You’d
like to get venture capitalists to take a look at
your company. But how do you do that? What do
venture capitalists look for when deciding to
invest in a company?
Strong management. The first requirement is
a strong management team, with relevant
experience, drive, self-confidence and expertise.
Many venture capitalists even rephrase the old
cliche about what is most important in real estate
-- "location, location, location." For
many venture capitalists, it's "management,
management, management."
A growing market. The next requirement is
whether your company is targeting a substantial
and rapidly growing market. Does your company have
a reasonable chance to successfully enter the
market and obtain a strong market position?
A unique product. Does your company have a
proprietary or differentiated product? Does your
product offer benefits over existing products?
Does it have patent or other proprietary
protection to forestall competitors?
IPO candidate or acquisition target. Does
your company have the possibility of growing
quickly and becoming an attractive acquisition
target or IPO candidate? Venture capitalists are
concerned about how they will realize liquidity
and receive value for their investment.
Sound business plan. Is your company’s
strategy and business plan sound? Remember, most
venture capitalists expect to see a
well-thought-out, coherent business plan.
Significant gross profit margins. Can your
product or service generate significant gross
profit margins (40 percent or more)? Large profit
margins give a company room for error and enhance
its attractiveness for a possible IPO or
acquisition.
"Home run" potential. Finally,
the venture capitalist wants to see the
possibility of hitting a "home run" by
investing in your company. If your own projections
and plans show only modest growth, or if the
growth of the business is limited by technology or
competitive factors, don’t expect to get
financed. Most venture capitalists won’t be
interested unless the company can grow to at least
$25 million in sales within five years.
If you think your company has what it takes to
secure venture funding, take notice of the
following advice and then start knocking.
Gather information. Find out about the
different venture funds’ strengths, reputations,
particular interests and preferences for stage of
company development. Make sure you are approaching
the appropriate venture capitalist for your
business or market.
Prepare a top-notch business plan. Venture
capitalists typically won't look at a company that
doesn’t have a good business plan.
Get an introduction. Venture capitalists
are likely to be more receptive to a proposal
forwarded by someone they know and respect.
Convince your lawyer, colleague, or accountant to
send over your business plan or make an
introduction.
Be prepared. When you do get in front of
the venture capitalist be prepared to demonstrate
the following:
- A clear understanding of your business
- A clear understanding of the barriers to
entry and other hurdles of business
- Drive and ambition
- Relevant experience
- A vision for the growth of the company
- The character, expertise, experience and
skills of key members of the management
team.
