Acquiring venture capital funding can consume a large amount of valuable time and effort. Here are a few tips that can help you secure funding and get on with the process of building your company.
Choose the Right VC
Carefully research your potential investors. Learn about their focus areas and their philosophy. Then, go to venture capitalists who have financed firms similar to your own; they will understand what you are saying. Some VC’s are very hands-off, whereas others regularly become quite involved with the operations of their portfolio companies. Be sure to talk to those that more closely match your needs. Once you have identified a good match, be sure to talk to the right person within the firm. For example, if your idea is in the realm of medical technology, be sure that you are speaking to those people in the VC firm.
A VC likely will spend only a few minutes looking through your business plan. Illustrate concepts using diagrams so that one does not have to read the plan to figure it out. Assume that the VC will not read the entire plan, because he/she probably won’t read it. A full business plan may have 50 pages or more, but the VC probably will not be interested in that level of detail during the initial review. As such, it is a good idea to have an executive summary of no more than 10 or 20 pages.
Focus on the results of your team, showing any demonstrations at the beginning of your presentation. An initial demo helps to eliminate any questions that may otherwise linger throughout the presentation and distract from your pitch. Many start-ups originate from a team of students, but it is wise to recognize that you will need a broader team with more experience and contacts, so it is not a good idea to list a team of only students. A team that already has worked together has a better chance of securing funding. In this context, working together means having done a similar business project together. If you have no team, you may do better by seeking an incubator; a major job of incubators is to help you build a team. While venture capitalists may spend time helping their portfolio companies to recruit, VC’s do not want to be your HR person.
Use the logos of your partners and potential partners on the opening page of your presentation. Use big names if possible. VC’s are clubbish and would like to be able to associate with your high-profile partners. However, if a potential partnering firm already has decided not to work with you, be sure to remove it from the list.
When listing potential competitors, it is not a good idea to mention giants like Cisco Systems or Microsoft, or any other competitors that are heavily funded. Even if they currently are far behind, they have the resources to quickly take the lead. Don’t forget how Microsoft overtook Netscape’s huge lead in the browser market.
Be sure that you are prepared to clearly articulate how you will make money. VC’s like proven models, for example, one that signs up customers and automatically hits their credit card each month for a certain amount. Such a model often is considered superior to one that requires you constantly to have to encourage people to use your service.
Customer Acquisition Costs
You should have an estimate of your customer acquisition costs. If you have a web site, know how many people will visit the site per dollar spent to get them there. If you do not know this number, take the time to come up with a rough estimate because you likely will be asked.
The entrepreneur instinct usually is to give up as little equity as possible in exchange for funding. As a result, entrepreneurs all too often will arrive a pre-money valuation that is grossly unreasonable. If you insist that your start-up is worth $150 million pre-money, you will lose credibility. Unless otherwise indicated, the assumption will be that you have only an idea. (If you already have 2000 man-hours in software development, be sure to mention it in the pitch.) Seed funding often assumes a $1 million to $2 million valuation. The first round may be in the $5 million to $10 million range. You may consider omitting the pre-money valuation from the pitch altogether, or giving a genuinely conservative number to build credibility.
VC’s want to see visionaries who are passionate about their idea. As such, you should be able to talk without using notes or looking at the projector screen. The VC is investing in vision and passion, so show it. Your style is important because you have to able to sell. Even if you secure the first round of financing, if your company is going to go public you will need additional rounds. You have to be able to sell to investors, partners, and customers. When you are giving the pitch, project confidence by not speaking too quickly. Show preparedness by including answers to expected questions in the presentation. Finally, project the image that the train is leaving, and if the VC’s do not get on now they will miss out.
Brian E. Hill and Dee Power, Inside Secrets to Venture Capital : Locating Venture Capitalists; Preparing the Business Plan; Negotiating the Agreement