What Venture Capitalists Want

We all have a vision of the Venture Capitalist. Often times that vision is a mistaken one of something akin to the Marlboro Man. The truth is there are as many types of funding sources for entrepreneurs and businesses as there are makes, models, and colors of vehicles on the roads. This diversity precludes a single brush stroke describing them all.

Just as each of us has developed likes and dislikes from experience, the same can be said of VC's. Not all desire equity positions in your undertaking either. Some deliberately eschew the opportunity. Others demand the voice and control an equity position provides.

However, there are concerns common to all lenders / investors. When seeking funding for a business endeavor, it helps to immerse yourself in the mindset of the VC. Take a marketing approach. Your story needs to be compelling, your business plan complete. Think like they do. Ask yourself, what is in it for them? They certainly will ask that question, repeatedly. What do they really want and need from an entrepreneur?

Who are You?

Bankers lend funds provided by their depositors. FDIC requirements dictate the borrower hold commensurate collateral securing the principal. Entrepreneurial endeavors seldom possess such hard assets; creating the need for riskier and more expensive venture capital. Other far more nebulous 'assets' of the borrower becomes highly important. Who makes up your management team? Is this Act II or better for you and them? What is their background and education? What direct experiences have they in this industry? A carpenter opening his first restaurant probably will not endear much support. At least one VC claims not to invest in good ideas at all, rather it invests in good people. Competent management is essential.

What is Your Idea?

So, what is this great idea of yours? What are its advantages, along with its inherent disadvantages? Expecting VC's to sign confidentiality agreements before your unveiling proves you are not ready for classic venture capital. Be prepared to tell them everything. You are asking for their money, open up and provide them the information they need. Trust needs to be mutual.

Who is Your Customer and why will they buy Your Product?

Seldom is a product so new, so different, and so advantageous that people immediately abandon the old reliable in favor of it. If your offer truly is new, you face an adoption curve. The PC, cell phones, and DVD's each took time to penetrate the market despite their advantages. How do your intended customers satisfy current needs? What are their alternatives to you? Your competitors: what are their strengths and weaknesses? Espousing you have no competition suggests you are unrealistic. What is the single compelling reason for customers to switch to you?

Amazon was not the first to attempt internet sales. But they were the first major success. They kept a focus on books and asserted their advantage, 30% off.

How much of your product will they buy?

Pie in the sky sales estimates will kill any chance you have of securing capital. Where do your numbers come from? What assumptions have you made? What impact will external forces, such as a sputtering economy or an interest rate increase have, if any?

To protect investors, some VC's actually cut sales estimates in half gauging the effect on the financials. They presume estimates are influenced both by hope and dreams. What will create customer loyalty? Everybody claims to offer high product quality, great service, and the lowest pricing. You have to do better than that, if you want the money.

Is your offering a once in a lifetime purchase, or a consumable requiring repeat purchases?

PC printers are sold at rock bottom prices to gain entry to repeat ink cartridge sales. Design deliberately inhibits competitive cartridge pricing. This is where their continuing profits are made. What's your hook?

How will you put the money to work?

What assets will you purchase with the cash provided? How will these resources be employed? How does each invested dollar affect sales? This is probably the biggest mistake made approaching a VC: failing to make a convincing case the money provided will generate cash, now! Unlike some wines that gain value lounging around, venture capitalists do not want their money aging, particularly in your account, they want it working. Nothing motivates them more than the "ker-ching" of the cash register. Demonstrate specifically how the cash will go to work now, and you are well on your way. If funding is required for further product research and development, your enterprise is probably not ready for classic venture capital.

When is Payday?

How long do you need the funds? When is the payoff? How big will it be? What is the essence of your offer to these capitalists? Do your forecasted statements include payments to them? Displaying pro formas absent of such provisions will do little to create a warm cozy feeling in a venture capitalist's heart. Suggesting that value will one day be obvious for a buyout is of little comfort.

The exit strategy for the investor has to be planned just as well as the entry. Without a clear exit strategy, your plan is incomplete. Would you buy a half cooked egg, or half a pair of pants? Without a complete business plan, you're probably wasting your time and theirs.

Choosing to fund only a very small portion of the total number of proposals they evaluate proves a lot of work needs to be done by entrepreneurs on their presentation skills. Venture capitalists are looking to earn profits. Show them how you can accomplish this for the both of you, and you will have your money.

Arthur (Chip) Card is a Marketing Strategist with more than 20 years experience in the service and intangibles sector. He can be reached at: a.card@comcast.net

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