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

Target Your Market

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

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

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

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

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

Distribution Channels

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

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

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

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

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

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

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

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

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

Sole Proprietorship

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

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

Partnership

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

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

Corporation

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

There are three main types of corporation:

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

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

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

Limited Liability Company (LLC)

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

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

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

1. Enthusiasm and Passion

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

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

2. Dedicated Focus

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

3. An Exemplary Team

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

4. Unique Innovation

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

5. An Outstanding Product

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

The economy is gloomy – but not so gloomy that venture capital firms are holding off from making investments!  Entering a market segment may be tough to acquire new consumers who are saving more than spending, but VC firms are saying that a good business idea is always a good investment option for them, even in tough economic times.

Experienced VC firms know that there is always consumer interest in a great product or service.  However, a startup company may have a tougher time acquiring VC funding due to the larger amounts of capital needed.   In today’s economy, venture capital firms are choosing fewer startups and focusing only on those who have the best chance at survival.  Many VC firms are widening the gap from startups and investing more in Series A or Series B stage companies that have a proven track record of success.  

Why Business Stage Matters

Startup companies are still in development, adding members to the leadership team, performing market research, and performing product development and testing.  Usually there is no revenue coming in, but large amounts of capital are needed from VC firms to continue the business launch.  Due to the risk of failure or delayed success, and the higher potential of loss on a large investment, VC firms look more toward Series A or Series B financing.

Smart and savvy entrepreneurs should be able to build a team, develop a product or service, and launch their business without the need for VC funds.  Even if it means bootstrapping and raising capital from friends, family, and partners, there are ways to acquire funding to get a business off the ground.

Once a business launches and gets initial traction, there is better potential for success.  Management is in place and employees are working.  Business is coming in, but profit may not yet be experienced.  It is at this Series-A stage that many VC’s will take a look at new businesses and invest with less risk than a true startup.

Series-A vs. Series-B Funding

What do you need in your Series-A business to acquire VC funding in contrast to a more experienced Series-B business?  Hope!  In a Series-A stage, companies have not yet reached their full potential, and therefore, hope for significant profits and growth still exists.    

Series-A funding can help a business take off into breakeven territory and even profitability.  Funds from Series-A financing are generally used to increase productivity, cut costs, build infrastructure, and push distribution and sales. 

With a growing company, a VC firm can receive a greater return on their investment than with an already profitable Series-B company.  If you have hope, you can gain respect by building a company from the ground up and keep the momentum going.  And that hope can translate into a successful VC financing effort.

Your search for venture capital should be focused and directed at particular venture capital firms that stand the greatest chance of helping your business succeed.  Thousands of VC firms exists and are located all over the country.  Each one has specific elements they look for when distributing their VC funds.   How do you choose a potential group of venture capitalists who are most likely candidates for accepting your business proposal?

1. Location

Location may be an important key element for a VC firm.  A VC firm may only invest in companies that are within proximity of the VC headquarters.  It may be 100 miles or perhaps 500 miles.  If proximity is not relevant to a particular VC firm, they may also choose potential new businesses that are only located in larger metropolitan areas.  Know the geographical limitations of your potential VC firm before submitting a business plan for perusal.

2. Sector

What is your business type and what sector will you serve?  Many VC firms have specific business sectors that they will invest in, such as high-technology or healthcare.  When looking at a pool of potential venture capital firms that you would like to pitch, narrow your pool to those that invest in your business arena. 

3. Business Stage

In what stage is your business?  Startup?  Expansion?  VC firms will often specify that they only invest funds in startups, or maybe just in companies who need a money bridge before an IPO. 

A startup company puts the VC firm in greater risk for loss due to the potential for failure.  However, the returns and rewards are better when they do succeed.  Conversely, some VC firms will invest conservatively in already existing businesses with a proven track record, but is ready to make a large growth effort.  Know which stage your business is in and seek VC funding from groups that focus on your stage of growth.

