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

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

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

A VC Firm’s Business is Making Money

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

Venture Capitalists Are Privy to Many Ideas

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

Your Idea May Not Be All That Innovative

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

Giving to Receive Feedback

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

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

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

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

The Details of the New VC Taxation Plan

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

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

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

Could Venture Capital Firms Invest in Fewer Companies? 

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

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

How Could the Tax Law Impact the Entrepreneur? 

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

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

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

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

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

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

Meet Market Needs

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

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

Prototype Your Product

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

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

Conduct Beta Testing

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

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

Using Free Samples

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

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

Entrepreneurs are inherently risk takers, ones who play the roulette of the risk-to-reward ratio audaciously.   While venture capitalists are known to indulge in “high risk” investments, their risk tolerance may not mimic the adventurous entrepreneur. 

When an entrepreneur approaches a venture capital firm with a proposal for financing, the VC must determine whether the risk is too great for the investment.   In the eyes of the venture capital firm, there are three sure signs that a proposal is not worth the risk. 

1. An Unfinished or Sloppy Business Plan

A VC firm will make a first assessment of a proposal based on the submission of a business plan.  Sending in a generic, sloppy, or unfinished business plan will not bode well for your funding efforts. 

Business plan software is readily available at retail stores and even downloadable from the internet.  Templates are also plentiful if an entrepreneur wants to use one as a blueprint.  However, so many entrepreneurs fail to take a software-produced business plan and write in the organic and specific elements that are particular to his or her business.  These plans come off looking generic and unenthusiastic. 

Instead, make sure you take the care to personally write, or hire a writer, to compose the necessary sections of your business plan that need an individual touch.  Before meeting with a venture capital firm, make sure your business plan is perfect – free of spelling errors or mistakes. 

2. Asking for Wrong Amounts

Many entrepreneurs do not even realize what stage is applicable to their business.  An entrepreneur with a great idea but with no feasibility studies or market research may think he’s ready for stage-one production and market penetration.  He’ll ask for a $5 million investment from a VC firm.  Then he hears the laughter as they shut the door behind him.

Others may have an existing business ready for expansion, but are asking for too little for an expansion program.  Knowing the stage that your business is in and how much you need to reach the next level is incredibly important when approaching a VC group.  So many businesses fail because they did not have enough working capital.  Though asking for too much is not recommended, asking for slightly more than you think you need is a good idea.

3. Too Much Debt or Too Many Investors

Some entrepreneurs start out their business idea on their own with the help of family, friends, and bank loans.  At this point, they are quite proud of the fact that they did not need VC funding for start-up costs.  However, when they are ready to get VC backing for market introduction or expansion, many of these entrepreneurs will face rejection because the companies are already too overloaded with debt.

Another potential problem is that an entrepreneur acquires too many start-up investors to get the business off the ground and finds that there is no way to satisfy everyone on how profits are to be distributed.  A venture capital firm that finds an entrepreneurial business with too many investors is likely to move onto the next application.

Don’t make the mistakes that entrepreneurs have made so many times in the past.  Learn from the mistakes and get your business ready to present as a prime candidate to a VC firm.

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

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

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

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

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

Experience, Experience, Experience!

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

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

Business Smarts

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

Passion and Drive

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

Resounding Commitment

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

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

What is innovation to your business?  Is it the how you provide the absolute best in customer service in your industry?  Is it the way you perform business operations efficiently to save money and get the most out of your production dollars?  Are your products your core innovations, with new releases each year?  There are countless ways you can incorporate innovation into your company – and this originality should continue to grow along with your business. 

Entrepreneurs face the challenge of creating and growing businesses that must constantly change as they meet consumer demands.  What worked five years ago may not work this year.  While your business idea may have fit a market niche last year, consumers ask for something different today.

Innovation is not simply just a new spin on an idea.  It is the constant process by which your business meets demands by creating solutions.  But with all the demands put upon you as the entrepreneur and founder of your company, how do you find ideas to continue innovation?

