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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
- Relatives
- Friends
- Angel Investors (Former Successful Entrepreneurs In The Industry)
- Corporate Partners
- Equipment Leasing Firms
- Banks
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
| Years/X |
2X |
4X |
6X |
8X |
10X |
| 2 |
41% |
100% |
145% |
183% |
216% |
| 3 |
26% |
59% |
82% |
100% |
115% |
| 4 |
19% |
41% |
57% |
68% |
78% |
| 5 |
15% |
32% |
43% |
52% |
58% |
| 6 |
12% |
26% |
35% |
41% |
47% |
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
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