The Executive Suite: How to Talk to a Venture Capitalist

Friday, May 31, 2013

How to Talk to a Venture Capitalist

Securing venture capital is a critical turning point in the life of a start-up company. Venture capitalists do not just bring money to the cash-strapped start-up, but also offer counseling in running the company because they want to eventually sell their stake at a premium. However, they are inundated with investment opportunities and are selective in the type of operation they back. Entrepreneurs should consider the following steps in applying for capital.

Suggestions

Compile a list of venture-capital companies. An important source is fellow entrepreneurs who have received such financing. These investors prefer referrals rather than cold calls.
Pick investors who prefer your industry and firm profile. