New businesses trying to make a jump into the big leagues need the capital necessary to expand and grow. Finding venture capital is the choice for many smaller businesses, with the funding providing both the capital and the guidance for business expansion.

Of course, venture capital firms are extremely picky when it comes to their choices in whom to invest. In a few instances, businesses are awarded venture capital because they are in the right place at the right time. However, most of the time, it is only the most prepared businesses with the right ideas who are successful at finding venture capital.

How do you know if your business is ready for VC funding? Here are three sure signs that venture capital firms may take a look.

1. Organizational Structure

First, venture capital firms are succinctly aware that only businesses who are absolutely solid in their organizational structure will survive. A business organization must consist of experienced management professionals who are all dedicated and enthusiastic about the business product and mission.

An enthusiastic entrepreneur can be the catalyst that flings a great business idea toward success. However, a single leader is not enough. A venture capital firm will only look at businesses that have the right leadership in all areas of the organization, including marketing, sales, production, finance, administration, and overall CEO leadership.

2. Operational Experience

Keep in mind that venture capital firms will likely choose businesses that have some business experience. Only a small number of venture capital dollars go to seed funding. Most venture capital dollars will go to early stage, expansion, or later stage businesses.

You must prove to a venture capital investor that your business is not only set to grow or expand, but that it has the track record to prove the business model.

3. All Documents Prepared

The last sure sign that your company is ready for VC funding is having all the proverbial ducks in a row. All necessary documents must be prepared in excruciating detail. These documents should include:

- Business Plan - Give a complete overview of the business, including mission, product/service detail, leadership details, marketing plan, and pro forma financials.

- Business Model – This is the overall blueprint of how the company will be run. This document shows operational details such as production plans, marketing strategies, financing, etc.

- Business Proposal – This is a brief document that proposes why the business needs venture capital and how it will spend the cash.

- Financial Projections - These are detailed and researched financial figures that show where income is made, and where money is spent, with a goal of increasing net income year by year.

When you have all your t’s crossed and your i’s dotted, then you’ve just worked you way closer to venture capital funding.

There is no disputing the importance of a well-written business plan, especially if a business is looking for start up capital. Venture capital firms are the ultimate judge of a refined business plan.

However, not all new businesses are ready to present their business plan to any investor, much less a venture capital firm. It is often the case where business plans are unfinished, unedited, and even comical in their hype and unrealistic data.

So how do you know if your business plan has the credibility to go before the judges of venture capital? Here are a few tips:

Pinpoint the Market

There is no venture capital firm in the world who will agree to provide start up capital to a business who states that the world is their oyster and there is no limit to the market. A product or service must have a specific and pinpointed target market, and it must be proven in the business plan.

A business looking for venture capital funding must do the research using past experiences and relevant market studies. The data must be compelling and prove to venture capital executives that the market exists and that the potential market will buy the product.

Highlighting Barriers and Competition

A credible business plan will not shy away from bold and direct statements about competitive businesses and barriers to market. Competition is absolute, and all new businesses have unforeseen problems when making their mark on the market. Venture capital firms will appreciate those business plans that have taken the time to see the unforeseen – and has the courage to disclose them.

Realistic Financial Figures

It is too easy to work up spreadsheets with numbers that appear to be reasonable. Using simple percentage increases based on industry averages is not good enough, however. If a business does not have a prior income history, it is necessary to forecast figures based on research.

Be sure that your business plan presents realistic income figures based on market research and appropriate similar business modeling.

Promote the Leadership Team

Venture capital firms will be more drawn to a business plan with an all-star leadership team. An entrepreneur with a vision is a nice start, but a business plan highlighting a management team with previous and successful start up experience, or at least a great track record in the same industry, is a must for obtaining start up capital.

The success of an entrepreneur starting a new business venture depends heavily on his or her networking skills. The keen ability to acquire contacts who later may become vendors, customers, clients, correspondents, referrals, employees, associates, business partners, or even venture funding investors is essential to the success of the new fledgling company.

However, most entrepreneurs new to the business startup world take for granted the ability to network their way to build relationships with venture capital companies.

Venture Capital Networking Sources

There are plenty of resources available to business owners to help them in their venture capital networking journey. Here are just a few.

Entrepreneur groups – Local entrepreneur groups are found in most bigger cities. These groups are specifically designed to support local business owners in their journey to building a successful business. You can bet you’ll find others who experienced the same venture capital search as you.

