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September 5, 2012

Raising Venture Capital in 5 Easy Steps

When seeking funds for a business from venture capitalists, it is important to know what is expected from you before making a pitch. Here are some steps to guide you to successfully securing that much needed finance.

1. Prepare the Material to Your Pitch

The first step in getting ready for a pitch is knowing what to say, how to say it and the accompanying documentation. To capture the interest of an investor and have them listen further to your proposal, you must have a well rehearsed high concept and elevator pitch at the ready. This will give you a means of securing a further meeting to discuss your proposal. The business plan and power point presentation can then be used to expound further on the venture and its viability. First impressions matter a lot so make sure you have polished your act and materials.

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2. Create a Shortlist of Venture Capitalists to Approach

There are private equity firm database programs you can use to narrow your list of candidates. With a little input, these programs will use your location, industry and business stage to identify a list of compatible investors. You can then narrow the list down further by visiting the websites of each firm and verifying their details and that they are still active. In this way you will be able to focus your time and resources on the best matched investors to your venture.

3. Get in Touch with the Venture Capital Firms

When you have laid the groundwork, it is time to identify who to get in touch with at the firm. There are different members to the management team of a venture capital firm and each one has different responsibilities. At the top of the ladder there are the managing partners who make the final decision on financing deals. There are regular partners who evaluate proposals and are part of the decision making process. Associate partners are next and focus mainly on sorting unsolicited business plans. Venture partners on the other hand help in assessing business plans and represent the firm on financed companies’ board. You should try to establish contact with the highest ranking member of the firm you can.

4. Meet the venture capitalists

Once you have secured a meeting, be prepared to make an excellent presentation and have ready answers to the most common questions including those covering exit strategy, the amount of funding needed and how it will be spent. Being confident and giving factual answers will bolster your chances. Once they agree to push through your proposal to the next step in approval process, they will ask for due diligence documentation. This includes the business plan, financial analysis and forecast models, management resumes, employment contracts, letters of intent and so on.

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5. Negotiate for Favorable Terms

Be sure to approach as many compatible venture capitalists on your shortlist as possible. Having multiple offers for finance means you can secure a better deal. Look out for the “liquidation preference” clause. If at all possible try to secure a deal that guarantees nothing more than 1X liquidation preference. This will ensure that the venture capitalist will only recover the investment made. 2X or 3X liquidation preference terms allow the investor to make double or triple the return on their investment even before you get anything.

Peter

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