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What Venture Capitalists Typically Want

Large, strategic markets.
A market opportunity (customer demand) sufficiently large enough to build and support a business with at least $50 to $100 million in annual revenues. One way to demonstrate demand is to use a software product like “Good Keywords” (available at www.goodkeywords.com) to show exactly how many people entered a certain keyword or key phrase into the Internet search engines. This is current reality. People are actually looking for these things and you can list the number of searched in your plan as well as PowerPoint presentation. Try different variations of keywords and keyword combinations to make your case.

Early-stage
Companies that have developed the basic idea and business strategy, assembled a core team of people, and perhaps made some progress raising their own capital or financing from family and friends. These startups are typically interested in raising $2 to $10 million in a first or second institutional financing round.

An aggressive, growth-oriented business plan
The company's business plan should demonstrate its plan for rapid growth—startups that can become #1 or #2 in a specific market segment. Your plan must show how your company will become profitable and provide investors with a significant return on their invested capital in the near future.
Proprietary technology or other barriers to entry.
Can’t someone come along and blow you out of the water? That’s one thing investors are afraid of. So, how will you prevent others from eating your lunch? Investors love patents, but those take time and often can be circumvented by a clever competitor, nevertheless, if you have a clear technological innovation that is patented or warrants a patent, then use it. According to a patent attorney friend of ours, “a patent just gives you the right to sue someone.” Keep that in mind. Anyway, what have you done, what are you doing, and what can you do to prevent competitors from entering your market?

Strong management
Investors want to see entrepreneurs with relevant and successful business experience who are bright, talented and have a deep understanding of their market space and the business model driving their company’s success. (Not necessarily a complete team.) Many investors have a golden rolodex full of potential management team candidates, who have made them money before, they’ve worked with before, or they trust to get the job done – investors can be a wonderful resource for recruiting the talent you need and, with them on board, it makes the investment more attractive to the investor who recommended them.

An exit strategy for the investors
Show/explain how they will get their money back + a significant return on their investment. Notice that we don’t say a “reasonable” return on investment. Reasonable is no fun and certainly not worth the risk they are taking on your deal. Who can you sell your business to and why would they buy it? Going public (IPO) is a long shot, do-able, but statistically a very long shot.

A desire for advice and coaching.
If you are an “I can do-it-myself” smart-ass, you are doomed to remain all alone… Investors will likely invest because they can see their way to helping you succeed (e.g. assure the success of their investment). If they can make a few calls and get your product in to the Sharper Image Catalog, for example, they will feel more inclined to invest because they can help. Likewise, if they feel that you will utilize their wisdom, then you won’t make certain catastrophic mistakes. Many angel investors have certainly been through a variety of harrowing experiences that they never want to see repeated, and they certainly want to head you away from them. Are you someone who pays attention and takes the right action? Remember, these people have lived for a while on our planet and can smell/spot/sense a self-righteous ego-maniac in a heartbeat. (Read the book: “Blink” by Malcolm Gladwell.)

The company valuation must fit within risk/reward expectations for the investment.
How much is your company worth? They all will ask. Remember, the value of your company is based upon what it will be worth in 3-5 years, discounted by the cost of money and especially the risk (or doubt) of you making it. This is why everything you do and put in your plan must add up! You must eliminate or minimize all risks (recognize and acknowledge them, then explain how you will deal with them). Your management team are the people who will take the investors’ money and use it to build the business. Do they know what they are doing? (Do the investors believe it?) Your numbers must make sense. Everything you do, say, and demonstrate must build value in your business – provide the maximum certainty of success by years 3-5 in order to sell your business for a high multiple. You and your investors must fly over this hurdle.

Use of Funds
You must be able to demonstrate how you will use an investment to complete at least some of the following:
- Proof of concept
- Prototype of its product or technology
- Patent filing (for broad patent)
- Product development
- Market research
- Product launch
- Major contract or customers
- Management team
- Reduce other investment risks

What can your investor do to help besides investing?
As mentioned above, some investors can offer management advice, product guidance, or business contacts. They are often a great source of contacts with other businesses or people that you might benefit from knowing. Having a good relationship with your investor can also help if you ever get into temporary trouble and need some understanding. Ask yourself:

- How typically rigid are they about the terms of the investment?
- Does your investor have shareholders or government regulators to satisfy?
- Does your investor make his or her own decisions or answer to a committee?
- When do you want the money?
- Do you need it all right now or a little bit at a time?
- Can you coast along as you are?
- Some investors move more slowly than others, and some investment instruments take longer to implement. For example, if you are self-investing, you may have to wait until your CD matures.
- Am I willing to invest in this myself? Some investors are impressed by your personal involvement or by a list of others who have invested in your business. Putting your own money where it counts can be very persuasive.

"Choosing the Right Investor"
Read this excerpt (online) from Business Black Belt

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