How to Approach a Venture Capitalist to Fund a Startup Business
Oct 19, 2010 Nick Schklair
If you're trying to establish a new company and the startup venture investment is significantly beyond whatever personal resources you might possess, more than likely you’ll require outside funding. There are two approaches to funding: angel investment and venture financing. If the opportunity requires very significant front end funding, then venture capital is virtually your only alternative.
Moreover, commercial banks typically do not invest in start up ventures, therefore the burden of initial funding will still fall upon the venture capital community. The Small Business Administration (SBA) works with small business entrepreneurs, but they will typically avoid a risky start up situation, although they can offer moral support, information and contacts to whom they can refer you.
The Venture Capitalist and the Entrepreneur
The VC community typically specializes in certain areas: retail, biomedical technology, IT technology, real estate ventures, etc. Therefore, as a potential entrepreneur, it is incumbent upon you to search out those venture capitalists that typically would invest in an opportunity within your industry. Obviously, with a background of experience in one particular industry sector, their ability to evaluate your business is greatly enhanced when they see your business plan or Executive Summary
Locating a venture capital company that might be interested in your venture can be accomplished several ways: There are local venture capital groups in most large cities, angel investors and accountants may be a source of referrals to an appropriate venture capital firm. All of these venues should be explored, but if your opportunity is of such a breakthrough in technology, marketing or sheer market magnitude, a larger VC firm may be more suitable. The internet has a listing of of national firms on the National Venture Capital Association (NVCA) website.
Business Opportunity Locale, Sizing and Investment Stage
There are other factors you should consider in your quest to raise venture funding. Among them are whether your potential business opportunity is of local or national importance, your investment stage and the potential sizing of your company.
- Local or national business opportunity. If the business opportunity is only of local importance, typically, a smaller localized VC firm may be more appropriate. Also, there are universities and state supported resources that should be considered for local business ventures.
- Investment Staging. Some venture firms only handle latter stage funding after a business has been established. Others handle early and seed stage funding opportunities. Choose appropriately.
- Opportunity Sizing. Certain VCs handle only very large potential opportunities that typically require a large initial funding influx. A review by a VC can be a sizable commitment for the firm. Therefore again, choose your venture capital sources judiciously.
When contacting a venture capital resource, keep in mind that the first thing they'll want to see is your business plan or more than likely, an executive summary. The pro forma financial statements will be of extreme importance and should be included with the executive summary. They typically screen through hundreds, if not thousands of plans every month. It is important, if possible to try to speak directly with one of the professionals that may be involved in reviewing your plan.
Read on
Unsolicited plans or summaries are very common and it's easy for your plan to be lost in the shuffle of daily paperwork and never attain any "mind share", whatsoever. Why waste the time? Try to contact and speak with someone by telephone, if possible, before sending your plan anywhere. Also, be aware that on the initial preliminary go around, the VC will not waste time by signing a confidential disclosure/nondisclosure agreement. If you have any doubts, contact an attorney specializing in business startup funding situations.
Lastly, when and if your plan is reviewed, be prepared for an endless stream of questions. You and your team may be required to meet an associate that will review your plan and will ask to see you in person. When this occurs, the door is opened on the beginning of negotiations. The venture capital firm in early stage financing will almost always demand control of your (prospective) company. It's called the golden rule, "He who has the gold, makes the rules". When you've got that far, be prepared for major ownership compromises, it's all part of the process that may be quite lengthy.
Copyright Nick Schklair. Contact the author to obtain permission for republication.
Excellent !!
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