4. VC Partners

Most venture capital firms are financed by investing partners.  Know who the partners are and which areas of experience each has.  By choosing a VC firm with partners who have experience in your business idea, you may have a better chance at getting accepted for funding.

5. Portfolio

Take a look at the investment portfolio of a VC firm.  You may find that they are diversified in a number of different market segments, but some may have primary sectors in which they invest.  Try to find a firm who has invested in businesses similar to yours and were successful.  Good experience in an industry could determine that they will continue investing in that industry with your business.

6. Assets

If you are an entrepreneur with a startup business who needs many cycles of capital funding, take a look at VC firms with adequate assets themselves.  You may need early stage technology development, marketing research funding, startup funding, and then progress onto first or second stage funding.  Make sure your potential VC firm will be able to follow your business along its path of success.

Where will your business be located?  This decision is one that must be made carefully.  The geography of your business headquarters, as well as the state of the legal business entity’s registration, may make the difference in whether your company will receive VC funding.

Many VC firms have specific guidelines and policies that not only determine in whom they invest, but also where they want to invest money.  And it may have nothing to do with your business idea.  A quality business that fits VC guidelines, but not the geography, may not be chosen as a funding option.  Therefore, you should always know in advance whether a VC firm has specific geographical guidelines.

Why is location so important?  Below are some of the typical reasons VC’s have geographical limitations.

The Cluster Effect

Why is it that most software or technology companies are located in the Silicon Valley in California?  Since the late 1990s, tech firms have clustered around the Silicon Valley area.  Giants like Apple and Google are headquartered there.  Some say that the locale provides the best talent, and thus, tech firms have the best chance to succeed in that area.  A VC firm may determine that if they invest in tech or software business, it will be only in the northern California area.

A Balanced Investor Portfolio

Venture capital firms also have investors to whom they must answer.  Investors that contribute money to a venture capital firm want security in knowing that not all their proverbial eggs are in one basket.  Subsequently, a VC firm will balance a portfolio over a geographical range.  If one region of the country hits on hard economic times, other businesses in different areas will pull the slack from disappointing results elsewhere.

State Laws and Regulations

Have you ever wondered why so many financial and credit companies are located in Delaware?  The corporation laws of that state are the most relaxed in the country, and they allow financial firms much flexibility in managing corporate policies and interest rates.  Since interest rate limits that a company may charge are based on the legal state entity status, many financial companies choose Delaware in order to charge higher rates.

The state you chose to register your business can be a key decision.  Like the example above, a financial firm will have greater options if they become a Delaware corporation.  You should determine how your business operations will best succeed in a perfect world of little regulation.  If you discover that the state you currently reside in does not offer the flexibility you require for your business, consider registering it in another state.

Venture capital firms can be picky about what businesses they chose to invest in and in what states they operate.  Usually a VC firm will know the best regions for a particular business.  Take a look at your potential set of venture capital firms and research each one to know what regions they prefer and by what type of business.  Your state headquarters could make the difference in obtaining much needed venture capital funds.

Venture capital is one of the few financial resources a startup or small company can access to obtain large scale funding for growth and expansion.  However, attracting a VC firm and convincing them to invest in your business venture is not easy.  In fact, only the best business ideas with the best people will be lucky enough to receive a nod from a venture capital firm.

Having a great business idea and plan is not always enough.  Entrepreneurs may have a knack for creativity and developing business ideas, but communication and sales may not be their strong point.  An entrepreneur who recognizes this fact will be wise to hire a public relations and communications expert to be the front person for the company.

Benefits of a Public Relations Expert

• Contacts - Experienced PR people have a long list of contacts and networking resources.  They know what media sources to contact when attempting to make a promotional announcement, and may also know the right contacts who may know somebody who knows somebody in a venture capital firm.  Having a wide stretch of network contacts can be a great benefit for a new business.

• Media Coverage – Your PR person can secure beneficial media attention before your business makes a presentation to a venture capital firm.  A PR specialist will have the ability to write attention grabbing press releases that could result in free publicity from news sources.  Positive clips from newspaper interviews or feature stories, or even videos from broadcasted news, can grab the attention of VCs.  