Industry networking groups – Oftentimes, you as an entrepreneur can look within your own industry to find the best suited venture capital option. Use association groups, newsletters, conferences, and trade shows to discuss your venture funding needs and get leads to VC firms others have used. Popular industries in areas like technology, medical and health, biotechnology, etc, have plenty of networking group possibilities.

Internet entrepreneur groups – Online you’ll find a plethora of resources for new entrepreneurs. A few narrow searches can result in websites aimed at helping business owners find databases of venture capital firms, along with articles and guides to getting VC funding and more.

Don’t Quit Networking After Venture Funding

A mistake many new small business owners experience is limiting their venture capital funding to a single venture funding deal. If a new business is lucky enough to land venture capital acceptance, that is usually not the last venture funding they will receive.

Rare is the case where a new business is funded by a single venture capital firm. Rather, it is imperative they the small business use their current VC firm to network with additional venture capital companies.

An entrepreneur with a young business will likely look at two or three venture capital firms, or even more depending on the size of business and the industry, to meet necessary financing needs to move on to the next level.

Venture capital firms are notorious about choosing only select candidates for their funding. Out of hundreds or even thousands of potential candidates, only a few are selected as investment opportunities. However, not only do venture capital firms offer money to help a new business get up to speed and meet their full potential, but they are also there to act in an advisory capacity as well.

So what other roles to venture capital firms play in a developing business? Here are just a few.

General Business Strategy Advice

Venture capital firms are in the business of helping other businesses succeed. In doing so, they have acquired a great deal of experience and wisdom along the way.

Do not expect a VC firm to hang back and be a “silent partner.” Instead, expect a venture capital firm to offer plenty of advice in how a business should proceed with their strategies and offer new strategies in addition.

Develop a Financing Plan

Obtaining venture capital is similar to getting a loan. While banks and other types of investors will usually set up a regular payment plan and expect a business to stick to it, venture capital will clearly outline how they expect to be repaid for their monetary contribution.

It is traditional to expect that venture capital firms may not expect any type of repayment right away. However, instead expect them to become equitable owners in the company, and design their “exit plan” with certain amount of preferred shares for an IPO, for instance.

Refine the Business Plan

A business seeking venture capital will get nowhere without a business plan. But once a venture capital firm decides to back a new business, they will likely offer advice on how a business plan can improve and be refined even more.

Marketing Advice and Strategies

A new business may have a super star lineup in their management team. However, there is always additional benefit from venture capital firms with national and even international marketing savvy. Expect that a venture capital firm will provide valuable marketing strategies for newer businesses and products.

Develop Contingencies

New businesses are likely to fail. Even a large percentage of venture capital backed businesses will fail. Venture capital firms are accustomed to this risk and can also provide additional and valuable advice and plans for contingencies when a business does not come together as planned.

New businesses trying to get a foothold in their industry can do extremely well with venture capital. However, financing is only a small portion of the role venture capital firms play. If you secure VC funding, expect an experienced venture capital firm to become a valuable, active business partner in your new endeavor.

Any entrepreneur with a new business idea believes their idea has merit and is a gem of potential. However, the hard part of the journey to business success is convincing others that the idea is a good one. Not only does the idea need to be sold on customers, but also to business partners like venture capital firms.

Obtaining start up capital for a new business idea is one of the first priority goals to simply get the business off the ground and rolling at full speed. Bank loans and family investors can help, but an entrepreneur who can finance his or her own way is extremely rare. Venture capital funding can infuse not only money, but valuable strategy advice for success.

Convincing a venture capital firm to fund your new business is a tough task indeed. VC firms are highly selective, but the right strategy to help sell your business idea will give you an edge in convincing those with the money to lend some to you. Here are a few ideas:

Business Plan

Without a doubt, a focused and refined business plan is essential to get the attention of venture capital firms. The business plan is a concise document that is the blueprint of how a business will move forward and succeed. It includes management profiles, sound marketing strategies, and reasonable financial projections.

Business Proposal

Selling a new business idea to venture capital firms requires not just a solid business plan, but also a brief business proposal. The business proposal is also a concise document that acts as the initial “pitch” to a potential venture capital firm.

The business proposal must present an educated request for capital based on sound research, experience, and prior studies. The proposal absolutely cannot be a request for money simply because your business idea is the “next best thing”. A venture capital firm will look for backing evidence that an idea is marketable, statistics on customer acceptance, and a realistic competitive strategy.

Presentation

If you are one of the chosen few who pass the initial venture capital proposal stage, you will then be asked to present your idea in person to the firm’s decision makers. Be advised that a live presentation should include a highly edited and concise PowerPoint presentation slide show and a polished verbal pitch with preparation to answer tough and direct questions.

