Preparing for venture capital

Venture capital can give your business the extra financial reinforcement it needs. But to gain this type of funding, you need to do your homework. Find out what investors are looking for and how you can develop a flawless business proposal.

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Preparing for venture capital
By Anita Campbell, Founder and CEO of Small Business Trends (Paid Contributor)
Published: June 11, 2013

Successful long-term growth in your business is largely determined by your ability to obtain enough funding to support current and future business operations. One common type of funding is loans from traditional lending institutions. Another is venture capital from professional investors.

With a traditional loan, you make payments over a set period of time. With venture capital, you give up an ownership stake in your business in exchange for financing. Even though you're rationing off a portion of your company, venture investors may open doors through their contacts, and actually bring in a larger sum of money than you might get with a loan. However, it's critical that your business has the potential for significant profit growth in a short amount of time. Because rapid profit growth is essential, venture capital funding typically isn't a good match for the average small business.  

"With a traditional loan, you make payments over a set period of time. With venture capital, you give up an ownership stake in your business in exchange for financing."

If you decide that a venture capital investment is right for your company, start by determining how you'll "sell" the individual or group of investors on why they should invest. The following tips can help you prepare your business pitch to venture capitalists.

1. Work your contacts

Getting a meeting with venture capitalists can be challenging. Consider leveraging a mutual professional contact to open that door with a personalized introduction.

Begin by evaluating your professional contacts, including your LinkedIn network. Ask your accountant and attorney if they have connections to investors, as they may know people in various financial fields. The more you ask, the more friends of friends, and colleagues of colleagues you'll uncover.

2. Create a persuasive pitch

Once you've secured a meeting, be prepared to address what a venture capitalist will get out of their investment in your business. Your primary job is to show how an investment will benefit them.

Start by putting yourself in an investor's shoes. Consider how appealing your business will seem to a third party who knows nothing about it. Additionally, create an effective pitch that shows enthusiasm and excitement, but also cold, hard numbers and facts. Be sure you include these vital elements in your pitch:

Projections: A venture capitalist's primary concern is how your business will make them money, and how long it will take. Include sales, profit, and growth projections that focus on what the investor stands to gain from backing your business. Keep in mind that a traditional venture capitalist is not looking to remain involved in your business for a lengthy period of time. Instead, they're interested in making a significant return in a short timeframe.

Viable market: Prove there is a viable market for your product or service by preparing answers to the following questions:

  • What problem does this solve for your target customer?

  • What does your product or service offer that customers can't get elsewhere?

  • How many customers are buying your product or service?

  • What is the business model (i.e., how do you make money)?

  • Who is the team? (Investors invest in people, so it's important to have a strong team with a track record of success.)

3. Practice your pitch

Venture capitalists expect you to know your business inside and out. So, you'll need to come prepared with a well-thought-out business plan, including monthly sales, expenses, and cash flow projections. Include plans for operations, product or service development, staffing, marketing, and sales. You should also list any potential business risks, and your contingency plans to address those risks. You don't want to overwhelm potential investors by flipping through all the pages of your plan, but it's important to have the necessary details readily available to cover your bases.

Also, venture capitalists' preferences vary regarding what kind of documents they want you to leave behind or submit in advance. Some will want an executive summary and a few pages of financials, while others expect a detailed business plan. Investigate what they want ahead of time, and give them the documents they expect.

Finally, practice your pitch several times in front of a few trusted colleagues. Encourage them to pepper you with questions – so that you can present your key points clearly, but succinctly. Since your first meeting may be 30 minutes or less, you only have a short time to make a great impression.

4. Prepare to negotiate a deal

Potential investors are experts at negotiating, so make sure to have an expert negotiation team in place, including an attorney and a financial expert familiar with venture capital deals so you can reach a balanced arrangement.

Remember, it could take a while to find and finalize an investment. Make sure you have a plan in place to sustain business growth and operations during this process.