Venture Capitalist Perspective

Monday, April 15, 2002

Business Black Belt, http://www.jian.com/business-books/business-black-belt.html

Better Business Management & Planning Practices

People will give you money for your venture provided it furthers their agenda. If you want to speed the process of getting cash, know who you are selling to.

There's a good reason why most business plans are never funded. Your idea has to make sense; your business model (to develop, market and sell your idea) has to make sense; and you and your management team have to demonstrate that you have enough sense to succeed. Fall short anywhere and your plan goes in the trash.

Venture capitalists
(VCs) are expert investors who specialize in a few industries. They perform sophisticated analyses of your opportunity and structure the deal to cover their own interests. They solicit other investors and institutions to entrust high–risk earmarked portions of their portfolios and make those investments in potentially high–return opportunities like yours. Everyone who plays this game knows and accepts the risks and they play by the following guidelines:

How are you unique?
Proprietary technology—-a patent, process, trade secret, or something that can be protected from competition—demonstrates uniqueness. You must have a unique product, process, or something special that can make a lot of money

Can I bet on the management's track record?
Investors usually bet on the jockey, not the horse. You must assemble a proven management team. A venture capital firm usually wants to invest at least $2 to $3 million or it's not worth all the effort. Since the stakes are higher, they want to see an experienced management team capable of capitalizing on your unique situation. VCs are masters at sizing up management. Any attempt to convince them that an inexperienced manager can do the job will only damage your credibility. It's much better to describe the management competence you intend to hire. Investors want to be assured that the business will continue if something happens to the founder.

Will I get a five- to ten-times return?
For the risk, most investors expect huge returns. When you project your income statement, their investment should enable you to do big things that will catapult your company forward. Often they look at the “J curve,” which projects the difference in growth (revenue and profits) of your business, with and without their investment. The upward curve in the `J' is the point where they write you a check.

What is my exit strategy?
When your company grows to $20 million... will you go public in 4 years... will you sell to a larger company, etc., investors will want to know when and how they'll get their money out.

Does this fit my niche?
It's likely you'll get a warmer reception (and a more valuable partner) if you choose an investor who already has a portfolio with many companies in your industry or market. They already understand the common difficulties and opportunities in your industry, and they may be able to provide synergistic assistance for your venture.

Get Investors’ attention.
Show an aggressive yet believable plan within the first two to three pages. VCs see a foot–high pile of business plans every day. Sell the financial assumptions, the base figures that drive the rest of your projections. Prove that sales will grow and costs will drop.

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