Venture Capitalism Tips

Alternative Financing

Not sure that venture capital is the right choice for your business' financing needs? Here are some alternatives that can help you get the cash you need to grow your business.

Friends and Family: Why not start with the people who know and love you best? If you have close contacts with cash, consider asking them to invest in your company, either loaning you the money to be repaid, or in exchange for equity in the company. It should be an easy sell! The downside of having loved ones invest in your business is that you run the risk of your business failing and not being able to repay them. That can wreck a personal relationship.

Bank Loans: Probably the most traditional form of commercial finance, a bank loan can provide you the money you need, and you won't have to give up any control of your company to get it. However, the application process is strict for bank loans, and your business may not qualify. You have to pay interest on the loan, which can eat into your profit.

Angel Investors: Angel investors serve two purposes: they get you the money you need and serve as mentors. Many angels are retired successful business people looking for smart investments to “entertain” them in retirement.

The great thing about angels is that you don't have to repay them monthly. They take their cut when you achieve your exit strategy. The downside is that angels are hard to find, and often require you keep them updated constantly on what's going on with the business, which can be time consuming. They also take equity in your company.

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Are You What Venture Capitalists Are Looking For?

While you're looking for the right investor for your company, venture capitalists are looking for the right company to invest in. Could it be you? Take a look at this checklist to see if you meet what most VCs are seeking.

• You have a track record. Venture capitalists look for established companies (or companies run by established experts in a given industry) that can prove they know what they're doing. They're not looking for the faint of heart and inexperienced.
• You need lots of money. If you need less than $250,000, look elsewhere for financing, because that's the funding point that venture capitalists start with. They're big players with big money to spend on the right company.
• Your company is growing. VCs don't fund companies without strong futures; how would they get their return on capital? Make sure you can prove that your business is viable and booming. It's the old adage of you need money to get money!
• You don't mind giving up some control. A venture capitalist will take part ownership of your company, and may require you to involve him in the management process. If you can't handle this, VC is not for you.
• You have an exit strategy. Venture capitalists look for companies with an aggressive exit strategy or who plan to do an IPO within 7 years.

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Perfecting Your Pitch: Giving A Great Presentation To Investors

Before you walk into a room full of venture capitalists, bank board members or angel investors, heed these 5 tips to ensure your presentation is top notch.

1. Keep it Simple and Short. Limit your PowerPoint to no more than 20 slides, and spend 1 minute on each.
2. Tell a Story. Your presentation should tell a captivating story of your business. It should intrigue investors enough to want to give you money.
3. Don't Over-Inform. Save the heavy details for an accompanying business plan or other document. Don't overload your audience with information.
4. Stay Away from Fancy Graphics. Your presentation is about the story, not the animated mouse in the corner. Again, keep it simple.
5. Practice! There is nothing more deadly than an unprepared presentation. Go through the slides and your prepared remarks several times, so you can do it smoothly when you have an audience.

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The Perfect Match: Finding Your Ideal Investor

Just like finding a romantic mate, searching for the perfect investor for your business can be difficult. Just because an investor is willing to give you money doesn't make him the right investor for your business. You want an individual that can contribute something to your company, such as expertise or knowledge of your industry. You may also not want to give away too much control of your company in exchange for funding, so you will have quite a quest to find an investor who meets all of your criteria!

That ideal investor could be thousands of miles away from your office, or just around the corner. Take your time to find the right investor, as it is a committed relationship.

Timeframe: Finding the right investor for your company takes time, and it won't happen overnight, so be forewarned. Depending on how much time you can dedicate to finding an investor, it could take years to find one that will align with your business' needs.

Don't rush it. This is an important relationship, and may last anywhere from three years to the life of your business, so it is necessary to research all you can to find the investor that will best suit your company's needs.

Personal Qualities: Investors are people, and people have quirky personalities. As this is a professional relationship, do your best to overlook any personality traits that just annoy you in an investor, but if you have serious issue with how the individual acts (is unprofessional or quick to anger), use these as red flags to tell you that this may not be someone you want to build a relationship with. Keep looking until you find someone you click with.

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How To Meet Your Investor

If you're new to the investing game, you probably don't know any investors that might be interested in funding your company's growth. How can you meet them? Here are a few places to look.

• Networking. The best way to meet someone professionally is through networking. Because networking is about building relationships, you will find investors open to talking to you about your business. Give interested individuals the overview of what you're looking for at a networking event, then follow up with a formal presentation later.

