note the creative and focused marketing techniques you used to gain new and returning customers.  With your knowledge of marketing techniques that work, venture capital firms can see that you know how to fill a niche and attract the right customers. 

Growth

Particularly if your previous entrepreneurial venture was successful, demonstrate to venture capitalists just how much growth you experienced.  Quantify your financial results using charts and graphs.  Show how your business entered new markets through your own growth plans and through any joint ventures in which you engaged.  Remember, VC firms want to know that the companies they invest in will grow and prosper.  Prove to them that you are perfect for the job. 

Entrepreneurs are people with big ideas and big dreams.  Likely, if you are reading this, you have some kind of entrepreneurial dream that you are pursuing.  In your process of growing a new business and obtaining funding from venture capitalists, make a strong note of how you can bring success to your company with your history of entrepreneurship.

Though you may have a stellar business plan and gained the interest of a venture capital firm, you need to prepare for your presentation.  Many entrepreneurs vying for VC funds are turned down at the pitch stage.  Why?  They were unprepared and did not deliver convincing answers to questions.  You can avoid this pitfall by preparing adequately for your pitch with these following strategies. 

1. Rehearse, rehearse, rehearse

Stage performers don’t confront a paying audience after one or two dress rehearsals.  They plan every move, every emotion, and practice each scene time and again until it flows freely and naturally.  Do the same with your presentation.  Practice it until you know the information you want to deliver intimately and can present it comfortably.

2. It’s in the eyes

Nothing is worse for a venture capitalist firm than to watch an entrepreneur who fails at public speaking.  In order to grab the attention and excite your venture capitalists, you need to show excitement and enthusiasm yourself.  When you practice your pitch, also practice your emotional delivery.  You don’t need to speak loudly, but do speak in a good audible tone.  Show your excitement in your face, particularly the eyes.  They will be watching you.  Your enthusiasm can spread to your VC audience.

3. Share the stage

Don’t do it alone.  Try to get everyone on your leadership team to make a part of the presentation.  Different segments of your plan could be divided, such as the financial section or the marketing strategy.  The more your VC audience sees all members participate, the better they will understand everyone’s enthusiasm for your endeavor.

4. Prepare for Q & A

Rarely does a practiced presentation go from point A to point Z as rehearsed.  Expect your VCs to throw questions at you and your team members as you proceed with your pitch.  Oftentimes, a question will arise that will be answered in an upcoming portion of your presentation.  You could give a teaser of an answer, but you may simply and politely inform the questioner that his or her question will be answered in detail in an upcoming point. 

After a presentation, there will usually be plenty of questions from your potential VC group.  You will best be prepared to deliver answers by knowing your facts and figures as best you can.  However, don’t stumble if a question is raised for which you cannot provide an answer.  Simply be honest and inform that you do not have an answer at the time, but will follow up after the meeting.  However, don’t forget to follow up.  Be sure to deliver an answer by email or phone call to the individual or group. 

Getting ready to deliver a presentation should take plenty of preparation time.  You’ve spent the time focusing your business plan, but a live presentation is where you will deliver the emotion and enthusiasm of your entrepreneurial venture.  So be excited, get them excited, and invite them along for the ride. 

How you sell your product or service is an important issue for venture capitalists.  Anyone can have a great product or offer a super service.  However, only those with clearly defined target markets and channels of distribution will have the ear of a VC firm.

Target Your Market

Knowing your target client base allows you to develop a target market strategy.  Show your marketing strategy to VCs in three steps:

1. Market research - Finding a market for your product or service requires research, particularly if you have a great potential niche product or service.  With proper market research, you can determine exactly your target market demographics, such as age range, income, education, etc.

1. Analyze demand – In your business plan, display target market demand patterns.  Does your niche fit in a more homogenous or focused sector?  Or will you need to reach a more diffused demand? 

1. Approach the market – Show VCs how you select and approach your target markets.  Will you follow a mass market approach?  Or focus different marketing strategies on more specific market segments?

If you have already performed market research, you are a good step ahead and can formulate a market approach to present to your VC investors.  If not, VC funding can help your business get the proper research in order to get the data you need to make a targeted approach.

Distribution Channels

If you know who your customers are, then it is easier to determine how to get your product or service to them.  Even if you do not have the research data needed to make a full target market strategy, you can begin the process of determining your distribution channels.

