A business venture can be funded in a number of ways, including your own private capital, “blood money” (money borrowed from family and friends), a small business association loan or a bank loan. In some cases, however, it may be of benefit to obtain funds via venture capital (VC) funding. Here are five requirements that you will need to satisfy in order to procure VC funds:
1. A strong referral. Most venture capitalists find their investments via referrals from industry contacts such as attorneys, bankers, research analysts and accountants. If your small business is in a successful early stage of operations, those attorneys, bankers and accountants may already have been in contact with you. If they haven’t, you can try locating them by inquiring with other small businesses about their accountants and other collaborating professionals. Small business events and happy hours are also places that are frequented by such agents.
2. A business plan. You will need a business plan or an offering memorandum that describes your small business in expert detail, as well as a sound financial model containing revenue projections. Keep a PowerPoint presentation handy in case you are invited to a personal meeting. If the venture capitalist is a private equity professional, you will also need to show an income statement, balance sheet and a cap table.
3. An existing client base. If you are about to ask for millions of dollars in investment capital, the VC (or VCs) will want to see an existing customer base that is already benefiting from your goods or services. If you do not yet have a customer base, obtaining funding will be harder but is not impossible. Demonstrating that there is an interest in your products through online sources such as a website, blog or social media page is a good way to start. Distributing the product through goodwill gestures to potential clients (e.g., universities, charity organizations) and then gauging their responses is another way to show that your business has potential.
4. Strong growth potential. Figuring out that your small business has a line of new and marketable products is easy. Figuring out just how well these products will do in the open market is next to impossible. Part of the problem is that you may not know about or have access to all potential markets – something at which the venture capitalist is actually more adept. Meanwhile, the VC is focusing on your small business’s growth potential because he or she wants to see a return on investment of 10 times or even better. To address this problem, you will probably need to launch and grow your small business for a few years before asking for VC money. After all, if you cannot believe in your company enough to make it a legitimate business, why should the VC invest millions of dollars in this venture?
5. An expert management team. No business is an island. While you yourself may be an expert engineer and quite comfortable with building product prototypes, you will need a financial officer sporting an MBA in order to convince the VCs that their money will not be wasted on mechanical gadgets. Likewise, you will need a product manager, a marketing expert and probably an attorney or two. Many of these individuals can be retained on a contract basis, reducing your overall costs. However, you must show the VCs that you are considering the business from all angles, and not just the one in which you are the expert.