• Word of Mouth. Although you may not know any investors, your colleagues may. Ask around to see if anyone can give you a referral. This beats cold calling an investor who doesn't know you at all. Arrange a lunch meeting with your mutual contact and the investor to ease into the relationship.

• Online. Today, there are online communities of investors that provide blogs and resources for small business owners looking for funding. You can even apply for financing without ever meeting your investors (although the amounts aren't as high as you would get in a face-to-face meeting).

• Email/Phone. It's not the best way, but if all other methods fail you, send a formal email to an investor you have researched, stating that you are interested in meeting him to discuss your business' growth, if he is interested. If he's not (could be currently tied up in other projects), you can mark that one off your list and keep looking.

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Venture Capital: A Definition

You may have heard of venture capital but be unsure of what it actually is, what it entails, and how you may be able to use it for your company's financing needs. Here's a quick 101.

Venture capital, according to Wikipedia, is a type of private equity capital given to finance new, growing or struggling companies. Because the financing is typically higher-risk than most banks will approve, outside investors are sought, and those that invest usually get high returns on their investments as well as sometimes partial ownership of the company.

Venture capital is popular in certain industries that require large up-front investments, which can't be financed by more traditional means. These industries include:

· Technology

· Life Sciences

· Biotechnology

The financing can be used for a multitude of purposes, from growing the business (marketing and advertising budget, increasing inventory) to keeping the company from sinking.

Types of Venture Capital Investors
The venture capital investors may be individuals looking for a high-return (and by nature high-risk) investment, or institutions that provide venture capital to candidates that meet certain requirements. Typically, investors want to see that a business has the potential to grow, thus increasing their investment. They may require certain standards to be met within a certain timeframe (usually 3-7 years) in order for their funding of the business to continue.

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What NOT to Do with Angel Investors

Angel investors are a force not to be reckoned with, so don't be fooled by the name. Here are a few mistakes you should avoid making to save yourself time and get the funding you need.

1. Don't under-prepare. You are asking for money for your company, so start at square one. By walking into a meeting with an angel without the proper paperwork to prove you are a good investment, you will get the door shut in your face. Bring a professional presentation, business plan, and financial documents to your meeting.

2. Don't look nationwide for an angel. If you keep your search local, you'll save yourself time and airfare. There are likely many qualified angel investors in your own backyard. If you can get them, referrals are the best way to find an angel.

3. Don't skip over the bad parts. Angels know there is risk involved in your company; otherwise you wouldn't be standing before them asking for money. If you don't warn your angel about the risks associated with your company, you could be out of compliance with your state's disclosure requirements, and you can upset an angel who later finds out you weren't up front with him.

4. Don't offer preferred stock. By offering your angel investor common stock, it puts him on equal footing with you, rather than having an advantage over you by owning preferred stock.

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A Gift from Heaven: Angel Investors

If you need financing for your high-risk business, but can't find a venture capitalist to work with the small amount of financing you need, consider an angel investor. Angel investors can provide under $1 million in financing (which many venture capitalists won't even deal with) in exchange for ownership equity.

What Will They Want? An angel investor knows there is a chance that your business could fail, taking his money with it. So it's understandable that the stakes are high. Angels typically look to get a return of 10 times or more on their investment within 5 years.

While this seems exorbitant to many, angels should be considered if you can't get a traditional bank loan due to the volatility of your company. If you believe it will grow, an angel investor can give you the financial backing to make your business a success.

Many angel investors work in groups, to collaborate their funds and research efforts. If you are a high-growth startup, and have received some financing, but still need more, angel investors may be able to help you secure the investment you need to develop your company.

The Downside: Something to consider if you are thinking about working with an angel is that you will have to relinquish some control over your company. Some entrepreneurs find this difficult to do, and would rather find other means of financing and keep full control of operations.

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Get the Money: Prove Your Worth

While there are literally hundreds, if not thousands, of venture capitalists out there with money to burn, they're obviously not knocking down your door to give you money. There are even more companies asking for financing than there are investors, so in order to get the funding your business needs, you'll have to have a competitive advantage.

Are You Worth Your Salt?
You may think you're the next Bill Gates, but can you prove that to venture capitalists? VCs aren't afraid of a risky investment, as long as they can easily see the potential for growth and profit. If your company is just like every other company in your industry, you'll have a hard time proving that.

