Pass the Investor Screen Test
Q: I own a small but growing manufacturing firm. I'd like to seek some additional funding to help grow my business, but with so many venture capital firms to choose from, I don't know which ones to approach or how to do it. What advice can you offer?
A: Once you figure out that there are virtually hundreds of venture capital firms out there that could potentially do a funding deal for your firm, your next goal should be getting your business plan in front of the appropriate investors. The screening process for funding emerging businesses is already a difficult series of hoops to jump through. To increase your chances for success, it's crucial that your business plan have the correct introduction to a funding source specifically matched to your area of expertise. I have always told my clients, "Given all the sources and levels of funding groups in the capital markets, getting hooked up with investment partners is in many respects a relatively easy step in the overall deal process, if you know how to do it."
Think about these figures for a moment. In 1998, more than 3,000 equity funds, investor groups and venture capital firms across the United States provided more than $150 million in growth capital deals. But trying to piece together the perfect structure and terms for your company's plan will ultimately come down to who you know much more than what you're asking for, or what kind of performance you think your company can deliver to outside investors.
There are two different paths that your written plan can take in getting into the hands of a potential deal partner. First, you can send it "cold" to dozens of investor groups with a cover letter introduction and one of your firm's glossy product brochures. Someone at the funding firm will then open the envelope and check your letterhead to see if they recognize you. When they don't know who you are, you may get nothing more than a two-minute skim of your executive summary, which is rarely enough time to attract investor attention, so this process usually ends with a "thanks, but no thanks" form letter sent back to you.
The preferred route for funding can go one of two ways. You hand off your growth plan to a close referral, probably a business associate, who personally sponsors the proposal to an insider at a venture funding company. This person will directly represent your concept and venture prospects to one of the key decision-makers within the funding group. Or you could provide a copy of the business plan directly to a principal at the capital group, after the referral has already personally introduced you to a key insider. If this initial meeting goes well, the funding principal will personally solicit the plan and circumvent the normal review process for unsolicited entrants. These "sponsored-solicited" plans have an advocate who initiates and maintains dialogue with a key insider to further represent the strengths and attractions of the investment opportunity.
This personal referral is crucial to initiating serious investment negotiations. Decades of research have confirmed time and time again that sponsored-solicited plans are more likely to get a second read-through and serious due diligence by the capital firm vs. those that are received "cold" by the funding group.
The typical business plan is perhaps 30 to 40 pages in length and clearly communicates five things:
- Who you are and what you do
- The size of your target market and who else is out there doing something similar
- Why you are different enough to be the targeted buyers' choice
- Who's on the venture team that can make this enterprise meet its objective
- What kind of performance you can deliver for those willing to back you
Submit your proposal cold, however, and your thorough business plan might not get the careful consideration it deserves. On the other hand, a sponsored-solicited plan has already piqued the interest of a key insider before you even get your first meeting with the potential investors. That first round of face-to-face dialogue positions the business plan well ahead of unsolicited proposals. You want the plan to initiate a thorough due diligence, and if all goes well, it further improves the likelihood of receiving a funding offer. An outside sponsor will receive a finder's fee, but that's money well-spent to get your proposal in front of insiders who want to learn more. The key point in getting your proposal out to investors is never to leave your growth plan out in the cold.
David Newton is a professor of entrepreneurial finance and head of the entrepreneurship program, which he founded in 1990, at Westmont College in Santa Barbara, California. The author of four books on both entrepreneurship and finance investments, David was formerly a contributing editor on growth capital for Industry Week Growing Companies magazine and has contributed to such publications as Entrepreneur, Your Money, Success, Red Herring, Business Week, Inc. and Solutions. He's also consulted to nearly 100 emerging, fast-growth entrepreneurial ventures since 1984.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.