• Great Presentation Skills – The right PR person will make the perfect spokesperson for your group.  Their smile, cheerful attitude, and ability to communicate clearly and answer questions can thrust your business brand and reputation into the right VC hands.  In many new business cases, the entrepreneur is a great central figure for the business model and development, but not always the best choice to make a presentation to potential investors.  Make sure that when you get the chance to present to a VC firm that you choose the right person to perform the main speaking role.

Choosing a PR consultant or hiring a full-time PR spokesperson should be done carefully.  Your PR choice could result in big savings in advertising costs with the right free publicity received from news outlets.  Take a look at PR consulting firms and see if that is the right option.  Sometimes the right choice is to hire a freelance PR specialist who can devote more time to learning your business and have a better understanding when making presentations. 

Insist that you review a potential PR person’s experience and success.  Your PR person should have experience and verifiable results in the areas you need, whether it is in presentations or media publicity. 

Taking your business to the next level may require large funding from venture capitalists.  Consider the possibility of hiring an experienced PR consultant to be your front person and helping make your company look its best.

Part of a good business plan is a plan for exiting the business.  Indeed, even you, the entrepreneur, should have a plan for your business where you will no longer be running it.  If you are looking for venture capital funding, having an exit strategy is even more critical.  Remember, venture capitalists receive the most profits when an exit strategy is realized, such as an IPO or acquisition. 

But what is an exit strategy, and how does one conceive of a sound and strategic exit strategy?

An exit strategy is the plan for an entrepreneur or business owner to exit the business.  An exit could take one of many forms.  The business could be sold, all assets could be liquidated, or the business could go the public investor route with a public stock offering.

Liquidate the Business

Some entrepreneurs form a business with the intention of short term gain rather than a lifetime job and income.  Growing a business to end up with a large equity balance on the balance sheet may be the right strategy for a young entrepreneur who has bigger dreams and ideas.  Once the business hits the equity goal, all assets could be sold and debts paid, leaving a nice profit for the entrepreneur.

Likewise, a business that fails is likely to go this route as well.  If an entrepreneur exhausts all means of trying to keep the business breathing to no avail, the liquidation option may be the best exit strategy to get out without further losses.

Sell the Business

Rather than calling it quits and selling the business assets, an entrepreneur could make an exit strategy to sell the business to an interested party.  This strategy may be good for an entrepreneur who also does not want a long-term commitment to the business, but desires to make a profit from his or her efforts.

Selling a business could either be to another entrepreneur who wants to run a business for himself.  Or it could be a strategy to become acquired by a larger business.  Many small business entrepreneurs have gone this route.  YouTube, for example, was formed by former PayPal employees and was subsequently acquired by Google for $1.6 billion – which is not a bad exit strategy.

Opt for an IPO

The initial public offering (IPO) of a company is what many entrepreneurs aspire to accomplish.  A successful private business that has shown growth and revenue expansion can be highly desired by investors.  By offering the business as a public stock company, the entrepreneur releases his or her ultimate hold on the company and puts it in the hands of a board of directors.  The entrepreneur could stay on as CEO or simply cash out his share of stock options.

Whatever the exit option, a successful entrepreneur will have a plan.  The exit strategy is particularly important if an entrepreneur wishes to obtain seed money from a venture capital firm.  The VC wants to know the ultimate plan for the entrepreneur before investing large sums of money.  Thus, it is important that you develop a sound exit strategy plan for your business.  Though it may not be the ultimate result, it still gives an entrepreneur an alternate goal with the business.

Many entrepreneurs are currently worker bees in a “day job.”  Working for another boss is still the norm, but would-be entrepreneurs have the type of personality that desire to be their own boss.  However, should an entrepreneur quit a day job to completely invest into a new business?

