As an entrepreneur, there’s a good chance that you are going to need some outside funding. If you are looking for rapid expansion, venture capital may be for you.
Venture capitalists, also known as VC’s, are people who work for institutions that make investments in early-stage companies (like yours). These VC firms are not investing their own money, but instead represent others such as pension funds. And unlike SBA Loans, venture capitalism is a high risk, high reward game. Banks go through a thorough checklist before they even think about approving a startup for a SBA Loan. VC’s, on the other hand, know that if their investment pays off the return on investment will be 10, 100, or even 1000 times what they put in. According to the National Venture Capital Association, VC fundraising totaled $18.17 billion from 169 funds in 2011.
What Are Venture Capitalists Looking For?
Different VC’s may have different criteria when it comes to deciding whether a startup gets funding or not, but there are general rules that most venture capitalists follow. The general rule is that they would like to get at least 30 times their money back in 5-7 years. Consequently, VC’s tend to focus on high-tech companies that have scale, speed and exit potential. For example, according to Price Waterhouse Coopers the Software industry received the most venture capital in the 3rd quarter of 2010, getting $1.0 billion in investments. The Biotechnology industry followed collecting $944 million and the Medical Devices and Equipment industry collecting $573 million.
VC’s also consider a company’s management team before they invest. They are looking for a team that knows how to execute and has years of professional experience in the field. It also helps if there is someone who has had prior positions in the field and knows all the ins and outs of the industry.
Pros and Cons of Venture Capitalism
While there are many potential upsides to getting VC funding, it is not a perfect system. As a result, going with a VC firm might not be the right choice for you for several reasons. First off, it takes a lot of hard work to get money from a venture capitalist. You have to be able to prove that your company will grow rapidly so that it can either be bought by a larger company or have an initial public offering so that the VC’s can get their money back. Therefore, you need to have a great business plan and need to be able to “sell” your business to these firms. Also, when a VC invests in your company he or she partially owns your startup, which means that venture capitalist can exert some control on company decisions.
Still, there are major upsides if you decide to go with a venture capitalist. The most obvious advantage of VC funding is that these firms have DEEP pockets and can invest millions of dollars if they believe you can lead your company to success. Equity investors are also invested in the same thing as you: the growth of your company. For that reason, VC’s can be a great source of advice and can help you make new connections that will help you build your business. Finally, you don’t have to pay periodic principal and interest payments with equity investments. In fact, most venture capitalists do not require you to pay them their money back!
What Do You Need?
If you think VC funding is right for your startup, there are 6 presentation materials you should have before you even consider reaching out to venture capitalists. These include:
- A High Concept Pitch: This is pitch is less than 1 sentence and should make it clear to anyone who hears or reads it what your company does. For example, Dogster sold itself as “Friendster for dogs.”
- An Elevator Pitch: An elevator pitch is different than a high concept pitch. These are generally one minute long and tell a VC the benefits of your product or service, the difference between your company and others, and what unfulfilled need your company meets.
- A Teaser Email: A short email that, again, sells your company and makes the VC want to contact you for more information.
- A Business Plan: You want your business plan to be as realistic as possible. For more information on how to write a business plan, visit our “What is in a Business Plan?” blog series.
- An Executive Summary: A brief summary of your business plan that gives a VC everything they need to know on one page.
- A Slide Presentation: This presentation should highlight the important pieces of your business plan, like you did in your Executive Summary.
After you have created these 6 ingredients, you can now begin to reach out to VC’s. Make sure that you also put the time in and research all of the venture capital firms that you are interested in so you can tweak your presentation toward the VC’s interests.