May 15, 2011
If you’re looking for venture capital for your business’ start up or expansion, you need to know what to expect and how to prepare yourself before you begin your efforts in earnest. Read on to find out what you need to do if you want to attract venture capital firms and receive their financial backing.
1. Get your communication strategy and due diligence deliverable ready
The first step is to get your elevator pitch, high concept pitch, email communications, business plan and presentation ready. One part of your business plan needs especially close attention; this is known as your operations plan, which spells out the risks inherent in investing in your company along with your plans to minimize or eliminate these risks. Another important part of your business plan is your executive summary, which is vitally important since it will often be the first point of contact with potential investors.
Learn more on how to raise Venture Capital! <==== 2. Put together a list of potential investors Find a database of private equity and venture capital firms and use it to find the most likely candidates. Search the database for investors which are located close to you and specialize in firms in your stage of growth and in your industry to narrow the field. Next research the firms remaining on your list to ensure that they're actively investing at the moment (and to verify the information from the database). The more narrowly focused your list is, the better you'll be able to reach out to firms which are the best match for your business. 3. Contact your list of potential investors Find out which people to contact at the firms on your list. While managing partners are often the people whose approval is needed to close the deal, they tend to be too busy to respond to unsolicited proposals. Partners are usually a better prospect, since they will have more time to communicate with prospective investments yet still have enough pull to make things happen. Venture partners are lower still in the pecking order, but can help introduce you to others farther up the ladder. While the more senior people you can reach, the better off you are, remember to focus on any contacts you already have. 4. Meeting investors and fulfilling due diligence requirements When you deliver your presentation, you'll need to be prepared to answer three questions which venture capitalists will invariably ask: what's your business worth, how much capital do you need and what's your exit strategy? Deliver all the due diligence materials the venture capital firm will need to make a decision: business plan, company and management background information, capitalization table, financials, leases, employment contracts, sale and purchase agreements, letters of intent and anything else they request. Try to get the firm to give you an answer, whether it's yes, no or maybe. Learn more on how to raise Venture Capital! <==== 5. Negotiate terms You can create a much stronger negotiating position for yourself by approaching more than one potential investor at the same time. This will create competition, which naturally will work in your favor. When it comes time to actually negotiate, liquidation preference is something you should pay especially close attention to. Try to get a 1X liquidation preference, which is a guarantee that the venture capital term will recover their investment in a buyout or if your company goes public instead of a 2X or 3X liquidation preference, which means that the investor will receive two or three times their investment before you see any of the profits. Watch out for the phrase "participating preferred liquidation preference, since this gives investors their preferred liquidation position (either 1, 2 or 3X) as well as their percentage of any proceeds from a buyout or IPO before you see anything.
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