and Business Resources
magazine - July
By David R. Evanson & Art Beroff
Venture capital is within reach, but you have to work for it. Follow
these steps to that deal-closing handshake.
Raising venture capital is a lot like painting a room: The actual painting
is the final step. What takes the most time is prepping the job—getting
rid of old wallpaper, patching, sanding and cleaning.
In this vein, we understand our “Top
100 Venture Capital Firms for Entrepreneurs” list might provide irresistible
fodder for capital-hungry entrepreneurs. But before you pick up the phone
and start dialing for dollars, think about the prep work required to do
a good job and be successful. Not sure how to start? The following steps
1. Understand the mission. You
need to know what you’re looking for. First and foremost, you must find
a lead investor. A lead investor is the firm that will either do the whole
deal or orchestrate the participation of other venture firms, with their
own capital commitments.
2. Form an advisory board. For
better or for worse, a good number of deals that reach the closing table
get there because of personal relationships somewhere along the line.
Forming an advisory board decreases the degrees of separation between
you and your potential investors by increasing the likelihood that one
or more of the industry notables on your board has a relationship with,
or is at least known to, your investors.
3. Secure legal counsel. A good
attorney who’s experienced in venture capital transactions may be worth
his or her weight in gold when it comes time to actually close the deal.
But the reason to hire one from the outset, even before you begin negotiating
with venture capital firms, is that retaining counsel gives you access
to the attorney’s Rolodex and provides entrée to more potential investors.
In addition, your attorney’s name will (hopefully) dress up your business
plan and, like the advisory board, provide a personal link between you
and your investors.
When investors ask what your company
does, they don’t want the five-minute soliloquy entrepreneurs
typically give them. They want something short and sweet.
The following description is a real yawner: “We provide solutions
that enable our customers to achieve a substantial time-to-market
and business flexibility advantage compared to companies that
use traditional Web-based software application development
tools . . .” Instead, try: “We make software that puts real
economy in the New Economy,” and see if the conversation doesn’t
go in a more productive direction.
4. Have a business plan and an executive summary
at hand. If you’re on the line with investors, there’s a good
chance they’ll ask you for your business plan. You’d be wise to have it
ready to go so you can send it out immediately. Another important reason
to have a business plan available is that it forces you to think through
the sort of nettling issues that investors raise, because they could start
asking you all kinds of questions while you’re on the phone. And you just
won’t be able to answer them with any degree of clarity or conviction
unless you’ve gone through the discipline of writing a business plan.
Keep in mind, you shouldn’t send your full business plan out to investors,
even if they ask for it. Send an executive summary instead, and include
summary projected financials. When you make follow-up calls, the trick
is to make sending your full business plan a condition of meeting face
to face. Here is how the call goes: “I appreciate that you want to see
more based on our executive summary. I will send you our plan, but only
under the condition that you agree to meet in person so I can present
it to you.”
Of course, the investor might want to meet with you after reading just
the executive summary. But as great as that would be, it doesn’t obviate
the need for writing the plan and deriving the benefits that would result
from that exercise. Besides, your next investor might not be satisfied
with only the executive summary.
5. Line up your references. Remember,
luck is where opportunity and preparation meet. If an investor is itching
and wants to talk to vendors, customers, employees, consultants or industry
experts, the best solution to offer is a name and a phone number, not
a vague “I’ll get back to you.” Once again, you have to do the groundwork.
Call your allies ahead of time, tell them they might get a call, let them
know what it’s about, and, if it’s practical, guide them toward what they
6. Get warm-body introductions.
If points one and two failed to drive the message home, then perhaps this
one will: You’ll get further faster with an introduction to investors
than you will if you go after them without one. Maybe it’s the saying
“It’s not what you know, but who you know.” Maybe it’s a conspiracy to
make sure the rich get richer. Maybe it’s just human nature. But whatever
the reason, avoid contacting people out of the blue if at all possible.
David R. Evanson is a principal at Gregory
FCA, an investor relations firm.
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