How to Raise Money from Angels and Venture Capitalists

By John Riley

In representing a group of venture capitalist firms in the western states not so long ago, I learned just how important the business plan process is in raising money for a business. My responsibility was to look for young companies that showed promise, do some due diligence and then if the company still looked promising, I would select one or two venture capital firms interested in the market involved and turn my recommendation and report over to them.

 It’s important to realize we are talking about a process, not a single act of writing a plan and submitting it. The decision to finance or not finance can occur at any point in the process. So understanding the process can make the difference between success or failure.

 Your objective is to create sufficient interest in your business that the investor will consider your plan viable and want to meet with you.  The business plan alone won’t get you the money.

 In general, venture capitalists are reluctant to fund start-ups that have no financial history. After a company has been in the market for three or more years, they have a record of success or failure in the marketing of their product or service. At that point, the venture capitalist can learn enough about the company and its product or service to evaluate the degree of risk.

 When you’re looking for seed money to start a business, the most likely source, other than friends or relatives, is the angel investor.  They are ready to invest with limited or no business history, but  the amounts of money are usually smaller than what the venture capitalist is willing to invest. If you decide to seek out an Angel, you can go to the Internet and post information about your company on  Angel investors visit the site often.

 But, there is an exception.  When a company comes up with a product or service that is truly a breakthrough in design or technology and stands alone in the marketplace, investors, with checkbooks in hand and minimal concern for their business history, are ready to deal.

 When the company is ready to go to the market for capital, the need for a business plan comes front and center.  While there is no shortage of Internet and professional sources of information on the recommended outline for a business plan, the important thing is to have the information the investor wants in creditable form. While some entrepreneurs have written their own business plans, if the money involved is substantial, hiring a consultant to write the plan seems to be the preferred course. Depending on the size of company and the complexity of the business, costs for the plan can run from $4,000 to $35,000 or more.

 While there are many important information needs that must be provided in a business plan, there are four questions that are a good place to start:

  1. Why does the market need this product or service?
  2. How big is the market and what will your share be?
  3. What’s your competitive edge; how will you protect your intellectual property or technology?
  4. How much money do you need and how will you spend it?

 All business plans should have an Executive Summary up front to summarize the most important  information/data in the plan. It must be very well written because investors are usually swamped with business plan submissions so  they read the Executive Summary first and if it doesn’t capture their interest , the plan will probably go into the recycling bin.

 Among the reasons business plans fail, three are the most common:  1) the data and or information presented is exaggerated or unrealistic. Keep in mind, most venture capitalists work in firms that often have professionals on their payroll who know the markets they target very well and can quickly spot misleading or inaccurate information.

 2)  You don’t want to minimize or omit your plan’s weaknesses. No plan is perfect and the investor expects to see a problem or two that might threaten the accomplishment of your goals.  The key is to recognize the problem and then tell how you plan to deal with it. 3) minimize or eliminate opinions and present sourced data and professional or expert commentary on the market situation.

 Although there are many business plan structures, I use this one:

0.1              Background

1.0               Executive Summary

2.0               Financial Plan

3.0               Company profile

4.0               Products and services

5.0               Manufacturing

6.0               Market Analysis

7.0               Market Plan

8.0               Contingency plan

9.0               Addendums

 When your business plan is in hand, you may opt to contact your banker before considering a venture capitalist since the banker is primarily interested in interest income while the venture capitalist focuses on equity in the enterprise. Entrepreneurs often make the mistake of contacting only one or two banks and if that is unsuccessful, they give up and go looking for a venture capitalist.

 That’s a mistake.  Banks, like other businesses , target the markets they want to pursue. So if you talk to a bank about giving you a loan for your software company, the bank may not be interested in that market. However, other banks may be looking for software opportunities. The rejection may not have anything to do with you or your plan. The point is, contact five or six banks to give yourself better odds for success.

When you finally meet with the investor, he may tell you to redo part or all of the plan and suggest you format it his way. No need to be alarmed. Every investor has a way they like to have information presented and if they do want you to revise the plan, that’s actually a favorable reaction because you know he’s interested.

 Now that you have met the investor, she will have answered four basic questions about you in her mind… Does he:

  1.  know this business and the market he wants enter?
  2. have good business skills
  3. have good people working for him?
  4. really have commitment to his business?

 If you pass that test, chances are you are about to enter a serious negotiation for money.

 On average, approximately four to six months will have passed from the time you start the business plan process until you get money from the investor.  Don’t forget, this is a process and you can succeed or fail anywhere along this timeline.

Explore posts in the same categories: Financial, Management

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