Wednesday, February 11, 2009

Five Keys to Raising Venture Capital

Raising venture capital is never an easy task. The target seems to always be in motion and you are subject to macro trends which are completely beyond your control.

With this in mind, below is a quick list of five things an entrepreneur should keep in mind:

1. No VC has ever invested in the perfect business plan. While the creation of your business plan is an important thought process for refining your ideas and anticipating challenges, it is nowhere near as important as actually implementing your business and/or proving your concept. You need to have a business plan to show that you understand what you are doing and what the challenges and risks will be, but without evidence of action, a business plan is not worth the glossy paper it is printed upon. Note -- angels WILL invest in just an idea/business plan, see point 2 below.

2. You need to know and understand the different types of capital that are available. There are significant differences between seed capital, early stage capital, venture debt and growth capital. There are also significant differences between angel investors, venture capitalists, strategic investors and private equity funds. Before you start pitching folks, make sure you know what you are looking for and whom you are looking to get it from.

3. Can you explain your business to a 5th grader? Most 10 year olds are savvy enough to understand the fundamentals of virtually every business. If you can't explain your business to a 5th grader, you should spend more time thinking about what the core of your business is. It always amazes me when a (potential) entrepreneur cannot explain his business to me in a way that fundamentally makes sense -- and, according to my wife, I am slightly more sophisticated than a 5th grader.

4. Don't BS people. Anyone that is a real source of funding is sophisticated enough to see through a sales routine. They may not call you out on your "marketing" but they certainly won't invest. Answer questions directly and when you don't know the answer, admit it. Don't tell the investor or his advisors what you think they want to hear. Trust me, it is more obvious than you think. Also, don't over play the buzz words. If they are buzz words, the novelty has already worn off. Seriously, Web 2.0/3.0 just does not get people excited anymore. Explain what you are doing and how you are going to do it -- see point 3 above.

5. Investors go with who they know. As an entrepreneur, if you don't already know potential investors, then you need to start getting to know them. Talk to your local incubator, present to some angels, meet professional advisors in your sector. You could even try commenting on relevant blogs. A pitch given via a warm introduction has a vastly superior chance of succeeding when compared to a cold call or a true elevator pitch.

Good luck!

1 comment:

  1. I think number 4 is a sound business tip in general. I work in sales and always think a client is better off knowing more information than not.
    BS never helps anyone in the long run.

    ReplyDelete

 
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Dividends and Preferences by Hank Heyming is licensed under a Creative Commons Attribution 3.0 United States License.