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October 12, 2010

5 Simple Steps to Get Venture Capital

Want venture capital? Click here to watch this free presentation.

When seeking venture capitalists to infuse your business with the cash you need to succeed, it helps to know where you’re going before setting out. This is what to expect.

1. Preparing communications and due diligence materials

Perfect your high concept pitch, elevator pitch, teaser email, business plan, and slide presentation. The operations plan, which is part of the business plan, deserves special advance attention – because it lays out the risk factors of investing in your business and how you will overcome them. The executive summary, another business plan element, is also key – because it is one of the first impressions you will make on potential investors.

2. Developing a master list of venture capitalists to contact

Get access to a private equity firm database program, and use it. Plug in your key defining factors – such as location, sector, and growth stage – to narrow the list. Scour the websites of the VCs on your list to verify the resulting data, and confirm that they are actively investing. The more VC firms you eliminate from your list, the more powerfully you can focus your efforts on the firms that are most likely to match your business profile.

3. Contacting the venture capitalists on the list

Determine the right people to contact at the firms on your list. Managing Partners are the final arbiters of venture deals, but are usually very busy. Partners have a good balance of availability to you and clout within the firm. Associate Partners often read unsolicited business plans, but have less clout than Partners. Finally, Venture Partners assist in managing portfolio companies and assessing new deals, but they have the least power. The higher up the ladder you can go, the better – but focus on your existing connections when sending out your teaser emails.


4. Meeting with venture capitalists and fulfilling due diligence

Deliver your slide presentation. Answer the three most common questions VCs ask in meetings: How much capital do you need, what is your company worth, and what is your exit strategy? Get a yes, no, or maybe as to whether the firms would like to invest in your business. Deliver all requested due diligence materials: company background, management background, business plan, financials, capitalization table, leases, employment agreements, purchase or sale agreements, letters of intent, etc.

5. Negotiating the terms

Created a competitive investment atmosphere from the very beginning, by approaching multiple investors at once. When actually negotiating terms, look out for “liquidation preference.” Try to secure a 1X liquidation preference, which guarantees the VC will recoup their investment in an IPO or buyout – rather than 2X or 3X, which doubles or triples their take before you see a cent. Also beware of the “participating preferred liquidation preference.” This gives investors their 1X, 2X, or 3X liquidation preference, plus their percentage share of all proceeds of a buyout, before you see a cent.

Want venture capital? Click here to watch this free presentation.

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