The venture capital process begins with an introduction to a venture capitalist. Cold calling on venture capitalists is a long-shot— venture capitalists see many “over the transom” deals, very few of which become investments. Introductions to venture capitalists through referral sources they respect improve the odds of securing financing.
All venture capital firms will tell you that their best deals come from the companies in which they have already invested. The second best way to get in the door is to have someone who has some pre-established credibility with the fund make an introduction. If you can’t find such a person, your legal counsel, accounting firm, or banker can make an initial contact on your behalf. If they are unable or unwilling to do so, don’t hesitate to make it yourself.
The best approach is to place a phone call to the designated person listed in the guides. When they finally return your call, simply outline your project and ask if you could send them your Special Executive Summary. If after reviewing your summary they have an interest, they will request your complete business plan.
It is very difficult, not to mention a waste of valuable time and money, to send numerous plans out blindly to numerous funds. Every venture capital firm in the country receives several to many plans per day. While they may get around to briefly reading them, it may take two or three months.
When the firm is notified of your project by an intermediary, simply send your plan with a brief cover letter and keep your fingers crossed. If you haven’t had a reply in two or three weeks, a progress call is appropriate. Calling every few days will only alienate the initial screener of your project and assure that your plan will fall deeper into the bottom of the pile.
However, don’t get discouraged after all this discussion about how hard it is to get a receptive ear. Remember, venture capital firms need product, too; it’s just the realization of the old axiom that “entrepreneurs run and money walks.”
The VC meeting: What to do when you finally get through the door.
Presenting your business idea to a potential venture capital investor need not be a hair-raising experience. Remember, you’ve already passed the first hurdle by getting this meeting in the first place. This probably means that someone they know and trust referred you (always a good approach) or that your idea is intriguing and has captured their imagination on its own.
Your challenge now is to work your way up the list of several prospects that nearly every good venture investor enjoys these days. Your presentation should be concise. Here are a few pointers to keep in mind during the fundraising process.
Understand your business
What is the essence of the value proposition to the customer? How large is the target market? How fast is it growing? What are the business and profit models? Show that you have thought deeply about this business and have done your homework. Good investors will probe deeply. If a question stumps you, resist the temptation to fake it. Acknowledge the need to look into it further. Most investors prefer “learn-it-alls” to “know-it-alls.”
Describe how your experience and track record position you for success. Show your passion for the business. Demonstrate real commitment to the project through personal investment or the foreclosure of alternatives. If you have already quit your day job and invested your vacation money, say so. You should create the feeling that this is such a compelling opportunity that you have no option but to pursue it vigorously.
Make a connection
Identify links to the prospective investor. Note any of the firm’s past investments that are relevant to your company. Demonstrate a good fit and potential value creation with their portfolio companies.
Be prudently open
Being unnecessarily circumspect about your business can cast a pall over an otherwise good meeting. Trust, but verify. Ask the investor for a commitment to confidentiality, verbal is sufficient. Save sensitive details until you have developed comfort and sensed a genuine interest level. This can be a bit of a balancing act, but you will need to reveal enough to get a second meeting.
Identify the risks
One of my favorite questions is, “Let’s suppose we are having coffee together two years from now, commiserating over the fact that this just didn’t work. What might be the reason?” Great entrepreneurs almost always have a thoughtful answer or two. If you know where the minefields are, you can avoid them. Also, an honest assessment of the competition will build credibility.
Orchestrating a successful financing is a bit of an art. Make sure that you approach at least a few potential investors in parallel. The comparisons between firms will be illuminating. Also, valuations are almost always highly subjective and a little competition is generally healthy for the process.
Seek true partnership
Remember you are buying even more than selling. Watch for signals from the investor that they will be a good partner: Do they listen well? Are they generally respectful? Do they seem to have an instinct to help? Are they generally enthusiastic and positive? Building a company is a daunting challenge and emotional support from your financial partner can be critical.
Most importantly, be sure the investor passes the intangible but very important “gut check.” Good chemistry and compatibility are important ingredients in fostering and maintaining a strong and lengthy partnership.
There is no substitute for talking to entrepreneurs who have worked with this investor. Were they accessible and constructive under adversity? How did the investor’s involvement directly affect the company’s success or failure? Good venture partners make a difference. Equity in a startup is very dear. Make sure you will be getting your money’s worth.
Wishing you success,
John B. Vinturella, Ph.D.
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