Home Articles Strategy: Attracting capital – are you ready?

Strategy: Attracting capital – are you ready?

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AA06-Sep-Oct-2004-neely_largeThe statistics are disturbing. A typical venture capital (VC) firm receives around 1,000 business plans a year, and quickly rejects 90% without a detailed review.

The problem is not a shortage of investment funds — money will always be available for promising investment opportunities. Rather, most entrepreneurs do not understand the expectations and requirements of VC investors and are unable to communicate their business proposals as attractive investment opportunities.

Talking the VC’s language

Reviewing business plans is time consuming. Most business plans received by VCs are unsolicited, sent by entrepreneurs with whom they have had no contact. Accordingly, VCs tend to review business plans ‘defensively’, looking for telltale reasons why they should reject the proposal, rather than pursue it.

In the ‘first pass’ glance through your investment proposal, a VC will be looking for answers to key investment criteria:
The problem is not a shortage of investment funds — money will always be available for promising investment opportunities. Rather, most entrepreneurs do not understand the expectations and requirements of VC investors and are unable to communicate their business proposals as attractive investment opportunities. Reviewing business plans is time consuming. Most business plans received by VCs are unsolicited, sent by entrepreneurs with whom they have had no contact. Accordingly, VCs tend to review business plans ‘defensively’, looking for telltale reasons why they should reject the proposal, rather than pursue it. In the ‘first pass’ glance through your investment proposal, a VC will be looking for answers to key investment criteria:

1. Does your product meet a pressing market need?

Your market research should provide credible data demonstrating clear market demand for your product. However, raw figures will not be enough. VCs expect to see letters from potential customers indicating their interest in purchasing your product when it becomes available

2. Does your product have a sustainable competitive advantage?

It is extremely rare that a product will have no competitors. Your analysis of the competitive landscape should highlight how your product differs to existing offerings, and explain how this differentiation is sufficient to provide a competitive advantage. It is equally important to detail your strategy for sustaining that competitive advantage, through intellectual property protection, an innovative business model or a unique service offering.


3. Is the market opportunity sufficiently attractive?

The larger the market, the greater the opportunity. Pointing to a domestic market worth tens of millions is not sufficient. The market must be global, worth hundreds of millions (preferably billions) to gain VC interest.


4. Does the management team have the right mix of skills and determination?

The quality of the management team (the range of complimentary skills and experience) is often the deciding factor. VCs would rather invest in an A-Team management with a B-level idea, than a B-Team management with an A-Level idea. Your management team should also demonstrate commitment to the venture by investing their own funds and working on the venture full time.

Your business plan should be no more than 20-40 pages (including financials). While VCs will require sufficient technical detail to understand the product and its benefits, they are more interested in the market, your financial requirements, the commercialisation strategy and investment returns.

The right approach

Before you approach a VC, you should ensure your venture is ‘investment ready’.

Your product should be ready (or at advanced prototype stage), with promising customer feedback. Revenue generation (i.e. sales) should be near-term, with a clear path to profitability (optimally within two years) and a firm ‘exit strategy’ for investors.

Do not send your business plan to every VC firm in town. Identify potential firms whose investment criteria match your needs and, where possible, speak to them first about their review process and whether they are actively seeking investment opportunities. Ideally, you should arrange an introduction by a friend or colleague known to the firm.

If your initial approach is unsuccessful, attempt to learn as much as possible about why your proposal was declined. Do not be defensive. Each knock could give you the inspiration and knowledge you need to eventually raise that capital.

Mark Neely is a lawyer, technology commercialisation consultant and the author of 10 books, including The Business Internet Companion.
Email:[email protected]

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