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I come from a private equity and business finance background, and I truly understand how frustrating and hard it is finding equity capital for a business. Understanding what Venture Capital looks for and what the VC process is all about, makes it much easier to develop and a successful venture capital campaign.

Venture Capitalist Hot Buttons – What VC Looks For

ü  Look for High-Growth opportunities.

ü  Look strongly at the Entrepreneur’s Track Record.

ü  Rates of Return Outlooks of 30-60% dependent upon deal risk and stage.

ü  3-5 year Investment Term on Average.

ü  Needs to be good timing with the Fund’s Allocation Strategy.

ü  A Solid Business Plan, containing an Executive Summary, Marketing Plan, Strategic Plan, and Realistic Financials, is critical in gaining a VC’s attention among the hundreds of opportunities being considered. A good Investment Overview is also a great way to stand out in the crowd.

ü  Play the numbers game.  Two deals out of ten may only be successful so getting VC’s attention is challenging.

ü  Look for unique, proprietary characteristics in your Product or Service.

ü  Require Competitive Edge and Strong Barriers to Entry.

ü  Collateral is less of an issue but having a Seat on your Board is often mandatory.

ü  Look for excellent references and industry relationships in potential Companies.

The Venture Capital Process

Ø  It will take you 4-6 weeks to develop your Business Plan, and while you are developing your Plan, you should be researching Venture Capital Funds.

Ø  A typical Funding Process Timetable:

o    4 to 6 weeks funding research while developing your Business Plan and before the Finance initiative begins.

o    Weeks 1-2:  Establish initial contact of the top 3 Venture Capital Fund picks.

o    Week 3:  Email the Long Form Version of your Executive Summary and Investment Overview to the 3 Funds.

o    Weeks 4-6:  Initial conference calls and meetings.  20-30 minute Deal Presentation.

o    Weeks 7-14:  Follow Up meetings; present Business Plan and Loan Package; complete Due Diligence requirements.

o    Week 15:  Offers received.

  o    Weeks 16-22:  Determine which offer is best for your Company.  Negotiate Deal Terms.  Accept Term Sheet.  Sign Commitment.

o    Weeks 23-24:  Closing and Funding.

Note:  From the time you start developing your Business Plan until you receive Venture Capital Funding will be about seven months, so ensure you have enough self-funding for your first year of start-up to give you maximum flexibility and enough time to secure a good Equity Deal.

Ø  Venture Capital works with their Investment Companies very closely.  3-5 years being the average time until Exit.

Ø  ROI for a VC Fund is over the entire pool of funds, not an individual company.  So remember you are just a number to them and up to you to prove yourself with Effective Management and Solid Fiscal Performance.

Ø  Venture Capital looks for a Distinct and Unique Product or Service; Competitive Edge; Original or Marketable Innovation; large and growing Market Niche; Solid Management Team; and to Reduce Risk while Increasing Valuation over Time.

Ø  Funding Rounds:  These vary from Sector to Sector and among different VC Firms.  An approximate Round Process is:

o    Round One:  Usually $2-5 Million for a small start-up Company.  Up to 60% VC ownership.  Seed round.

o    Round Two:  Product Developed and Tested in the Market.  Looking for 2 to 3 times the initial value.  Development Round.

o    Round Three:  Expansion Capital.  VC brings in “Zaibatsu” relationships or relationships with other Companies to help expansion.  Attracting Company Talent, finding the right Market-Oriented CEO as needed.

o    Exit Round:  IPO, Sell Company, VC sells Stake or Merger.

Note:  It is typical to have a different VC Firm for each round, with the earlier Venture Capitalists being bought down over time by the Company and/ or the subsequent VC Rounds.  This minimizes the original VC’s risk, ensures anti-dilution and gives the Entrepreneur control back in the Company, if he does a good job.  Original VC funds can and will remain until the Exit Round, which will be typically in 3-5 years but more recently up to 7 years.

Finding Venture Capital Funds

Ø  A lot of research and networking.  Utilize readily available databases to find 20 strong fits.  Use your networking and connections to be “introduced” to 5.  Close the deal.

Ø  It is that simple and that hard.

Ø  Utilize developed connections in the National Venture Capital Association.

Ø  Easy Info Find is an inexpensive, very expansive, easily searched VC database.

Ø  Use online VC networks to establish connections but DON’T shop your deal on the Network. Excessive shopping kills VC deals faster than anything.

Ø  Retain a Private Equity Law Firm specializing in your Sector.  They can guide you through the VC process, as well as, be a valuable VC networking facility.

Ø  Timing is everything.  You may find the right fund but they are no longer funding.  Ask them for a referral.

Here is a a Video of a Venture Capitalist explaining some Do’s and Don’ts when approaching a VC…