Ten Steps to Raising Venture Capital
by Graham Anderson
Author of THE WAY OF THE VC and EuclidSR Partners
Follow these 10 steps to help you secure your dreams.
1. Determine Whether Venture Capital is Appropriate
Consider Alternative Sources Of Capital:
- Bootstrapping By Providing Services For Hire
- Angel Investors (Former Successful Entrepreneurs In The Industry)
- Corporate Partners
- Equipment Leasing Firms
2. Find the Right Firm – Ask the right questions
- Stage Focus – e.g. Does the firm invest in companies that have not achieved revenue yet?
- Geographic Focus – e.g. Does the firm invest in companies in the Southeast?
- Industry Focus – e.g. Does the firm invest in Internet companies?
- Size Of Investment Criteria – e.g. Does the firm invest as little as $500,000?
- Return On Investment Criteria – e.g. Is the market large enough to create a 40% annual rate of return for investors?
- Investment Style – e.g. Does the firm like to take a roll-up-the-sleeves, “hands-on” approach or a passive advisory approach?
3. Prepare a Business Plan
- Hook them or lose them in the first 2 pages – lead with a tight executive summary
- Explain your company’s “unfair” advantage – show why you will succeed in a sea of competition
- Outline a well-defined product or service and target market
- Provide relevant market data and analysis and a cogent plan of attack
- Demonstrate that management has the necessary skills to execute its plan
- Show uses of funds and concrete financial goals and milestones
4. Secure an Introduction
- Gain an introduction to management at current or former portfolio companies
- Get professionals who provide services to venture capital firms and portfolio companies excited to work with you
- Network your way to your target venture capital firms – elicit professionals’ support and have them provide an introduction as a trusted intermediary
- Target lawyers and accountants who provide services to the venture community
5. Grab Firms’ Attention
- Focus, Focus, Focus – play to venture capitalists’ short attention spans
- Find strong, seasoned managers willing to work on the team
- Demonstrate a very large future market opportunity
- Prove the management team’s ability to adapt rapidly and successfully to a changing environment
- Show escalating barriers to entry in your market
6. Make a Powerful Presentation
- Get to the point – Brevity is the soul of wit
- Focus on the market opportunity – Technology is a necessary but not a sufficient condition
- Guide the presentation toward the management, the market and the money
7. Follow Up With Additional Information
- Bring up any adverse news or information first and control its dissemination
- Avoid negative surprises
- Provide complete information when requested
- Make it as easy as possible to get to “yes”
8. Understand the Valuation Process
- Identify the major risks in your business
- Reduce the perceived risks to increase the value of your company
- Understand investors’ return on investment criteria – e.g. discount rates for earlier stage companies are significantly higher than for later stage ones
- Identify a clearly definable exit strategy
Internal Rate of Return (IRR) on a multiple of original capital investment (Horizontal Scale) realized over an assumed period of years (Vertical Scale).
9. Survive Due Diligence
- Back up sales, revenue and expense claims with documentation
- Provide solid references
- Organize records of all contracts
- Secure all intellectual property rights
- Audit historical financials
- Examine legal documents with attorneys
10. Close the Deal
Remember that the deal is not done until the money is in the bank.