As I mentioned in my previous post, a business plan is one of the necessary first steps in creating a business. Even if you are funding your business with your own money at the beginning, a business plan will help you map out your business and keep you focused.
As your business grows you may need to seek out venture capitalists to invest in your business. This will give you the cash and expertise you need to keep growing.
For those seeking venture capital here are three questions you must ask yourself initially: Is your story right? Do you believe in your story? Can you sell that story? My recommendation is that entrepreneurs take the “as far as you can” attitude before approaching venture capitalists or other sources of money. That is, “beg, borrow or steal” before courting VCs.
Keep in mind the average venture capitalist reviews 1000 business plans every year and approximately three percent are successful. So it can be a challenge just to get a venture capitalist to look at your business plan.
By far the best way to get a venture capitalist to look at your business plan is to have a referral. This is more personal than using a broker. If a venture capitalist receives a call or email from someone he trusts about your business then he will be more willing to take a look at your business plan. This doesn’t guarantee you’ll receive funding, of course, but it helps you get through that crucial first step.
The person who refers you to the venture capitalist should be someone you know personally. Networking is a good way to find a referral. Your accountant, lawyer, banker, and financial advisor are all people who are interested in your business and are potential referrals for you. They also tend to have connections with VC firms and know which specialties and niches the venture capitalists specialize in.
You must be patient through the courting and investment approval stage, which can take six months or longer. Make sure you are actually talking to a partner inside the firm. Many VC firms rely on associates who can’t give a thumbs up on a potential investment.
You’re not actually in the process until you are actually talking and pitching to a partner. You require a partner as a champion and I don’t mean just ‘Yeah, yeah, I’ll bring it to the investment committee.’ That is a sign you’re dead. You need an ally inside the firm.’
You also need the courage to walk away from venture capitalists on occasion. My advice is if it gets dragged out, walk away. Take your losses and go somewhere else (and) continue pitching your deal until you get it financed.
If somebody takes eight, nine months to look at your deal, they are going to grind you down and you are probably not going to get financed.
Entrepreneurs are surprised just how close the relationship becomes with venture capitalists, especially in the earliest rounds of financing. Because a start-up will likely have limited management resources, venture capital executives might go beyond just taking a director’s chair to getting involved with day-to-day decision- making.
The entrepreneur’s first sort of venture capital firm that they want to work with, becomes so to speak, actually part of their company. If you can get people that not only buy into the idea but are enthusiastic about it, give you some help, that’s a real plus.
If the chemistry isn’t right there you should probably back off. You have to really get that mix right because you’re in it for a long time together.
Success in business boils down to relationships. Start networking from the very beginning. Look for associations to join and local business groups to attend. Face to face networking is even more important in this Internet age. Every contact is potentially valuable to your business.
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