Venture Capital

What is the best way to go about getting a venture capitalist to back you? How do you find people will to invest their money in startup companies? The bank? Investment companies? Start on a street corner with a sign “I have great idea, give me money”. :slight_smile:

What are they going to expect to see? A business plan for certain, so what typically goes in a business plan? Is there a typical format?

If it’s a small business, go to your bank and ask about small business loans. If you plan on building a Giant Corporation and going public, you will need the backing of the big Wall Street venture capital firms.

In either case, you’ll need a detailed business plan. There are some good books out there that will help you write one.

On this page, from the Small Business Administration, down a bit in the middle, are several links on developing a business plan. You can also go to your public library and find info on Business Plans and Venture Capital.

Venture Capitalists are essentially large investors (or investor pools) that seek out new ideas to finance in return for a large stake in the nascent company. But you have to be a bit further down the path than “Eureka!”. First you’d start with the idea, develop some initial financing, further develop the idea via a business plan*, engage professional help (lawyers, accountants, consultants for that industry), get the company going a bit, possibly get some more financing, show some sort of revenue or potential revenue, etc. About then you could try and court some venture capitalists.

BTW, I recall seeing in a thread recently a poster who has taken several companies public, so if he pops in I’d take his stuff over mine in a heartbeat.

*Business Plan basics = What is my business idea, why is it unique, why will it be profitable, why will it be successful, what are the details on how it will work, how will the cashflow, who are the major players in the company (management and investment), what is their financial position, what are the major obstacles to success, etc. I can do this in a more detailed and structured format (I have for my business), but I’d prefer to refer you to the site above or any number of books written on the subject.

That would probably be Bill H., and he definitely knows more about this than I do.

In my limited experience, you can’t just go looking for a VC. There are simply too many people out there looking for funding for a VC to be effective taking interviews off the street. There are several conferences held during the year which give people an opportunity to make a presentation to a room full of VCs. In many cases, these are part of MBA or other university programs, but in some cases they accept proposals from anyone and choose a list of presenters based on an initial weedout. In a lot of cases, VCs use a grapevine network to learn about interesting opportunities, but this requires you to know someone who knows someone who knows someone. In other cases, you can generate some industry buzz simply by running your company well, and this will open doors to investors.

Most companies that successfully get funded by VCs already have other funding. The founders beg and borrow whatever they can to get started, often relying on family sources and personal credit. It’s pretty rare for a VC to fund a raw idea unless the person already has an established track record in the field, so if you’re a newcomer, even with what seems to be a home-run idea, you’ll need some significant progress toward marketability before you’ll get a VC’s attention.

Also note that when the opportunity comes to get VC funding, you want to look for more than just money. In some cases, companies that get VC funding don’t even need the money, but need what comes with it. VC investment provides a “stamp of approval” that tells everyone in the industry to take you seriously. VCs also have access to law firms, marketing companies, and financial institutions that would never take your call without their referral. VCs also have access to enormous talent pools because of their personal networks, so if you anticipate needing, for example, a world-class CFO, the fact that a VC can provide that might be more important than their money. The point is, you want to choose your VC carefully if you can and not just take the dough from the first rube that says yes.

I forgot to mention one thing regarding business plans…

The number one mistake I see a lot of startups make in their business plan is to ignore reality. Their plans read like marketing statements touting how great and innovative their product/service is, and they don’t spend enough time looking at the competition and all the possible failure modes. Your business plan should enumerate every possible scenario that could cause your company to fail, from not getting the startup funding to create your product/service in the first place to getting scooped by a major player who drives you out of the market, and how you intend to address these issues. The plan needs to be written for you to use as a roadmap in building your company, and the fact that you show it to investors is incidental. You write it for you, not them.

I don’t have the ear of any VCs, but I have a feeling that they immediately gong all these business plans filled with smoke and fluff. They expect to see a realistic review of the industry and your place in it, not a daydream of success.

Thanks very much for all the replies. This is very valuable information and exactly what I was looking for.

before you approach a VC, in order not to waste your time and teh VC’s time, do 4 things:

  1. draft a comprehensive business plan.

  2. boil the business plan down to a 20-30 minute powerpoint presentation

  3. be able to explain specifically how its investment will be worth 5-10 times, and when. For example, if we can get your $5 mil, we can do x, y, and z, and this will result in (a realistic projection of sales) and we expect costs to be such and such and profit will be this and a company with this much profit is worth this and your 10% of the company is worth this. You have to fill in the blanks. The VC can but if you can’t he won’t want to invest in your company.

  4. be able to explain how the investor cashes out his investment at such time. will you be able to IPO, will some larger company in the industry want to buy you, etc.? Not every company is a candidate for an IPO or acquisition.

I will admit that most companies can’t meet these criteria, but only a few who haven’t have been successful for VCs.