Raising Entrepreneurial Capital

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.’’

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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

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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.

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Cynthia E. Griffin, ‘‘In Good Forum,’’ Entrepreneur, July 2000.

Venture Capital 199