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 Capital Hot Buttons – What VC Looks For

• Look for very High-Growth opportunities.
• Look strongly at the Entrepreneur’s Track Record.
• Rates of Return Outlooks of 30-60% dependent upon deal risk and stage.
• 3-5 year Investment Term on Average.
• Needs to be good timing with the Fund’s Allocation Strategy.
• A Solid Business Plan, containing an Executive Summary, Marketing 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. Don’t forget a good Strategic Plan showing how you will put your Business Plan into action.
• Play the numbers game.  Two deals out of ten may only be successful so getting VC’s attention is challenging.
• Look for unique, proprietary characteristics in your Product or Service.
• Require Competitive Edge and Strong Barriers to Entry.
• Collateral is less of an issue but having a Seat on your Board is often mandatory.
• Look for excellent references and industry relationships in potential Companies.

The Venture Capital Process

• 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.
• A typical Funding Process Timetable:
  • 4 to 6 weeks funding research while developing your Business Plan and before the Finance initiative begins.
  • Weeks 1-2:  Establish initial contact of the top 3 Venture Capital Fund picks.
  • Week 3:  Email the Long Form Version of your Executive Summary and Investment Overview to the 3 Funds.
  • Weeks 4-6:  Initial conference calls and meetings.  20-30 minute Deal Presentation.
  • Weeks 7-14:  Follow Up meetings; present Business Plan and Loan Package; complete Due Diligence requirements.
  • Week 15:  Offers received.
  • Weeks 16-22:  Determine which offer is best for your Company.  Negotiate Deal Terms.  Accept Term Sheet.  Sign Commitment.
  • 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.

• Venture Capital works with their Investment Companies very closely.  3-5 years being the average time until Exit.
• 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.
• 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 bring down Risk while Increasing Valuation over Time.
• Funding Rounds: These vary from Sector to Sector and among different VC Firms.  An approximate Round Process is:
  • Round One:  Usually $2-5 Million for a small start-up Company.  Up to 60% VC ownership.  Seed round.
  • Round Two:  Product Developed and Tested in the Market.  Looking for 2 to 3 times the initial value.  Development Round.
  • 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.
  • 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 minimises 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

• 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.
• It is that simple and that hard.
• Utilize developed connections in the National Venture Capital Association.
• Easy Info Find is an inexpensive, very expansive, easily searched VC database.
• Use online VC networks to establish connections but DON’T shop your deal on the Network. Excessive shopping kills VC deals faster than anything.
• 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.
• Timing is everything.  You may find the right fund but they are no longer funding.  Ask them for a referral.

About The Article Author – Frank Goley

Frank Goley has a diverse experience base as a business consultant, business turnaround consultant, business plan expert, business plan writer, business coach, small business consultant, business planner, marketing consultant, online marketing consultant, seo consultant, and business plan consultant for ABC Business Consulting. Frank is considered an expert in writing, developing and implementing business plans, business turnaround plans, funding business plans, marketing plans, strategic plans and web marketing plans. Frank offers comprehensive business consulting, business coaching, business turnaround consulting, along with web seo, web development and web marketing consulting, to small and medium size companies. Frank is the author of a business plan book, The Comprehensive Business Plan Workbook – A Step by Step Guide to Effective Business Planning, and he has over 50 published articles and e-books on business success strategies. He also writes the Business Success Strategies Blog and publishes the Business Success busineNewsletter.