For entrepreneurs going to venture capitalists for money, the first step is to research what the different venture capitalists are comfortable with or looking for. Just like any other kind of sale, not every venture capitalist is going to be investing in the same thing as the next guy is looking for. For instance, some venture capitalists are only going to invest in people who are looking for 5 million dollars or more and only biotech. The next one is looking for people who need $250,000 and a maximum of a million, and they are looking to invest in services businesses. If a entrepreneur gets them mixed up or assumes makes a big assumption and sends a big business plan–an unsolicited business plan–it’s annoying. They will have wasted a lot of money, and they don’t look smart. Not only does the business plan gets thrown away, but a lot of times a entrepreneur gets put on list of somebody who is stupid just because they would not have taken the time to some basic research.
Where do you get the research to know what the venture capitalists are doing? There are directories, websites, venture capital associations, and departments of commerce; it’s not hard to get a basic sort. Typically, of the literally thousands of sources of money out there, there maybe 50 that would fit a particular companies profile and to be worth looking at.
I guess one of the observations I am making is that some basic salesman mentality seems to be going by the wayside when people are asking for money. They would never do this kind of behavior when they were trying to sell their product. They know they need to do some research about what the market wants. They know they need to do some lead with benefits rather than features when it is a sale of a product, yet when people are asking for money they forget all that and start hitting the venture capitalists with features and “here’s why I need it.” A lot of the proposals I am seeing read like a kid going to their parents for money saying “just give me a bunch of money and here’s how I can do this and if it doesn’t work I will go back to school, I promise!” That type of very self-serving adolescent behavior isn’t going over very well.
There are steps that the venture capital companies often use. Wanting to look at a three page prospectus is the first step, and I think the entrepreneurs need to do a little more research and make a call connect somehow to the venture capitalist. Somebody in their office is usually in charge of the task of conveying what needs to be on that perspectious. They intentionally have a different outline to see if the entrepreneur will listen.
Why would you want to give money to somebody who can’t and won’t listen at all? Even as a venture capitalist, you don’t want to have significant management participation in a company later. You don’t want to partner with someone who refuses to listen right from the beginning. The venture capitalist company may say that their prospectus should include an executive summary or projections for the first two years or a market analysis or whatever it is they specify that they want. Those are the things that should be in the three-page prospectus–nothing more. That is what they said they want. That is how they screen proposals. If, at that point, the company ends up sending the entrepreneur a great big business plan instead of the prospectus.
The next step often is a screener from a venture capitalist company who goes through the prospectus to look for fit. It isn’t just the quality of a presentation. It’s a matter of what the investors who are participating in the investment pool are looking for. For example, one of the investors I represent is a person who worked in a corporation for 35 years, is retired, has a lot of money, doesn’t like his kids, and wants to live vicariously through some younger people. He would like to have his money do those things that he did not do and regrets working with the same boring company. He is looking for things that involve technology and music. So I always had him in mind and when looking at proposals I am screening–not just for the quality of the proposal and the concept the entrepreneur presents. But if the investors I am representing aren’t looking for that, there isn’t a fit and so it stops.
Entrepreneurs need to remember that sometimes the “no” is not just about the quality of their idea but the preferences of the investor; some of it is pretty subjective. If there is a basic fit often there is a phone appointment that has to happen. For example, someone in my position or a similar position might want to interview the entrepreneur and ask some questions. The entrepreneur needs to be ready to answer these questions. They tend to fall in the eighteen points of strategy; six of the questions are within marketing and sales, six of them are in management, and six of them are in finance. To reinforce what those are, they are not that complicated but I find that a lot of people have not thought them through. Some examples of the kind of questions in the marketing area: What’s the logic behind the market place choice? What’s the logic behind the pricing? What’s the logic behind the selection of product? What’s the logic behind the promotional campaigns? In management, examples are: What’s the logic behind the technology choices? What’s the logic behind the procedures? What’s the logic behind the organizational structure?
The operative word here is “logic.” I have seen a lot of business plans where people have addressed the major points of the business plan, but they presented it as though it is fact and there’s no logic. For an example, somebody will present, “We are going to be doing a website, direct mail, and advertising, and here is our budget.” But there’s no explanation of logic as to why. It doesn’t have to be a treatise, but there does need to be some logic as to why those three things have been chosen out of a vast list of different opportunities for marketing. The venture capitalist cannot tell those three things are chosen only because that is what the entrepreneur likes to do, that’s all they can afford to do, and it’s the most effective. Some kind of sentence about the logic behind each of the choices in the eighteen points of strategy are really important. The phone call interview is essentially a quiz to make sure the entrepreneur understands these things. Some of the key words within the financial area are like capacity, collection, control, capital investment, and cash flow. All of them start with the letter “C”. The whole point of the phone call is to test the person. Can the person convey that he/she thought things through? They will have the benefit of sitting there with the business plan in front of them, so if they are nervous and forgot, they can flip through the pages and look up the answers if they have to. There usually is a telephone screening to see if their homework has been done.
If it sounds good, the person asking the questions might say, “Here is our basic read of your prospectus.” It looks like in phase one you might want to create a website and you want to do the RND on the product, but you need the money for is the website. Tell us again how you are going to attract the customer. First,lthey want to confirm that they understand what the prospectus is all about. They will ask these things just to have the entrepreneur think out loud. If somebody gets past this point, the screener sends it to research. Another important point is that I find prospectuses don’t sort the nature of the proposal well enough. For example, the strategic driver of a proposal might be that it is a new technology, but maybe it’s related to multiple industries. Perhaps it sounds like telecommunication, but it is really financial.
