understanding of the market for their products. This understanding must be
based on thorough market research and competitive analysis. Early-stage
companies must be completely realistic about the strength of existing com-
petitors and the potential for additional competitors if the chosen niche
proves to be profitable.
Venture capitalists are looking for strong management teams in emerging,
high-growth sectors. Prior success with a start-up, especially if the company
was taken public, will dramat ically increase the odds of funding.
Established companies seeking growth capital are more interesting to
investors if they are already profitable. If not, the venture team may have
a difficult time demonstrating that they know how to run and grow a
profitable company.
As shown in Table 6.2 investors’ expectations of return on venture invest-
ments tend to be significantly higher than that for most other types of
investments because of the risk involved. Evidence suggests that there is
also a ‘‘management premium,’’ which affects the investors’ expected return
on investment. When there is less certainty about the venture team’s ability
to achieve the objectives of the business plan, investors might add 5% or
more to the required return. A strong management team should reduce the
required return by a similar amount.
Investors are most comfortable with a strong management team with
relevant experience in the areas most important to the sustainable competi-
tive advantage of the company. A recent survey of 100 professional venture
capital firms showe d that the top three (out of 24) factors they considered
before investing in venture proposals were ‘‘capability for sustained intense
effort,’’ ‘‘thorough familiarity with the market targeted by the venture,’’ and
‘‘demonstrated leadership ability in the past.’’
5
In evaluating these criteria, investors may ask for references, both per-
sonal and trade, and seek input from your customers, suppliers, and
bankers. Include any available testimonials in the business plan.
A key element of the financing structure is exit strategy, namely, how
investors get their money out of the company. Due to its importance in the
overall proposal, it will be discussed in detail in the following chapter.
APPROACHING PRIVATE INVESTORS
Occasionally, companies use finder firms, or venture ‘‘catalysts,’’ as
sources of assistance in locating investors, though finders are generally
not sources of capital themselves. Finder firms may work for an upfront
5
http://www.growco.com/gcg_sbentries/sb_vcsbetonmanagement1.htm
198 Venture Capital
fee, a monthly retainer, and/or a percentage of equity in the company. While
there are many reputable professional finders and advisors to this process,
one must be sure to perform considerable due diligence unless the company
is very well known. Though finders may sometimes provide us eful introd uc-
tions, remem ber that investors generally prefer working directly with the
venture team in making investments.
With or without a finder firm, your chances of getting the opportunity to
present your proposal to prospective investors are best when you are recom-
mended by someone they trust. Ask your banker, lawyer, and accountant if
their network includes such prospects, and if they would be comfortable
recommending you. Build your own network by attending functions of the
local Chamber of Commerce, economic development agencies, and business
associations.
Many communities conduct functions called venture forums, where entre-
preneurs can make very short ‘‘pitches’’ (typically 5 to 15 minutes) about
their business concept to audiences that hopefully include prospective invest-
ors. These are typic ally followed by a question-and-answer period, when
angels and venture capitalists ask for more details about the company, its
management team, the market , and more.
Should you decide to present at a venture forum, the National Venture
Capital Association web site (www.nvca.org) features an events calendar
that lists venture conferences and forums. Some of the larger forums are
conducted by The New York Venture Clu b, The Capital Network in Austin,
Texas, and the Los Angeles Venture Association.
Some forums are oriented toward specific purposes, industries, or geo-
graphic areas. These can range from investing in socially responsible com-
panies to high-tech ventures only, to firms that will create jobs in a particular
local area. Formats vary widely.
Unfortunately, it is our experience that there are often more service
providers than investors in the audience at venture forums. That is, entre-
preneurs are more likely to be approached by insurance agents, accountants,
and lawyers looking for business than investors considering the venture.
The best that an entrepreneur might hope for from such a forum is the
opportunity for another meeting with an investor to present the venture in
greater detail. ‘‘Most investors require additional meetings, ’’ advises Tom
Siegel, president of the National Association of Venture Forums. Siegel adds
that venture forums should still be considered long shots and that they
require lots of follow-up and perseverance. Despite that, says Siegel, they
are still a great tool for helping entrepreneurs get exposure, refine their
business models and sharpen their pitches.
6
6
Cynthia E. Griffin, ‘‘In Good Forum,’’ Entrepreneur, July 2000.
Venture Capital 199

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