Wednesday, October 28, 2009

What Do Venture Capitalists Look For In A Start-Up Small Business .... Before Seriously Considering Offering Funding?

First, make sure you talk to venture capitalists who are focused on the area that you are in:. Understand their investment criteria including geographic and industry specialization, stage of company development, and size of investment preferences, return horizon, etc.

It is also important whether a fund will act as a lead investor .... and whether it has complementary or competing companies in its portfolio.

Then deliver on what they all typically require (you can ask them for any specific format they would like to see) ....

1. An innovative, differentiated business proposal, well spelt out in a brief and clear summary document and include .....

- what stage of development you are in, e.g. from 'no revenues/initial product development' to 'no revenues/product ready for launch' to 'product launched/some revenues.

- how you intend to protect and build your intellectual property from competitors .

- what is the specific purpose of raising funds, e.g. marketing, research, manufacturing, distribution, etc.

2. A clearly defined client group or market (and possibly hot client leads or research showing demand).

3. A first class, experienced and committed management team to make it happen (provide as much details as possible about past successes - having a great team is THE key requirement).

4. Financial commitment by the team members (skin in the game is very important).

5. A financial plan that shows exceptional growth potential and is based on realistic, justifiable assumptions (as this is your input into the valuation process).

A lot depends on the type of business and the situation however the first step is to ensure that you have a good proposition for any prospective financier.

OK… So what is a “good” application..?

1) You absolutely need to have a business plan. Without one of these you pretty much have no chance and as first impressions count, I wouldn’t suggest trying your hand without a business plan .... expecting that you’ll get a second shot by producing one and making another appointment!

2) You need to be able to demonstrate a knowledge of the business (or proposed business), your target market and the industry that you will be operating in.

3) The cash…. How much you need, why, how long will you need it for, and what you’ll be spending it on. It is important to state quite clearly how much you actually need.

For example if you ask for 100k when you actually need 150k .... but expect that the bank won’t go that high – the chances are that a savvy commercial lending manager will see through this. You’ll look as if you don’t have a true understanding of the finance requirements of your own business – and the answer won’t be the one you’re wanting to hear!

If you’re wanting the cash for use as working capital – ask yourself “Do I need all the money in one lump sum”? If the answer is no, then you can negotiate with the lender to release it in stages .... provided that you meet certain pre-defined milestones. This can be a more compelling business case for the lender as their risk is reduced in this instance.

In addition ....

Do you have anything that you can offer as security? This reduces the risk and makes the proposition appear more appealing.

Are you contributing any of your own funds to the venture? If so – again, this makes the proposition appear more appealing because it demonstrates your own belief in your venture. In short you are prepared to put your own assets on the line.

* Venture Capital – With VC’s they will want to acquire some equity in the venture in return for their cash (and may want to place someone on the board). However on the upside often they come with significant experience and contacts which can help to propel your business forward. They generally are less risk averse than the banks .... however their costs are higher. VC’s tend to want to keep the investment in the business for a relatively short time before harvest so they will want to have a clear exit strategy agreed at the outset.

Another option is Business Angels. They are similar to VC’s however they tend to want to assist new business ventures for more philanthropic reasons.

Finally, I’d suggest locating one of the government run business support agencies in your area. They are likely to have the latest information regarding grants and other funding that may be available ..... and may also be able to assist with developing a business plan and marketing strategy if you do not already have these in place.