Brainstorm
Before seeking financing from a VC, sit down and make a list of the competitive advantages your company has. They may include:

• Making your product cheaper than competitors
• Offering function no other company has
• Customized design or product
• Technology that is about to hit (riding the Web 2.0 wave, for instance)

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SBA: An Entrepreneur's Best Friend

When it comes to small businesses, we've got one government entity on our side. The Small Business Administration. From grants to loans, the SBA has everything an entrepreneur could need.

SBA 7(a)
The SBA 7(a) loan program helps small businesses that might not qualify otherwise for a loan. It's a flexible loan in that it can be used for a variety of purposes, including:

• Equipment and machinery
• Working capital
• Furniture and fixtures
• Land and building
• Debt refinancing

504 Loan Program
The 504 loan provides long-term, fixed-rate financing for real estate, machinery or equipment if you're currently expanding. These are considered “brick and mortar” financing solutions, and are perfect if you want to buy commercial real estate.

Microloan, 7(m) Loan Program
The SBA can lend you up to $35,000 for inventory, supplies, furniture, fixtures, machinery and equipment with its microloan 7(m) program. This loan is available in select locations only.

Loan Prequalification
If you want a loan for $250,000 or less, take advantage of the SBA's loan prequalification program. SBA experts analyze your application and help you make it as strong as possible, based on your company's financial history.

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Finding Venture Capital

You do not have to have a business to get venture capital. New entrepreneurs may be able to gain capital based only on a business plan.

Investors are always on the look out for a possible successful business to invest in. You no longer have to try to borrow money from a bank to help start your business. Try looking into possible investors for your business. For more information try the National Venture Capital Association at http://www.nvca.org.

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How to Impress a Potential Investor

*Find your passion. If you are enthusiastic, your investor will be, too.
*Remember, you are an entrepreneur. You know your business inside and out. In essence, your potential investor is investing in you, not just your business.
*Prove your business works by providing evidence of paying customers. Get your customer's comments and opinions and offer this information.
*Don't limit yourself to just one investor. Get yourself out there. Tell anyone you know what you are doing. You may be surprised on who you may find is looking to invest in a business.
*Save yourself time and money but sending out your idea summarized in two or three pages. Like yourself, investors are busy and you don't want to waste your ideas on someone who may not be interested in what you have in mind.

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Great Business Plan = Winning Over Investors

How much time did you invest in your business plan? Your idea may be wonderful but how you say it may not come across as well as you think. Find a business plan writer to edit your plan, so your ideas come across clear and strong.

Think your business plan will result in a return on your investment in a few short years? Your three to five year financial projections should include your idea of how soon a return can be expected by investors.

Also, don't forget to include a fair evaluation of the competition. Knowing your competition proves you know your business.

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What is Venture Capitalism?

By definition, venture capitalism is a monetary system based on the trade of wealth, in other words, a business or an individual, and the people or companies invest in an innovative enterprise where potential profits are large.

In more simple terms, it is the opportunity to invest in a young company that has the potential to grow into a big enterprise. Imagine someone who runs a great hamburger restaurant. He wants to expand his business by opening a restaurant in another city. He may ask for investors to invest in his company. In exchange, when the company succeeds and finds a profit, the investor may see a return on his investment with interest or he shares a percentage of the profits.

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What Venture Capitalists Do

You may have heard the term venture capitalists, but what do they do exactly? Venture capitalists are interested in helping you succeed. Venture capitalists may finance new and growing companies and assist with the development of new technologies or products. They think of long-term relationships with companies. They provide the funding and the company produces a way for them to make money off of their investment.

With any investment, there are risks involved, not every business is a success. Venture capitalists have to evaluate these risks and made decisions based on plans and well thought out ideas. If you have an innovative business plan, it may be worth it to find a venture capitalist that would be interested in looking at your proposal.

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Good and Bad Investors

You do not have to take any offer that is presented to you. You should research the investors as much as they are searching you. Find out if they have invested in other companies before. What happened there?

Do you really feel the investor is interested in your company? Is your investor as passionate about your products as you are? Ask yourself these questions while you consider the offer.

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Self Evaluation of your Business Opportunity

Would you invest in yourself? Sometimes you can save yourself a lot if time and trouble by taking a critical look at your own plans and ideas. If you had the money to invest in your business, would you?

Be honest with yourself. Would you take out a mortgage on your house to invest in your business? Many investors may ask you this question or similar ones. If you are not willing to invest in your own business, why should your investor? Make sure your plan is as solid as it can be and that you believe it in enough to help others believe in it, too.

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