By David V. Alhadeff, Managing Partner of Velocity Capital LLC
This is a useful round-up from a US VC on what to do when looking for VC funding.
Given the state of the financial markets, the world and the general gloom and doom in the press today, raising venture capital in this market may seem like a kamikaze mission. But for the fearless entrepreneur set on raising money, there are definitely some rules to help tilt the odds of success in your court. I call them the Ten Commandments of Raising Venture Capital.
Rule #:1 Know your VC
Not all VCs are created equal. Each firm has its own set of investment guidelines that it follows when making investments. Typical rules include geographic focus, investment stage preference, lead/follow-on investor, minimum and maximum investment amount, industry focus and board seat requirements. Make sure that the strategy of the firms you are targeting match your funding needs.
Rule #2: Make a personal introduction
Cold calling does not work. Find a business or personal acquaintances that can make an introduction such as lawyer, accountant, CEO of the VCs portfolio company, or banker. VCs are looking for good investments and tend to prioritize personal introductions.
Rule #3: Get to the point
At your first meeting get directly to the point. Be crisp, concise and articulate about your business. Be clear on what you do, who buys your products, how you make money, and how you plan to grow. Keep powerpoints to under 12 pages and executive summaries under 2 pages.
Rule #4: Have the right team
Emphasize the quality, passion and experience of the founding team. You are not expected to have a complete executive team, that is what the new money is for. You are expected to have passion, industry expertise and proven start-up experience (making money for other investors).
Rule #5: Differentiate yourself
Everyone has competitors. Those that say they have no competitors are not believable. Directly present yours and the measurable difference your product or service offers.
Rule #6: Show the ROI
What is your value proposition to the customer? How does your business save time or money (or both). What is the cost to the customer of not using your product or service?
Rule #7:Address the real market size
Who exactly are your customers (i.e. what exact position in a Fortune 100 company?). What is the real market you are serving? Everyone is entering a $50 Billion market in 2004 according to Jupiter. What is the exact size of the addressable market of purchasers of your product or service. Show a bottom-up analysis of how many customers you need to hit your numbers.
Rule #8: Know your numbers
What is the exact use of proceeds? What is the amount of money/time to break even? Explain the key matrixes that drive your business such as number of customers, sales per customer, cost per customer etc. Be prepared to discuss what you would do with more money and how you could make it with less.
Rule #9: Honest Exits
Assume the IPO door is shut and that the only way for your investors to realize a return (what it is all about) is an acquisition. Be prepared to provide tangible examples of recent and related acquisitions. Also, provide examples of at least three different categories of potential acquirers (suppliers, distributors, competitors) and five companies in each category to show that there are plenty of viable of exit options.
Rule #10: Valuations come last
It is better to raise more money for growing the business at a lower valuation than not enough (or no money) and go out of business. Early stage valuations are subjective, get over it. Your first round of investors will probably own 30%-50% of the business.