You can convince venture capital firms that your business deserves their financial backing. However, to do so requires your attention to the details of your business idea, and how you present your ideas to the VC firm. Get your metaphorical ducks in a row, polish your presentation, and you will have a much better chance of getting the attention of VC firms.

Financial trends have their ebbs and flows, their ups and downs, and their hot and cold trends. Sometimes the stock market is bullish, and some years it’s a bear. Some years, real estate is a great investment with a big payoff, while other years it is wiser to avoid any investment in real property.

Venture capital also experiences trends with certain investment markets. Experienced venture capital firms are wise to take note of which businesses and industries are more likely to succeed, and which investment opportunities are the best places to place their available funds.

2011 was a big year for venture capital. Since 2008, venture capital funds dwindled due to a shrinking economy. However, results of 2011 showed a 22% growth of total funds invested compared to 2010. And 2012 looks to be a banner year for investment opportunities in new businesses.

What are the hottest trends for venture capital funding in 2012? Here is a look at three of the top industries venture capital funds are looking at.

Software as a Service (SaaS)

Software is still hot, but instead of the old traditional method of buying software from a box at Office Depot, or even downloading code from an internet source, software companies are delivering their “product” through their own servers.

SaaS has been a growing sub industry of technology sub-industry ever since the advancement of lighting-speed internet. Clients can simply log on to a software vendor’s site, create an account, and experience the benefits of the software function.

Venture capital firms are finding that SaaS is a hot investment opportunity. If you are a new business in software development, consider SaaS as a possible option to catch the eye of venture capitalists.

Big Data in Information Technology

Information technology and security companies are receiving a lot of attention from venture capital firms. In the second decade of the 21^st century, the collection and storage of electronic data is more important than ever.

Industries such as health care and social media are big users of data. Companies that develop newer and more efficient database management tools that help with the collection, storage, and retrieval of large amounts of data will find their way into the good graces of venture capital firms.

Social Mobile Technology

Facebook has announced it will go public with a $5 billion IPO. Who says social media doesn’t pay? With the hundreds of millions of smart phones in users’ hands, and the myriad of new Android phones and Apple iPhone Siri, phone clients are looking to go mobile and stay there.

If you have a company that is able to tap into the mobile social media application market, you will be a hot player for venture capital in 2012.

1. Prepare a Comprehensive and Well-Researched Business Plan

2. Establish Your ‘Dream Team’

3. Prepare for Your Interview(s)

A business plan and proposal letter are only the means to getting an invitation for a comprehensive interview. Be prepared to ‘wow’ a VC firm with your preparation. That means designing a 5-10 minute presentation that you have practiced over and over.  It also means being prepared with answers to tough questions about your business venture. An unprepared entrepreneur will quickly see a closed door.

4. Identify The Proper Venture Capital Firms

If you have viewed the Oscar Best Picture nominated film, The Social Network, you may remember the powerful scene when Facebook founder, Mark Zuckerberg’s friend, Eduardo learned he was practically ‘diluted’ out of any substantial ownership of the new company. This was after a number of rounds of venture capital start up financing. The scene is powerful because Eduardo knew that with every stage of new investment, the founders’ equity in the company got smaller and smaller. Ultimately, his ownership share was diluted to less than 1%.

What is dilution and how can you avoid getting ‘diluted’ out of your proper share of a start-up company? Consider a cup of water with a few drops of food coloring. You can easily see the coloring in the water. However, after adding three more gallons of water, the color of the water is diluted so much that you can hardly discern it at all.

The same thing happens when more and more money is invested in a start-up company. The more a venture capital invests start up financing in a business, the more equity they will claim in the company and dilute the founders to a less substantial position.

What can you do to assure that you and your co-founders of a start-up company are not completely diluted? Here are a few tips.

Ask How Much Dilution is Likely to Occur

When working with venture capital firm for your start up financing, be completely upfront and ask how much dilution may occur. This is especially important if you expect at least three rounds of start up financing.

The more successful your start up company is, and the more value it gains with each stage of start up financing, the better off you’ll be. However, do realize that if your business value remains about the same or even decreases, your amount of dilution will increase at a dramatic rate.

Obtain a Dilution Schedule

It is perfectly within your right to obtain a dilution schedule. A dilution schedule is simply a matrix listing each current ownership interest, including yours, your co-founders, mangers, and the venture capital group(s).

The matrix should also list all the series of start up financing A, B, C, etc, plus any convertible notes, warrants, common stock, and any convertible preferred stock. The total amount of equity interest for each party should add up to 100%. Double check the math and be sure to discuss any dilution that seems out of the ordinary.