If the entrepreneur has not thought about the fact that somebody who is very knowledgeable will be researching this and does not put it in the right category and give the venture capitalist some direction, the venture capitalist may give it to the wrong research group. Let’s say, for example, the key element of the idea is an advance in how the financial markets work, and they will automatically give it to people in telecommunications. They will say that this is nothing new, nothing big, and throw it back because there is not innovation here, and it gets killed. If they gave it to the financial people who look at the financial market and understood the value of the idea, they may have gotten a favorable response. Help the venture capitalist know which researcher to give it to. Before they have the investors review it and say “yes,” they have to have some experts look at the concept and say “yes, this has actually has possibility.”
Even small houses have somebody who is going to look into the idea. Just because the entrepreneur looks at it and is excited about it and says it is fabulous, it does not mean that outside experts are going to agree. Once it has gotten to that point, there is research about the venture capitalist. There are several additional steps: contacting the venture capitalist, delivering the prospectus and the research phase, and the interviewing screening. I might have reversed those two steps. There may be a point where the screener looks at this again and says, ”OK, now this looks like a good concept. It matches what the investors in my particular group are looking for, and we have a good fit and a decent concept. It does sound like the entrepreneur has thought through all 18 points of strategy. Now lets have it in front of my group.” That’s where they will actually want the whole proposal. Having a big pile of proposals all over the place too early in the process does not help. Two or three copies of a proposal might be asked for at the key time, and that is when the written word has to really take care of itself.
The reader should recognize that they haven’t done an in-person presentation yet, and that is ok. Because a lot of sales people don’t like that, a lot of entrepreneurs don’t like that. They would like to give an in-person presentation before anybody has to read. The reminder here is that you are still at the fit stage: Are we even remotely interested in something like this? Is it worth our time to be having an interview? The venture capitalists know that there will be gaps and holes and problems with the business plan, and by the time they are looking at it as a group, they are not looking for perfection; they are not looking for everything to be right. They might be listing questions they might have, and there might be two or three pages of questions which an inexperienced entrepreneur takes as critical. The more questions that come out of it, they more engaged they are. That means the venture capitalist, the investors, were engaged in the process and cared about it enough that they generated a bunch questions. If they had a meeting and came out with one question, they didn’t care, they didn’t like the proposal, or there wasn’t a fit. The more questions the better. That is when an in-person appointment might happen. The polite venture capitalists will have given the list of questions to the entrepreneurs, so they will be more prepared. The major question of the article was how to make the perfect pitch to a venture capitalist. By the time you have made a perfect pitch to the venture capitalist, you would have gone through the major steps ahead of time.
By the time there is an in-person interview, you should know their major questions. It reflects either the interest of the venture capitalist–their particular preferences–or it will reflect the things that might not be strong in the written presentation or it is just a way to open you up. Whatever the major questions are, that is going to be in the content of the in-person presentation. It could just reflect on their past experiences with previous entrepreneurs and what problems they have had. Trying to psyche out why they are asking those questions gets people into trouble, too. How much technology should somebody have? Should they try to wow the venture capitalists with tons of power point special effects? I think no. I think power point helps reinforce the ideas and have the content stick because the investors are being hit with hundreds of ideas all year. Differentiate what you are doing compared to somebody else. While it is important to have visuals, special effects and video too early gets misinterpreted as hiding behind the technology instead of looking eyeball to eyeball and actually listening to what the venture capitalist is asking. I find that special effects are better for investor relations programs later one people have invested, and they want to see a return. Then they want to see if they were to smart having invested. When somebody is thinking about giving you money and giving you a chance, it is much more relationship oriented. The phrase is they are “betting the jockey, not the horse.” They are really focusing on the leaders, and if you are too busy hiding behind technology and distracted and not connecting with what the investors are concerned about, you are going to lose it by trying to impress them. This article could talk about the process that the venture capitalists use and remember the basic sales logic of benefits, not features, and doing research about what is important to the people before you speak. Listen to what they want at each step, and don’t anticipate the next step so much that you blow the step. That relationship eyeball to eyeball is important with this.
Anther major point is that some of the decisions are subjective, but they are not as subjective as you like to think they are. Sometimes people get turned down when they ask for money because they say that the venture capital fund has invested six times in a row in pharmaceuticals, and they like to have a mix in the portfolio. They just don’t want the seventh pharmaceutical investment. They may still like the pharmaceutical idea, but they still say no because their due for diversification rather than replication of what they have been doing. That may be why they say no.
Known as The Growth Strategist™, Aldonna R. Ambler, CMC, CSP helps rapidly growing midsized companies (typically $20 – 200 million/year) realize their goal of Achieving Accelerated Growth With Sustained Profitability® through opportunity/resource analysis, executive coaching, strategic working sessions, and her intermediary role regarding growth financing. Her clients are among the brightest, most ambitious business leaders whose names now appear on published lists of the fastest growing privately held corporations. The recipient of 23 prestigious awards for her success as an entrepreneur and industry leader, Ambler hosts a peer-to-peer Internet radio program, aptly called The Growth Strategist™, which features lively interviews with CEOs of midmarket companies who have successfully executed the growth strategy of the week. AMBLER Growth Strategy Consultants, Inc. is the official coaching partner for the Greater Philadelphia MSA for Gazelles International. She can be reached toll free at 1-888-Aldonna (253-6662), by e-mail at Aldonna@AMBLER.com or online at www.TheGrowthStrategist.com