The 5 Things You Need to Land Venture Capital Find out what VCs look for before investing in a new company.
In the book, Write Your Business Plan, the staff of Entrepreneur Media offer an in-depth understanding of what's essential to any business plan, what's appropriate for your venture and what it takes to ensure success. In this edited excerpt, the authors offer tips from an investing expert about what you need to do to improve your chances of getting a VC to invest in your company.
Jim Casparie, founder and CEO of The Venture Alliance, a national firm based in Irvine, California, dedicated to getting companies funded, spoke with several professional investors at VentureNet, a conference run by the Software Council of Southern California.
The individuals he interviewed included David Cremin, managing director of DFJ Frontier; Michael Song, a partner with Rustic Canyon; Bill Collins, managing partner of Publex Ventures; and Robert Kibble, managing partner of Mission Ventures. Some additional insights were also provided by Jon Kraft, chair of the Software Council of Southern California.
So what do these investors prefer to see in a company before they get excited enough to write a check?
1. Seasoning. They're looking for more experienced, older entrepreneurs who've "been there, done that." The time of investing in the 19-year-old kid who's a tech genius isn't necessarily gone, but the kid had better be able to find an older, seasoned executive to join their team.
2. Customers. Rather than putting the emphasis on the team or the revenue numbers, there seemed to be a new emphasis on the customer:
- What compels them to buy this product or service?
- What problems does this product or service solve? Why is it better than the alternatives?
- Why is it worth the price?
- Does it compel you to tell others about your experience?
- Are your customers asking if they can invest in your company?
3. Team. The team is still an important part of the equation, but the entrepreneur is just as important. Here's what the investors are looking for in both:
- Passion. The entrepreneur must demonstrate a contagious excitement about their vision for the company.
- Tenacity. The entrepreneur must prove they have the stamina and willpower to stay with their vision through thick and thin.
- Flexibility. The entrepreneur must be willing to reevaluate and refocus their plans when things don't work out as anticipated.
- Commitment. The entrepreneur must be willing to invest enough of their own money into this project to convince investors they are serious.
- Teamwork. The entrepreneur's team must prove it can work effectively together.
- Coachability. The entrepreneur and the team must be coachable. No team knows everything they need to know to succeed.
- Knowledge. Investors prefer to back teams that really know their market and have a combined background that is rich and impressive in the niche for which the company is engaged.
4. Opportunity. Investors want big ideas, those that can change the world. Ideas that change our behavior, culture or way of thinking. Ideas that can build $100-million-size companies. Anything less is too speculative. The risks of investing in a company are so great—and the chances of a reward so small—that investors can't afford to bet on opportunities that won't surely have huge payoffs. And one of the biggest problems when addressing opportunity is, "Am I too early?" Investing in a huge opportunity five years before the market will recognize and embrace it is a very frustrating thing. Not only will you lose your investment, you'll have to suffer the extreme frustration of watching someone else make a lot of money on the foundation you helped build.
5. Business model. Will the numbers map out? In other words, once someone takes a sharp pencil and starts tracing where every revenue dollar comes from and then seriously challenges every expense it'll take to generate that revenue dollar, will you have
- a profitable model?
- a repeatable model?
- an expandable model?
- a predictable model?
- a defensible model?
Many entrepreneurs fail because they don't know how to do this type of exercise with a "real world" view.
So how do you and your company match up? If you were honest and found areas where you were lacking, please find someone who can help you fix your problems before you approach anyone to invest. Your extra investment of time will significantly improve your chances for funding.