Employee Suggestion

Your employees are one of the greatest assets of your business.  Many entrepreneurs treat employees as a necessary expense, and by doing so, receive the bare minimum of effort from their workers.   However, if you empower your employees with ownership of their tasks and duties, and by giving them the freedom to suggest options for better efficiency and customer service, you have found a potentially bottomless source of business innovation.

Salespeople who work face-to-face with customers daily can offer great suggestions for better packaging or other improvements that meet customer needs.  Who would know better than the salespeople who ask the customer directly how to serve their needs? 

Be choosy when you hire your administrative staff.  The most creative ones can offer ways to save overhead expenses by developing more efficient procedures and inventing new time-saving processes.

Customer Feedback

Listen to your customers.  Solicit their feedback.  Ask them for advice on how you can serve their needs better.  Customers love to tell businesses how to do it better.  While their feedback may not always arrive in the nicest way, by analyzing what your customers say in their complaints and solicited comments, you can continue your innovative process to grow your business.

Follow an Example

Some adages say it’s better to lead than to follow.  However, there is no harm in matching, or even surpassing, your competition by imitating their processes.  Keep a constant finger on the pulse of your industry.  Read trade magazines.  Attend conferences.  Find out what everyone else is doing and what is working.  You can take those ideas and incorporate them into your own business processes to become more efficient and improve product ideas. 

Innovation requires constant creativity, work, and evaluation.  However, in order for your business to succeed for years to come, you must find ways to keep your product and business fresh for your customers.

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

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

1. Match Criteria

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

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

2. Sector Preference

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

3. Stage Preference

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

4. Avoid Conflicts

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

5. Narrow a Location

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

6. Ask

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

If you have an existing business and are on your way to acquiring growth funding and support from a venture capitalist, be sure to highlight any customer channels your business has through the use of social networking, or what is known as Web 2.0.  The buzz from online social networking can be a big boost to your business in the form of word-of-mouth recommendations and position your business for big growth potential – something that a potential VC likes to see.

Web 2.0 is the general term associated with the way users of the internet communicate with each other and connect online.  With tens of millions of web users actively posting content every day, Web 2.0 has a huge potential for the success of any business.  If you haven’t already, jump into the metaphorical ocean of social media and get your business noticed.

Blogs / YouTube

Does your small business have a website?  It should.  A website can have much more use that just a static web presence with your business products and location.  A website that is updated frequently has a much better chance of getting noticed by search engines.  You could easily start a blog that you update on a daily basis, or at least 2 or 3 times a week, with the happenings of your business, company highlights, and special promotions. 

Along with blogs are the sensations of viral videos seen on the popular YouTube.  If you have the gumption, the creativity, and the equipment, you could make short, clever videos of your company and post them on YouTube.  It could be as easy as making a “how-to” demonstration videos of a product. 

Facebook / MySpace

Social online sites like Facebook and MySpace are the latest and most hip ways for people from around the world to stay connected to their current friends and family, as well as long-lost classmates.  The power of MySpace among teens and those in their twenties was enough to singlehandedly power many companies offering MySpace related widgets, designs, and tools.  Of course, other businesses jumped on the bandwagon, creating a profile and collecting “friends” to whom they could promote. 

Facebook has gained much popularity with users of all ages and offers a similar way to keep your business name branded by forming “groups” and keeping your contacts posted with events and updates.

Opinion Sites

There are many online sites that allow members to post their opinions and recommendations about other websites.  A mention from some of the most popular sites could get your business noticed by millions of customers at once. 

Check out sites like Yelp, Twitter, Reddit, Digg, StumbleUpon, and Del.icio.us, and get your business name on there.

The popularity of Web 2.0 has helped thrust many businesses and online sites into a frenzy of customers.  You could have a tremendous advantage with VC groups if you can show them that your little business already has big numbers of potential customers. 

Do you know what stage your business is in right now?  Are you just starting with a great idea that you think will revolutionize the world?  Are you operating a current small business at optimal levels and ready to jump into a national expansion market?  Or are you ready to take on an acquisition and merge technologies and resources to form a giant in your industry?

Your business stage plays a large part in how much money you can secure from venture capitalists, and from whom.  Many VC firms are very strict about providing only seed money to potentially big businesses.  Others are only in the market to fund companies preparing to go public with an IPO. 

