When an entrepreneur has decided to attract the interest of a venture capital (VC) firm, the last thing that should happen is a blown opportunity. Venture capitalists have been around the block a few times and know what a company needs in order to succeed.
It is your job to convince a venture capitalist that his or her investment will be profitable. To that end, I offer the following tips:
1. Demonstrate Your Ability to Execute
A business idea is not enough. You must be able to convince a potential investor that you can turn your idea into revenue and profit. Too many entrepreneurs have great products or innovative services, but no idea of how to monetize them. Be prepared to lay out a strategy, a business plan or model that defines your strategy for making your idea pay dividends.
2. You Must Have No Delusions of Grandeur
Too many entrepreneurs get a big head and feel they are entitled to a huge salary commensurate with other CEO’s. Wrong!
You likely have little or no track record, no demonstrable management skills and your company is probably in the red. Be realistic about salary expectations. Keep them in line with your needs, not your wants, if you expect funding from a venture capitalist.
3. Have A Definitive Product or Service
If you start talking to your investor about funding research and development, you have made an egregious error. Venture capitalists seek a product or service that is viable and ready for the marketplace.
No venture capitalist will gamble on research and development funding—period! Realistically, they would invest in biotech stock if their goal was to fund research and development.
4. Develop a Proven Target Market
Be prepared to prove you have done your due diligence with respect to who your customers are (target market) and how many there may be (market potential). Venture capitalists want to be convinced that you have done your homework. These demographics are an important component of your pitch to any would be investor and no venture capital firm will fund an enterprise that cannot demonstrate a robust market for its product or service.
Experienced venture capitalists know the harsh realities of the marketplace. It is important that you are not perceived as naïve on the subject of competition. No matter how novel your product or service, someone out there has a similar idea. Embracing your competition is the best ploy. After all, the very fact that you have competition confirms your idea as a viable one.
5. A Healthy Respect for the Investor’s Money
Avoid conveying an irreverent attitude toward VC money. A venture capital firm may have deeper pockets than you, but I assure you they value their money as much as you value yours. To that end, avoid expensive lunches, fancy restaurants, expensive rooms and unnecessary frills. All these luxuries have the potential to derail your funding by giving the investor the impression that you do not place the appropriate value on money. It is to your advantage to impress any potential investor that you are conservative, even frugal, when it comes to money.
One more thing: Don’t seek money you can’t justify. It is necessary for you to carefully review your balance sheet before meeting with your investor. Your investor will certainly have done his homework! Accounts receivable are an often overlooked source of cash. Make certain you have a firm handle on their value. You can achieve this easily by plugging a few numbers into this free online tool. Make any adjustments to your funding request accordingly.
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Photo: Agave Denim
Andrew Cravenho is the CEO of CBAC LLC, an innovative invoice financing exchange. As a serial entrepreneur, Andrew focuses on helping both small and medium sized businesses take control of their cash flow. Prior to CBAC, Andrew founded an annuity financing company relieving tort victims of financial hardship.