Getting Funded with Venture Capital

It's generally believed that venture capitalists (VCs) fund only about one- to two percent of the business proposals that come across their desks. Facing such long odds, the hopeful entrepreneur must remain aware that the major challenge, therefore, is to get his or her business plan noticed, read, and seriously considered. The VC will read only a small number of plans from cover to cover, and even fewer still are actually scrutinized in detail. This can undoubtedly be frustrating to the entrepreneur because the passion and effort that have been put into moving the dream forward are often rewarded with only a perfunctory acknowledgment.

So, if you're looking for funding for your new idea, how do you get your proposal to not only be seen, but also read? To begin with, when writing your business plan, you must remember to think and act as a marketer, viewing the potential investor as your customer. Make sure that you include an executive summary at the beginning of your business plan. You must keep in mind that the VC is probably a very busy person and is far more likely to spend time on proposals that immediately show themselves as attractive. Your plan should be written in an easy-to-understand format, and should draw attention to itself with a brief narrative summarizing its most important points. Consider using subparagraph headings to make the main ideas stand out. For example:

  • Describe, in one or two sentences, the vision and business proposition for your company – this is often called the "elevator speech" (in other words, what you would say to the VC if you had only the vantage of a sixty-second elevator ride to convey the merits of your proposal).
  • Indicate the amount of money that you're seeking to raise and the length of time it can be expected to be needed.
  • Describe your product or service in a manner that's simple and understandable, while drawing attention to its distinctiveness. You should also indicate the stage of development and the timing of when you expect to be able to deliver it to the customer.
  • Be sure to specify the value proposition that you'll be conveying to the customer, and try to illustrate the magnitude of the economic benefit.
  • Summarize the market size and scale of the opportunity, and make note of the competition in the marketplace.
  • Introduce your management team with one- or two-line bios on the key founders and participants. You must convince the investors that your team is qualified to bring your dream to fruition.

Take your time – as a matter of fact, take a great deal of time – on each and every sentence in your executive summary. It represents the expression of your business vision and economic proposition. Even though it's placed at the beginning, you might consider constructing it after writing the rest of your business plan.

Be sure to state in the beginning your value proposition. Scores of business ideas are clever, interesting, and useful but are nevertheless destined to lose money and fail. New companies typically have sizeable overhead costs to consider and competition with which to contend. The selling proposition of your product or service must therefore be compelling, usually by an order of magnitude over what's currently in existence in the marketplace – for instance, at least half the price or double the productivity of existing solutions is a good rule of thumb. Imagine what your salesperson would actually say when pitching the product to the intended customer. Remember, you're a marketer, so always start with the customer when imagining what the value you create will mean to the market.

Some venture capitalists look no further than the executive summary and its management section to decide whether or not to read the rest of the plan or visit the company. Therefore, put yourself in their shoes. How keen would you be to back a group of people that don't seem to have the relevant experience necessary for the business proposition that they're putting forth? If your management team doesn't quite make the grade in your own eyes, chances are good that the VC will reach the same conclusion. You must therefore ask yourself where you would be most likely to find the best possible people for the plan that you propose. Your team doesn't necessarily have to be complete; a single talented engineer or an impassioned and articulate visionary will likely do in the beginning. However, you must be convinced and persuasive that you can ultimately attract the right people.

Venture capitalists generally prefer new, emerging markets for products and services – markets that may not be large today but show great promise for the future. Aside from the obvious growth potential, emerging markets are also attractive to VCs because a leader in a rapidly expanding market can often cover a number of mistakes in operational execution. But remain realistic about market size, and make sure that you understand the difference between an "available market" and a "potential market".

You'll also need to express how you'll be able to create and maintain competitive barriers. Be sure to devote a significant amount of time and effort to identifying your actual and potential competitors. One common mistake that entrepreneurs tend to make is to compare their product or service of tomorrow with their competitor's product of today. Remember, the marketplace is not stagnant; your competitors are continuing to develop their products just as you are.

It can certainly seem like a long and often overwhelming journey from first giving birth to that fantastic idea to formulating it into a sound and compelling business plan. Utilizing the common-sense tips outlined above will move you closer to creating a proposal that will not only command attention but that may also ultimately be financed. In the end, however, it's not so much the business plan that will get your company funded but your ability to effectively communicate the fact that you possess the right team of people who can effectively capitalize on a rapidly emerging market opportunity. The business plan is only a tool that you'll use to convince your funding source that you've done your due diligence on all pertinent issues.

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