Tips for Obtaining Venture Capital

Ask anyone who has ever obtained venture capital financing and they will tell you that it is different than any other capital source. Venture capital (VC) is equity financing provided to start ups with potential for high short-term earnings growth. The venture capitalist expects to obtain a high appreciation return through a defined exit strategy usually with an initial public offering (IPO) or trade sale of the company.

Venture capital serves a defined niche in the financing market.  It usually supports newer entities that have growth potential but no track record to speak of.  Companies that use venture capital are ones that cannot obtain traditional financing but cannot expand without it.  Because of the strict guidelines and performance targets, VC is not a substitute for debt or equity financing but one method the startups can expand past their own limitations.

The availability of venture capital will ebb and flow with the overall economy, just as traditional debt and equity capital.  When equity capital is scarce so is venture capital. The National Venture Capital Association tracks VC funding data with MoneyTree and PricewaterhouseCoopers. They report that during the downturn VC funding has shrunk by one-third. In the third quarter of 2008, VCs invested $7.2 billion in 994 deals. Compare that with the third quarter of 2009, which saw $4.8 million go into 637 deals.  Venture capital availability and the number of deals are expected to increase with the overall economic recovery.

Since venture capital is different than traditional capital sources, to attract and obtain this type of equity, small business owners need to understand the specifics of venture capital financing.  The following are tips for presenting to potential VC investors:

• Be ready to present: You never know when you will get the opportunity to make a pitch.  It may come during a prescheduled visit or during an informal conversation.  Always be ready to present and close the deal.  Know exactly what you want to say and have the necessary information at your fingertips.  Some companies have received millions of dollars in financing from informal presentations made to VC investors in an airport between connecting flights.
• Know your business:  In order to get venture capital investors comfortable in taking on your company’s business risks you must be able to identify the issues and explain your strategies for mitigating them.  Try and target VCs that have some experience and passion for your industry.  The more they understand your operations the more likely they will be able to see the company’s future potential.  One investor says that he got Random House to invest $1 million in a company that offered a crossword-puzzle game because it attracted the interest of the company's crossword-puzzle editor. That editor pushed for investment in the company.
• It’s a numbers game:  Present to as many venture capital groups as you can.  Just because one group doesn’t see an opportunity doesn’t mean that they will all feel the same way.  Venture capitalists make money and pride themselves on being the only investor to see and understand the vision that eventually turned into a home run investment.  Make sure and let each group know that you have talked to their competition.  VCs are a competitive bunch and do not like to miss out on what others may think is a good deal.  Keep presenting to whoever will give you the time to pitch your ideas.

The best way to attract a potential venture capital partner is to know all the risks and opportunities of your business and your industry.  Even though after making the investment your VC partner may help form strategy, initially they will look to the business owner to be the visionary.  You must be able to convince them that you have thought of every conceivable financial and operating issue and have developed strategy to deal with them.  In addition you must be on the same page when it comes to an exit strategy.  In deciding on a venture capital partner you must find an individual or group of investors that think like you and share the same business goals.