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

Which Financials Venture Capitalists Care About

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

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

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

What to Include in Your Financial Projects

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

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

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

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

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

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

Create a Solid Plan

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

Use All Resources Available To You

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

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

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

Approach a “Youth” Friendly VC Firm

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

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

Join Your University’s Venture Capital Organization

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

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

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

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

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

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

1. Increase Sales

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

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

2. Reduce Expenses

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

3. Use A/P Leverage

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

4. Collect on A/R

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

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

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

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

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

What Else Venture Capital Firms are Demanding from Entrepreneurs

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

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

How to Negotiate with Venture Capitalists

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

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

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

A pitch to a group of VC investors is one of the biggest steps in securing VC financing.  You have your proverbial foot in the door with your business plan, and they have called a meeting.  Now you need to seal the deal with your pitch.  No pressure, right?

Pitching is an art.  It is a sales talk without the “high-pressure” selling element. You simply need to tell your story clearly and effectively so that the VC investors believe that your company is worth their time.  Here are some tips on making an effective pitch:

1. Be Sure Everyone Is Introduced

Introductions should go all around.  In another post, we discuss how to introduce you and your team to the investors.  But be sure to also know who your investors are.  Remember them each by name if possible.

2. Use PowerPoint

When you are making your rehearsed pitch, use a PowerPoint slide method.  You may have to bring your own computer and projector.  However, the visual aspects of slides help the audience better understand your main points.  Make sure you incorporate a few tips about PowerPoint:

• Use fewer slides than you think is necessary.  Often entrepreneurs will create a presentation of 30 or 40 slides trying to cram every possible detail in their presentation.  Rather, only use about 10 slides.  That’s about as much as an audience can digest, and you don’t want to give your VC investors indigestion.

• Use big fonts.  Make sure your points are readable from a distance.

• Use only 3 or 4 points per slide.  Don’t cram too much information on each slide.  Each slide should cover a main topic and 3 or 4 sub-points.

• Don’t go overboard with slide template design.  It’s tempting to create visual and graphical masterpieces with your slide templates.  Keep them simple with easy backgrounds.

3. Build a Story

Using your PowerPoint slides, you need to build a story about your company.  Start with the company overview.  Then go on to address the problems and your innovative solutions.  Talk about the benefits and the advantages to your solution.  Then knock out the home run with how you plan to go to market with your business model and financial projections.

4. Connect With Your Audience

When you are giving your pitch, you want to connect with your audience.  Do this by keeping your story engaging.  As in the above point, building a story through problem and conflict, then presenting solutions and positive outcome, help keep your audience engaged.

5. Be Genuine

Don’t try to be a salesman or even a game show host with slick voice and insincere manner.  Be yourself and be enthusiastic.  No one is more passionate about your company than you.  Share that passion and enthusiasm in your pitch.

6. Be Brief

Here’s where some new entrepreneurs get it wrong.  They will prepare 30 or 40 slides and talk for and extended time about how great they are and how fabulous their business idea is.  Instead, keep your pitch to about 15 to 20 minutes.  It doesn’t need to be any longer to get the main points of your business proposal.  The VC investors will no doubt have questions and will want to use the rest of the time to answer these inquiries.   Make sure you are prepared to include Q&A within your pitch time. 

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

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

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

A VC Firm’s Business is Making Money

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

Venture Capitalists Are Privy to Many Ideas

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

Your Idea May Not Be All That Innovative

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

Giving to Receive Feedback

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

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

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