Tips for Landing Venture Capital
At some point in your entrepreneurial career, you may consider seeking financing from a venture capitalist. Understanding what venture capitalists look for in a company and its owner can make getting your hands on those funds a little easier.
To get an insider's look at the process, we spoke with Bill Frezza, a general partner with venture capital firm Adams Capital Management Inc. in Cambridge, Massachusetts. Frezza's perspective will help you understand just what a VC is looking for in a potential investment.
should an entrepreneur include in a top-quality business
Bill Frezza: An initial proposal should come in the form of a three-page executive summary, to be followed later by a detailed business plan or presentation, if one's requested. [The follow-up] should include a succinct description of the product or service being proposed.
should be avoided?
Frezza: Inappropriately detailed financial projections, inflexible demands to sign a nondisclosure agreement, improbable projections of hockey-stick-like future growth, and a definitive indication that a fixed price or evaluation is being set.
recommendations would you make to an entrepreneur who's looking
to get their plans in the hands of a potential decision-maker? What
should the entrepreneur do if they don't already have
connections with people who can provide funding?
Frezza: A critical skill for any entrepreneur is his ability to use his personal network to gain access to investors, customers, suppliers, corporate partners, industry analysts and the like. I'm a pretty easy guy to find. If an entrepreneur can't figure out how to get to me through his web of industry contacts, in a large sense, he's already disqualified. Nothing reflects more poorly on an entrepreneur than spamming a business plan around addressed to "Dear Sir or Madam."
Entrepreneur.com: What are
some things entrepreneurs should keep in mind when looking for
funding from a venture capitalist?
Frezza: They must understand that as soon as they sell preferred stock to a venture capitalist, they've lost control of their company-even if the VC only takes a minority stake. That's why references are so important. The most useful thing an entrepreneur can do when selecting a VC is to call every CEO whose board the VC has ever been on, including CEOs the VC has replaced in the course of growing the company, and ask them what he or she is like to work with.
Entrepreneur.com: What are
some novice mistakes business owners make when looking for
Frezza: Probably the biggest mistake an inexperienced entrepreneur can make is letting a self-styled boutique investment banker or deal broker grab hold of the company by promising he can raise money. These go-betweens seldom produce results and can easily end up as the entrepreneur's biggest problem when trying to close a deal, especially if they ensconce themselves as interim-CEO. Great care should be taken, including getting references from former clients they've successfully raised money for and VCs they've successfully raised money from, before consummating such a relationship.
business owners are nervous about presenting their ideas to
potential investors for fear of having the concept stolen. What do
you say to people with this fear?
Frezza: If the idea is so easy to steal that giving a presentation to a potential investor is enough to give away the store, then the idea is neither protectable nor defensible-a requirement for VC funding. In any event, ideas are a dime a dozen, and very few are original. VCs don't invest in ideas; they invest in teams with an ability to execute a specific business idea.
reasons do you see for most businesses failing?
Frezza: The number-one reason is willful self-ignorance and the inability to adapt. Good companies must bend their plans to meet the needs of their customers and suppliers, even if this doesn't exactly match the founders' vision.
Entrepreneur.com: Do you
ever invest in concepts themselves or do you only focus on already
Frezza: The company doesn't have to be established-we've started with a professor and a grad student and built a company around them-but the entrepreneur must be the motivating force, not us. We are coaches, not players.
Entrepreneur.com: Have you
ever invested in a company because of the concept but replaced the
Frezza: We always try to bring the best executives we can into our portfolio companies. We hope we do this with respect and fairness to the founders, but once we become investors, what matters is the success of the company, not the success of any particular individual. If we know from the outset that a new CEO will be needed, we discuss it right up front before we invest-often making it an explicit condition for investment. We also try our best to retain the founding entrepreneur in a role where he can be more effective, such as CTO or VP of business development.
you're considering investing in a company, what do you look for
in that company's owner?
Frezza: Domain expertise. Operational experience. A track record of achieving his goals. A proven ability to learn from his mistakes and a willingness to accept responsibility for failure. Wisdom to know what he doesn't know. And a passion to succeed, including the desire to get rich.
- Develop a crisp articulation of the economic value your product or service provides to prospective customers.
- Cultivate a clear understanding of your competitive advantages with respect to alternative suppliers.
- Lay out a potential timeline from initial revenue through profitability and exit via an acquisition or initial public offering.
- Hone a short speech describing the key merits of your business that you can deliver within the duration of an elevator ride.
- Seek the counsel of experienced advisors and entrepreneurs who have done it before you.
- Be prepared to kiss a lot of frogs before you find that prince. And listen, listen, listen to feedback.
Joshua D. Bateman is a freelance writer and entrepreneur in Baltimore, Maryland.