Raising venture capital is a lot like painting a room: The actual painting is the final step. What takes the most time is prepping the job-getting rid of old wallpaper, patching, sanding and cleaning.
In this vein, we understand our "Top 100 Venture Capital Firms for Entrepreneurs" list might provide irresistible fodder for capital-hungry entrepreneurs. But before you pick up the phone and start dialing for dollars, think about the prep work required to do a good job and be successful. Not sure how to start? The following steps will help:
1. Understand the mission. You need to know what you're looking for. First and foremost, you must find a lead investor. A lead investor is the firm that will either do the whole deal or orchestrate the participation of other venture firms, with their own capital commitments.
2. Form an advisory board. For better or for worse, a good number of deals that reach the closing table get there because of personal relationships somewhere along the line. Forming an advisory board decreases the degrees of separation between you and your potential investors by increasing the likelihood that one or more of the industry notables on your board has a relationship with, or is at least known to, your investors.
3. Secure legal counsel. A good attorney who's experienced in venture capital transactions may be worth his or her weight in gold when it comes time to actually close the deal. But the reason to hire one from the outset, even before you begin negotiating with venture capital firms, is that retaining counsel gives you access to the attorney's Rolodex and provides entrée to more potential investors. In addition, your attorney's name will (hopefully) dress up your business plan and, like the advisory board, provide a personal link between you and your investors.
4. Have a business plan and an executive summary at hand. If you're on the line with investors, there's a good chance they'll ask you for your business plan. You'd be wise to have it ready to go so you can send it out immediately. Another important reason to have a business plan available is that it forces you to think through the sort of nettling issues that investors raise, because they could start asking you all kinds of questions while you're on the phone. And you just won't be able to answer them with any degree of clarity or conviction unless you've gone through the discipline of writing a business plan.
Keep in mind, you shouldn't send your full business plan out to investors, even if they ask for it. Send an executive summary instead, and include summary projected financials. When you make follow-up calls, the trick is to make sending your full business plan a condition of meeting face to face. Here is how the call goes: "I appreciate that you want to see more based on our executive summary. I will send you our plan, but only under the condition that you agree to meet in person so I can present it to you."
Of course, the investor might want to meet with you after reading just the executive summary. But as great as that would be, it doesn't obviate the need for writing the plan and deriving the benefits that would result from that exercise. Besides, your next investor might not be satisfied with only the executive summary.
5. Line up your references. Remember, luck is where opportunity and preparation meet. If an investor is itching and wants to talk to vendors, customers, employees, consultants or industry experts, the best solution to offer is a name and a phone number, not a vague "I'll get back to you." Once again, you have to do the groundwork. Call your allies ahead of time, tell them they might get a call, let them know what it's about, and, if it's practical, guide them toward what they should say.
6. Get warm-body introductions. If points one and two failed to drive the message home, then perhaps this one will: You'll get further faster with an introduction to investors than you will if you go after them without one. Maybe it's the saying "It's not what you know, but who you know." Maybe it's a conspiracy to make sure the rich get richer. Maybe it's just human nature. But whatever the reason, avoid contacting people out of the blue if at all possible.
David R. Evanson is a principal at Gregory FCA, an investor relations firm.