Pass the Investor Screen Test

Q: Iown a small but growing manufacturing firm. I'd like to seeksome additional funding to help grow my business, but with so manyventure capital firms to choose from, I don't know which onesto approach or how to do it. What advice can you offer?

A:Once you figure out that there are virtually hundreds of venturecapital firms out there that could potentially do a funding dealfor your firm, your next goal should be getting your business planin front of the appropriate investors. The screening process forfunding emerging businesses is already a difficult series of hoopsto jump through. To increase your chances for success, it'scrucial that your business plan have the correct introduction to afunding source specifically matched to your area of expertise. Ihave always told my clients, "Given all the sources and levelsof funding groups in the capital markets, getting hooked up withinvestment partners is in many respects a relatively easy step inthe overall deal process, if you know how to doit."

Think about these figures for a moment. In 1998, more than 3,000equity funds, investor groups and venture capital firms across theUnited States provided more than $150 million in growth capitaldeals. But trying to piece together the perfect structure and termsfor your company's plan will ultimately come down to who youknow much more than what you're asking for, or what kind ofperformance you think your company can deliver to outsideinvestors.

There are two different paths that your written plan can take ingetting into the hands of a potential deal partner. First, you cansend it "cold" to dozens of investor groups with a coverletter introduction and one of your firm's glossy productbrochures. Someone at the funding firm will then open the envelopeand check your letterhead to see if they recognize you. When theydon't know who you are, you may get nothing more than atwo-minute skim of your executive summary, which is rarely enoughtime to attract investor attention, so this process usually endswith a "thanks, but no thanks" form letter sent back toyou.

The preferred route for funding can go one of two ways. You handoff your growth plan to a close referral, probably a businessassociate, who personally sponsors the proposal to an insider at aventure funding company. This person will directly represent yourconcept and venture prospects to one of the key decision-makerswithin the funding group. Or you could provide a copy of thebusiness plan directly to a principal at the capital group, afterthe referral has already personally introduced you to a keyinsider. If this initial meeting goes well, the funding principalwill personally solicit the plan and circumvent the normal reviewprocess for unsolicited entrants. These"sponsored-solicited" plans have an advocate whoinitiates and maintains dialogue with a key insider to furtherrepresent the strengths and attractions of the investmentopportunity.

This personal referral is crucial to initiating seriousinvestment negotiations. Decades of research have confirmed timeand time again that sponsored-solicited plans are more likely toget a second read-through and serious due diligence by the capitalfirm vs. those that are received "cold" by the fundinggroup.

The typical business plan is perhaps 30 to 40 pages in lengthand clearly communicates five things:

• Who you are and what you do
• The size of your target market and who else is out there doingsomething similar
• Why you are different enough to be the targeted buyers'choice
• Who's on the venture team that can make this enterprisemeet its objective
• What kind of performance you can deliver for those willing toback you

Submit your proposal cold, however, and your thorough businessplan might not get the careful consideration it deserves. On theother hand, a sponsored-solicited plan has already piqued theinterest of a key insider before you even get your first meetingwith the potential investors. That first round of face-to-facedialogue positions the business plan well ahead of unsolicitedproposals. You want the plan to initiate a thorough due diligence,and if all goes well, it further improves the likelihood ofreceiving a funding offer. An outside sponsor will receive afinder's fee, but that's money well-spent to get yourproposal in front of insiders who want to learn more. The key pointin getting your proposal out to investors is never to leave yourgrowth plan out in the cold.

David Newton is a professor of entrepreneurial finance andhead of the entrepreneurship program, which he founded in 1990, atWestmont College in Santa Barbara, California. The author of fourbooks on both entrepreneurship and finance investments, David wasformerly a contributing editor on growth capital for IndustryWeek Growing Companies magazine and has contributed to suchpublications as Entrepreneur, Your Money,Success, Red Herring, Business Week, Inc.and Solutions. He's also consulted to nearly 100emerging, fast-growth entrepreneurial ventures since 1984.

The opinions expressed in this column are thoseof the author, not of Entrepreneur.com. All answers are intended tobe general in nature, without regard to specific geographical areasor circumstances, and should only be relied upon after consultingan appropriate expert, such as an attorney oraccountant.