To determine your distribution you need to know your product well.  Will it be something typically purchased at a grocery store?  Will you need a sales agent?  Or can you sell direct?  Below are typical distribution channels.  Relay to your potential venture capital investors how you think your product or service will use the following:

• Direct Sell – You may want to sell your product or service directly to customers.  If you do sell directly, will it be through internet sales?  Or will you need a brick and mortar store to display goods?  Selling directly can save money on “middleman” distributors, but requires much more effort on marketing and customer service.
• Agency – An agent is someone who works on your behalf to sell a product.  An agent could be a direct hire who works only for you, or an independent contractor selling on behalf of many clients.  An agent is usually a good and convincing salesperson and has access to good leads.  Though you may sell more through an agent, they usually work on commission, or for a portion of the sales they make for you.

• Distributor – A distributor is the “middleman” wholesaler who sells to multiple retail markets.  A distributor can save a lot of money on direct retail selling and delivery.  Of course, your product to the end consumer will be marked up by the cost of the distributor and the retailer markup.

• Retail – Retailers are dealers or resellers who carry many products sold directly to consumers.  If you want to avoid a wholesale distributor and sell directly to retailers, you will need a way to transport or deliver services or products. 

Before making a presentation to a venture capital firm, spend time on how your product or service ends up directly to consumers.  Knowing in advance, or at least having a good idea, allows you to plan your marketing strategies and reach your consumers.

Starting a new business requires significant decisions.  One of the biggest and most important is the business structure, especially if you are looking for venture capital funding.  Your business structure is the legal form it takes in operation.  As an entrepreneur, you need to carefully consider the different options so that your business will most likely succeed.

In order to focus on a proper business structure, you need to ask yourself some important questions.  Do you want to avoid personal liability if the company is sued?  How do you want to pay taxes?  Will you have a partner?  Will your business operate on a national or international level?  Questions like these can help you choose the right business structure.

Below are the most popular business structures that operate in the United States.  Take a look at the pros and cons of each to determine which one is ideal for your start-up venture.

Sole Proprietorship

Most small businesses are a sole proprietorship.  A sole proprietorship is a one-owner business.  The owner and the business are inseparable.  Though the owner reaps all benefits of the business profits, he or she is also liable for all debts, taxes, and potential legal judgments.

Depending on the state, a sole proprietorship generally does not need to be a registered business entity.  However, registering a business name with the Secretary of State in which you conduct business is wise.  Also, acquiring all necessary business licenses should not be overlooked, even with a sole proprietorship.

Partnership

A partnership is similar to a proprietorship, only there are two or more business owners.  A written agreement is not required, but should be drawn up for the benefit of the partners.  With any partnership, federal and state income tax is “passed through” to the partners who are liable for the taxes on earnings.  The partnership itself does not pay taxes.

A Limited Partnership (LP) is a type of partnership that requires complicated paperwork and state registry.  A limited partnership is usually run by one “general partner” and has one or more “limited partners.”  Limited partners are usually the investors who do not participate in the day to day operation of the business.

Corporation

A corporation is a registered legal entity that is separate from the owners and prevents the owners from having any personal liability in company debts or judgments.  However, a corporation must pay taxes on corporate profits, and all shareholders must pay taxes on dividends earned through the corporation as well. 

There are three main types of corporation:

• Private corporation – This is a company that is registered with the state of headquarters and is owned by private investors.  Each investor purchases a “share” in the company.

• Public corporation – This type is seen on public stock trading markets, such as Dow Jones or NASDAQ.  Investors also own shares in the company, but publicly traded companies have a great deal more federal regulation.

• Non-profit corporation – A non-profit organization is a type of corporation that performs charitable, educational, scientific, or religious type of business.  There are no “owners” who buy stock, but the company is overseen by a board of directors.  Non-profits can raise funds from grants and donations and do not pay taxes since there is no “profit” on the operations.

Limited Liability Company (LLC)

An LLC has elements of both a corporation and a partnership.  Like a corporation, an LLC is must file its entity through Articles of Organization with the state Secretary of State.  Owners of an LLC are “members” who have limited liability, but have a say in how the company is run.  However, similar to a partnership, all profits are passed through to the members, who then must pay the government on their share individually.  The LLC structure has become one of the most popular types with its easy form of ownership and tax status.

For tax, liability, and venture capital funding reasons, it is important to choose a business structure that will serve your endeavors well in the present and into the future.  Generally, corporations or LLCs are most ideal for securing venture capital, as you give your business room to grow and gain market share. 

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

1. Enthusiasm and Passion

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

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

2. Dedicated Focus

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

3. An Exemplary Team

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

4. Unique Innovation

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

5. An Outstanding Product

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