Twelve Principles to Get Venture Capital Funding

Today, one of the hottest solutions for small and medium-sized enterprises looking to get enough capital to fund their business is to get the financial backing of venture capitalists. Venture capitalists are pumping billions into Internet ventures. If you read popular newspaper accounts in New York, San Francisco, Chicago and Washington, D.C. it seems that everyone with an idea is getting funded. To date, one of the hottest trends for VC investments seems to be in e-commerce companies.

What makes a company attractive for investment? What can you do to improve your odds and be considered seriously by a VC?

I recently asked a dozen Venture Capitalists what they look for in choosing a business to invest in and how best to get their attention. To help you and your e-business tap into the cash flow, here are the twelve principles they said were most important.

1. Pitch your product or service into a big market. If someone is going to invest $500,000 they'd prefer to have that money work towards capturing a share of a $22 billion market rather than a share of a $100 million market. As Peter Neupert, founder of drugstore.com told me, "the pharmaceutical market in the US is over $200 billion in yearly sales. If we just target half of it, it's still a huge market." Or, consider what one prominent VC declared: "I'm not smart enough to know exactly which company will ultimately be successful, so I will in invest in 10 enterprises in order to get one hit. But each of those enterprises must be focused on a very big market or this strategy is in trouble."

2. Pitch to the Funds/VCs that are interested in your product/service. Some Funds, for example, invest in early stage capital but others don't. So, even if your idea is a good one, it won't matter much if you try to get late stage specialists to look at your proposal. Usually, they won't. Even if you do, it won't usually do you much good. Some funds specialize. They are set up to make investments in, say e-commerce tools or applications; others are set up to capture opportunities in broadband content development. Pitch to the Fund that is interested in your product/service and you will have a much happier experience.

3. Know who you're talking to and what they can bring to your venture. One of the most important aspects of accepting venture capital money is the particular venture capitalist who you will be working with. Deal at the top, involving the CEOs of both the strategic partner and the start-up. Many VCs will tell you that strategic alliances need acceptance from the entire organization, and that acceptance usually starts at the top. This is what is often meant by "value added." Also, the correct VC for your company is someone with good contacts for your product and/or service. They can bring you to the attention of those who are successful in that arena. They can make strategic further alliances for you, and help you to recruit good management. They can advise you best because they know the area you want to conquer. It's not unlike choosing a doctor -- go to a cardiologist (not podiatrist) if you're having chest pains. Each VC (and the Fund they manage) has strengths and weakness, preferences and biases that can be helpful or harmful.

4. Demonstrate that you have a firm understanding of the market space. "Stick to your knitting." Use your efforts to show that you can segment your market and provide something attractive in it.

5. Provide clear milestones to measure your success. This includes what you have already done and what you intend to do. If it will take six months to complete a portion of your plan, don't claim that it will take only 3 months. It is best to set up realistic expectations at the beginning. Besides, venture capitalists often have a good idea of how long things take because they work with lots of different companies every day--usually more than you do.

6. Address your weaknesses. They will show up sooner or later, anyway. No one and no company exists without faults. Usually, proclaiming that none exists means that you are, at best, "in denial." You can't get help if you don't ask for it. Let the venture capitalist know where s/he can provide you with assistance. This actually may create stronger bonds between you.

7. Avoid "broad stripping and broad sniping." Don't just gush up with a lot of self-serving sentences, such as "we will be the best, the most creative, the most awesome content generator ever to hit the World Wide Web." Maybe you will, but such premature boasting is enough to send a chill down the spine of most serious investors. In effect, it is easy to make claims, and it is another thing to actually deliver.

8. Be buzz word compliment. Don't confuse "hits" with "visits". Don't say "click through rates" unless you mean advertising. Don't confuse the Internet with the World Wide Web.

9. Clearly state why you're different. What is it, exactly, that makes your proposal stand out from the crowd? Be concise. Contrast yourself to the competition when appropriate. Explain why what you're doing hasn't been done before or why the previous execution didn't meet with success. What have you got that will work? Why will it work?

10. Reveal the strengths of your team. Explain why they are in place. Explain what will they bring (besides a graduate education or dropping out of school to work with computers) to the enterprise. Put forth their professional, and perhaps, personal achievements, and interests. Be specific in presenting their skills.

11. Depict and justify your target customers. It's not enough to just say "everyone will want this" or "is we build it, they will come." Try to provide a strong rationale for why people will want to use your product/service and how it will benefit them. Spell it out for the venture capitalist and you will improve your chances of getting funded.

12. Keep it simple. Don't over complicate things. If it's too complicated to explain, then you're in trouble. On a recent consulting assignment with a wholesale manufacturer, members of the company's Internet team wanted to state the objectives for their web site. After an hour of discussion, here's what it came down to: "The objective of our web site is to make it easier for existing and future customers to do business with us by providing them with information and services to grow their business." Nothing more needs to be said.

For more information, entrepreneurs should check out a new Web site devoted to hooking up investors with entrepreneurs: MoneyHunter. The site is a joint venture of Yahoo!, FastCompany and Price Waterhouse Coopers. It offers business plan templates, tips and advice from proven entrepreneurs, news and chat. It also offers a place for investors themselves to meet the most interesting candidates.

The National Venture Capitalists Association, a nonprofit organization, also offers directories and news for online entrepreneurs looking to find investors.