November 5, 2012
Tempering the joy of starting a company is the need to find sufficient financing to keep going until the company becomes self-sustaining. While savings, friends, family and credit cards will keep the dream alive for a while, eventually you will need either a loan or investors. Finding venture capital to trade for shares in your company is a major concern for many entrepreneurs; here is a rundown on how to obtain that financing.
Shop for a venture capital (VC) firm on the Internet, through your personal and business network and, if you have them, your angel investors. Try to find VC firms that match your needs and situation. Some firms prefer to be in on the ground floor while others expect your business to be well underway before they become involved. Some VC are interested in specific industries and other prefer either a new service or a new product. Finding the firm that has experience in your niche will increase the likelihood of acquiring financing.
Once you have attracted a VC firm, or better yet two or three, introduce them to your business, its potential, any obstacles you foresee and your solutions to those obstacles. Look hard for potential problems because investors will be very suspicious of a smooth-sailing scenario. Understand that at this first meeting it is as much about you as it is about your business plan. While the initial meeting may be short, be prepared to spend a whole hour. There is nothing worse than having a potential investor wanting information that you do not have on hand.
If you have intrigued the firm with your initial meeting, you will be asked for more information. This is where all the nuts and bolts are brought out and put on display. If possible, bring in your product or demonstrate your service. You will need to show sales projections, costs per unit, overhead costs, salaries and plans for continued growth. Potential growth is very important because venture capitalists expect a good return on their investment for at least five years and preferably ten.
Brainstorm in preparation for this meeting; concentrate on predicting every possible question in advance, and prepare a good detailed answer. Some possible questions that may be asked include.
- Where do you see the company in five years, ten years
- At what sales volume will a profit be realized
- How much influx of money do you need and how did you arrive at that figure
- For what would our investment money be used
Once one or more VC firms are ready to invest in your company, carefully consider their proposal. Like a marriage proposal, a financial proposal is for the long term, and although it may not last a lifetime, it will be expenseive to withdraw from. How much of an investment the firm proposes to make, how much of the company the firm expects in return as well as perks that will help guarantee their investment are what will detailed in their terms sheet. Remember the final decision is up to you, so look carefully. If you do not like what you see, walk away.
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