It is common for many entrepreneurs to continue working a full time job while developing and growing their own business.  An entrepreneurial venture does not always provide an income at first, and with a mortgage and kids, the regular income from a day job is important to maintain. 

However, some entrepreneurs argue that without devoting a full time effort into growing their business, it will not get off the ground.  Particularly with a new business, you need to invest much time and effort into marketing, growing contacts, and making sales.  With no money to hire extra help, an entrepreneur must take charge of all the duties him or herself.  Sometimes the reward to exerting full effort in a business venture is the realization of a regular income much quicker than a part time endeavor.

The real question to whether an entrepreneur should or should not quit a day job depends fully on the circumstances of the individual.  Some things should be considered:

Do you have large financial obligations?

Many entrepreneurs are married with families and a mortgage, not to mention all the credit card bills that have financed much of his or her entrepreneurial efforts.  If this is the case, a regular income from a day job may be essential.

Are you looking for venture capital financing?

Sometimes a venture capital firm does not want to support a business when the entrepreneur is not working at it full time.  It may show that the entrepreneur is not confident in the success of the business.

However, with the help of VC financing, it is possible for the entrepreneur to devote full time into the startup business.  In any case, an entrepreneur should disclose the reasons to a venture capital firm for not quitting a day job.  People do understand that financial obligations must be met.

Do you have adequate savings?

For anyone quitting a regular full time job, it is usually recommended to have savings to support minimally three to six months of no income.  Many young entrepreneurs are able to drastically reduce their expenses while endeavoring to build a new business and can live off of little savings.  Another possibility for a confident investor is to cash in on stock options or other investments to help pay bills during the transition from full time job to full time entrepreneur.

Ultimately, the confident entrepreneur will find a way to succeed.  Whether it may be from living paycheck to paycheck while a business grows, or living cheaply while devoting full attention to a business venture, the entrepreneur who will succeed will be the one who weighs these options carefully.

Entrepreneurs who are starting a new business have a big challenge ahead.  It’s not enough to have a great business idea and a perceived market, but a keen entrepreneur will spend a great deal of time evaluating and sizing up the competition.  Having a clear picture of your competition’s business process and product marketing not only will help you develop your own, but also will help in setting your business apart if you are looking for venture capital financing.

Knowing your competition isn’t about squashing them.  The days of industrial revolution monopolies, where killing or buying out the competition in order to be the last business standing, are a thing of the past.  Today, knowing your competition is learning about their message, their product, and their business process so that you can develop a product that sets you apart.  Your business should be able to penetrate the market and work harmoniously along with the competition. 

Becoming familiar with competition not only helps you design your business process, but it also allows you to find ways to form potential partnerships with your competition.  Collaborating on joint ventures is a great way to expand customer base and revenues for both businesses.

Starting with Your Research

Your competition research should begin with the prominent business in your region or even on a national level that sells a product or service almost identical to yours.  Acquire their marketing materials like brochures, catalogs, and website content.  You could even make a purchase from the competition as a “mystery shopper” to gain intelligence on how their customer service functions and the quality of sales service. 

Find the Message

Once you’ve gathered as much data possible, take a look at how your competition delivers their message.  Do they use fancy graphics?  Flowery words?  What is it about the marketing material that attracts a customer to make a call or visit their store? 

If you have data from a number of different businesses, look at how many may have similar messages.  Some businesses try to compete simply by imitating their competition rather than trying to stand out.  Look at the messages from each and determine what works best and what is ineffective. 

Spin Your Own Message

Evaluate how your message can be delivered more efficiently and effectively.  Can you provide better customer service?  Does your product or service have features above and beyond what the competition sells?  Find ways to set yourself apart.  You don’t have to create material that is identical.  Rather, find ways to incorporate what works into your own message that will attract the same type of customer.

Chances are that your business idea is not completely unique.  You will have competition in some form.  If you are an entrepreneur who is looking to expand business with venture capital, you should perform a complete evaluation of your competition so that you know where you stand within your niche – which will allow you to demonstrate to venture capitalists how you will stand apart.