Your start up business may not grow at the rate that Facebook did when it first hit the market. However, even so, you need to protect your equity interest and avoid over dilution.

Entrepreneurs looking for venture funding for their small business or start up are often approaching venture capital firms. And there is no wonder - venture capital firms can offer a staggering amount of money for expansion, marketing, and even IPO preparation.

Venture capital firms are often contacted first through an introduction letter and an executive summary. If the venture capital firm wants to know more, they will usually ask to see the full business plan and set up a meeting if the plan is attractive.

However, getting that first executive summary past the initial contact stage is never easy. Entrepreneurs should be advised to pay close attention and polish the executive summary to the point that it gleams.  

What are the typical mistakes that can cost the entrepreneur any further meeting with the venture capital?

An Unclear Executive Summary

Both venture capital firms and entrepreneurs agree that the biggest mistake on an executive summary is an unclear one. Many executive summaries are verbose, lengthy, and unfocused.

A venture capital wants a clear understanding of the new startup company, and clarity can be presented in a brief fashion. Entrepreneurs must succinctly articulate their company’s purpose and mission in a few sentences, or risk losing a VC firm immediately.

Too Long

Many executive summaries ramble on through paragraph after paragraph of mental regurgitation. The executive summary is not meant to be a detailed document. By its name alone, you can figure that it should be kept as a brief and concise summary and expanded in the full body of your business plan.

Unrealistic Valuation and Financial Projections

It is easy to imagine a startup company being successful and toss in desired growth statistics to match an entrepreneur’s imagination. However, to acquire venture funding, you must be realistic in your current business valuation and financial projections.

You will lose credibility with venture capital firms with numbers that are too high on expectations, or even too low on current cash needs.

Lack of Management Discussion

Too many entrepreneurs and beginning business owners talk too much about their product, and not enough about their own management team. It may surprise a lot of entrepreneurs, but venture capital firms place a high amount of emphasis on the management team, sometimes over the product itself, as to whether a startup company will succeed.

Your executive summary is the first point of contact with venture capital firms. Make it count. Avoid these costly and critical mistakes and polish your summary so that VCs will be clamoring to learn more.

For entrepreneurs and small business owners with dreams of becoming a large, nationally recognized technology company, venture capital is often an option for acquiring small business funding.

However, venture capital firms are not in the technology industry; they are in the finance industry. Thus, a venture capital firm will more likely look at a small business in terms of market potential, executive team, and previous financial management - and not just focus specifically on technology, even if it is superior.

But that doesn’t mean you should avoid identifying and fully disclosing your technology risks with a potential VC firm. They will expect it. So what kind of risks exist? And how do you identify them?

Product Development Stage

Many small technology companies attempt to acquire venture capital way too early in the venture capital process. If your company is still in the beginning stages of product development, there is a much larger risk for both you and the investing venture capital company. On the flip side, the further along in the product development stage, the better off you’ll be.

If you have a prototype that has been tested, and even analyzed and improved an efficient manufacturing process, you will have significantly less risk and be more attractive to venture capital firms.

Product Acceptance

You may have a product with superior technology, but why will customers purchase your product? And if similar products exist, why will they purchase yours over the competition?

These types of questions must be answered. Venture capital firms love superior technology, but they also understand that it must be marketable and have some advantage to acquire a large market base.

Failure to Commercialize

If you already have a product on the market, a tremendous risk exists if you are unable to fully penetrate the market. Your product must be marketable to the point where you generate enough revenue to exceed fixed costs and earn a large enough gross margin to make a profit. And commercialization is the way in which you capitalize on your superior technology with customers.

Proprietary Measures

Do you have proprietary technology? If so, if could be at risk of competitive espionage, or simply of commoditization when other companies try to copy your superior technology.

Be sure you take all measure to protect your proprietary and intellectual property. That includes:

?  Patents - Be sure to patent and protect your technology from copycats. Register your products with the US Patent Office.

?  Copyrights and Trademarks - If you have intellectual property, be sure to protect your property and trademarks with copyrights. For instance, the Walt Disney Company vehemently protects its intellectual property. Don’t even think of placing the famous mouse or any other protected character on any of your products. And be just as vigilant with your own. No one should use your intellectual property to make money without your permission.

?  Non-disclosure agreements - If you are afraid of espionage, don’t hesitate to use non-disclosure agreements with those with whom you share information. The at least gives you some recourse should your proprietary technology be released without your permission.

Identifying your technology risks can be a challenge, but by doing so, you ensure that a venture capital firm is fully aware of the challenges you face.