How has the economy affected venture capital new business funding? According to a report released in January 2010, the state of venture capital is in a deep freeze. The study and report was issued by Thomson Reuters and the National Venture Capital Association (NVCA), and it noted that the total amount of venture capital funding was at its lowest rate in 5 years.

The Reality of 2009

The report shows that investors are becoming less interested in funding new venture capital deals. VC firms raised a total of only $15.2 billion from 120 funds in 2009, down 47% from $28.5 billion from 223 funds raised in 2008.  This was down 58% from 2007 when a total of $36.1 billion was raised from 250 funds for venture capital.

In terms of actual investments made by private investors such as venture capitalists, in 2009, only 2,795 deals were made, with a total business funding of $17.6 billion. Compared to 2008, that number is down 37% when 3.985 deals were made for a total investment of $27.9 billion.

Why Venture Capital Shriveled in 2009

Why has the number of venture capital deals spiraled downward? The economy is a major concern, and investors have certainly reduced their risk tolerance levels. New businesses, despite whether they have a great idea and top-notch management team, are slated to fail with dwindling markets. While few venture capital firms did invest in new businesses in 2009, many voluntarily stayed out of obtaining new investments completely.

Looking to the Future

However, the outlook is promising. According to Mark Heesen, president of the NVCA, “most of these firms will not be afforded the luxury of continuing to wait for market conditions to improve in 2010.” Heesen goes on to project that 2010 “promises to be a defining period as we will gain a better sense as to what the venture capital industry will resemble in the next decade. All signs point to a leaner, more capital efficient asset class comprised of firms with proven track records of delivering value to limited partners. Not all firms will make that cut, but the ones that do will be very well positioned to invest.”

And according to a poll of venture capitalists about the outlook for 2010, the respondents said they expect to see gradual increases in the total amount of investment levels. Areas of expected increase are in “green” technology companies, as well as more venture capital investment in growth companies and later stage companies.

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. 

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.

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.

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

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

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

Seminars and Workshops

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

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

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

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

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

Network with VC Investors

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

Low Cost

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

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

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

Why Ask For Feedback?

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

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

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

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

How to Ask

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

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

What Not to Do

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

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

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

Be Prepared

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

Keep It Short and Concise

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

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

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

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

Be Yourself

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

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

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

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

Which Financials Venture Capitalists Care About

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

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

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

What to Include in Your Financial Projects

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

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

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

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

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

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

Create a Solid Plan

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

Use All Resources Available To You

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

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

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

Approach a “Youth” Friendly VC Firm

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

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

Join Your University’s Venture Capital Organization

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

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

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

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

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

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

1. Increase Sales

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

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

2. Reduce Expenses

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

3. Use A/P Leverage

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

4. Collect on A/R

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

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

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