for start-up companies, venture capitalists can be a very important (and discerning) audience when it comes to the business plan. You can bet that they will read your plan very carefully before handing over any cash.
What do you need to succeed in the venture capital sweepstakes? First, it helps to know about the nature of VCs. Venture capitalists come in all sizes, from small, independent operators to large national or even global VC firms that evaluate thousands of new business proposals every year. Some VCs specialize in certain industries — biotechnology or e-commerce services, for example. Others tend to stay close to home, funding companies in their own geographic area so that they can keep close tabs on their investments. Some VC firms prefer to invest in companies working in the early stages of development. Others look for companies that need a final push into the big leagues.
Now comes the $64,000 question — or if you’re lucky, make that $64 million: What’s the best way to get your business idea and plan in front of real, live investors? We wish we could give you a sure-fire, one-size-fits-all answer. There isn’t one. Still, entrepreneurs who’ve been successful before can provide you with valuable knowledge. The following sections provide a few tips that should help you distinguish yourself.
FANCY FINANCING LINGO
As you may expect, the world of venture capitalists has a language all its own. Most of it has to do with the various types of financing available — which in turn is closely tied to the different stages of a company’s development. Here’s what you need to know:
Seed financing: The money you need to prove that your basic business concept is a rock-solid one that can generate streams of additional funding. Seed financing may go into building a prototype of your very cool new technology; this is called “proof of concept.” Or it can be used to conduct market research to show that customers really want what you have to offer.
Start-up financing: The initial level of investment required to get your business off the ground. You can use the funds for everything from assembling your business team to developing your product or service, testing it, and bringing it to market.
First-stage financing: Additional money that comes in after your initial start-up funds run out. You often use the funds to support further growth by ramping up new product development, production, marketing, or your sales efforts.
Second-stage financing: Money raised further down the road after your business has initially proven itself. You typically use the funds to allow the company to expand even more by supporting growth in all areas of the company’s operations.
Mezzanine financing: We’re not talking about buying theater tickets here. Mezzanine means in between. In a theater, the mezzanine level is between the orchestra and the first balcony. In the business arena, mezzanine financing falls between an equity investment and a standard bank loan. The money allows your company to expand in a particular direction without necessarily having to give up additional ownership in the business.
Bridge financing: Like a bridge over troubled waters, this kind of financing can help your company over temporary rough spots. For example, you sometimes use short-term bridge loans before an Initial Public Offering (IPO) to smooth out any working capital needs that may occur before the IPO is completed. When the latter occurs, the bridge loan is paid off with the proceeds.
Making connections
As almost all successful entrepreneurs can tell you, it’s not just what you have, it’s who you know. The more networking you do — those people who can say nice things about you, your business idea, and your plan — the better your odds of actually getting onto some venture capitalist’s radar screen.
Doing your homework
Venture capitalists have been to the rodeo before, many times in fact. And although they love to see excitement and enthusiasm in the entrepreneurs they talk to, they absolutely need to know that you’ve also done all your homework — everything from scoping out the competition and sizing up the market to crunching the numbers and identifying the strengths, weaknesses, and uncertainties inherent in your business model (see the earlier section “Bringing Your Ideas into Focus” for tips on finding this info). You need to be enthusiastic, definitely; who goes into business without a strong dose of optimism? In short, your investors assume the happy talk … but they want an ironclad business plan.
Perfecting your pitch
Bankers, backers, and bootstrappers
Before you jump on the venture-capital bandwagon, here’s something else to remember: VCs are definitely not philanthropists. They take a big chunk of your company in return for the cold cash they provide. And they often demand a role in directing or even running your business, taking seats on your board of directors, or even naming the CEO. You’d probably do the same if it was your money.
On the other hand, you can fund your start-up the old-fashioned way — from pay-as-you go bootstrapping, family and friends, or via a formal business loan. There are even crowdfunding sites that can provide you a platform to source online equity financing. One key advantage of this route is that you get to keep all the voting equity (legal ownership) in the company. And you get to run your business any way you please — you’re the top dog and no questions asked.
Stop for a moment here to consider just what kind of new business you’re contemplating. If it’s a software-based venture — such as an online dating service, a YouTube.com video sharing site, or an educational tutoring site — you might not need much to get started other than a computer connection, your own ability to code, and the time to do so. If this is the case, perhaps clearing out some space in your room and draining your pitiful little so-called savings account is all that’s needed, since “sweat equity” is your major contribution as you bootstrap your way to riches. But on the other hand, if your new venture requires raw materials, dedicated manufacturing space, machinery, and trained personnel, it’s going to cost you up front before a penny of revenue comes in. Is that little piggy bank account up for this level of drainage? If you do have large start-up costs, another option is to take the route that many businesses follow and pay your way forward with either donations from close relatives or a more formalized business loan.
HELP FROM YOUR UNCLE SAM