Take a close look at your business stage.  Then compare your positioning with those VC firms you have narrowed down to be potential funding sources.  Find out which ones invest in companies in your stage of development.  Here are the most common:

Early Stage

An early stage company is one that is not yet ready to position its product or service on the market.  A company in this stage may need seed capital or start-up capital in amounts ranging from $25,000 to $250,000.

• Seed Capital – If your business is still in the idea stage and you have yet to perform feasibility studies, market research, and product development, you probably are in need of seed money in order to continue getting your business idea into fruition.

• Start-up Capital – A business that has performed studies and research into their chosen market and is ready to take their product into the public is prepared to receive start-up capital from venture capitalists.  Start-up money can help with the initial marketing push, helping to distribute your product in the market.

Expansion

Expansion capital is for businesses already in or ready to start production today.  The amounts that venture capitalists usually invest in expansion companies range from $500,000 to $5 million.  There are usually four stages to expansion capital:

• 1^st Stage – 1^st stage funding is used towards full-scale production of a product.

• 2^nd Stage – Usually for companies in production and generating revenue, but not yet making a profit, second stage capital helps to grow receivables, inventory, etc.

• 3^rd Stage – Third stage, or “mezzanine” financing, helps businesses perform major expansion and perhaps even develop and introduce new products.

• 4^th Stage – Also known as “Bridge Financing,” companies in this stage are in need of capital to help smooth the way to a potential IPO within about six to twelve months.

Acquisition/Buyout

A company in this stage has advanced operations and is prepared to acquire another competing company as a subsidiary, or expand into new markets and products with the purchase of an existing company.  Monies for this type of capital can range from $3 million up to $20 million.

Be prepared to show your potential VC that you understand which stage your business is in and how you propose to penetrate or expand into new markets and reach the next stage.  Find a VC that funds that stage.  Then solidify your business plan so that you can convince your potential venture capital firm that they should invest in you.

Your small business or start up company is ready to make the leap into national or international exposure.   However, you need the support of a good venture capital firm in order to get the funding necessary for such a momentous effort.   Not only do you need a spotless and polished business plan, but you need a business model that shows your potential funding source just how your company produces and sells your product.

A business model is the framework or method by which your business will sustain itself in producing and selling a product or service.  While production requires infrastructure issues that are too numerous to overview in this article, there are seven important product-related issues that you should have in place when you go before a VC group with a request for financing.

1. Target Customers

How will you find your customers?  How will your customers find you?  These are important questions to know about reaching your target consumer.  You need to know your target consumers demographic and how best to reach them, whether it is internet, television, radio, magazine or newspaper ads.

2. Product Differentiation

The basic question here is: what make your product so special?   Every other company in the industry is touting the latest widget that looks just like yours.  What innovation and added value does your product have that sets it apart from the competition?  Note and highlight this in your business model.

3. Pricing Based Upon Economic Models

What methods did you use in determining a price for your product or service?  Pricing is a careful balance of the economic equation of supply and demand.  If you price too low or too high, customers may not demand your product.  You need to determine a price that is not too low so that you make a profit, and not too high that turns customers away.

4. Innovative Marketing

Selling your product requires innovation itself.   Will you depend on advertising to sell your product?  Or will you have a sales team that sells face-to-face with your customers?  You need to determine how best to sell your product and use the right marketing mix and techniques.

5. Distribution Strategy

Your distribution is how you get your product in the hands of your consumers.  Will you run your own retail store?  Do you plan to distribute to other retailers through distribution houses?  Will you sell business-to-business?

6. Customer Support and Service

Your business needs a way for your customers to contact you with questions and help with your product or service.  Can they reach you by phone?  Via internet website support?  Have a system in place that is ready to take on customers’ needs after you’ve sold your product to them.

7. Customer Satisfaction

And finally, how will you transform target consumers into loyal customers?  One of the best business marketing techniques is word-of-mouth.  Gather a loyal following of customers who come back again and again and tell their friends, and your business can grow exponentially in contrast to regular marketing.  Offer satisfaction guarantees. Do what it takes to get a loyal following and your business will grow and thrive.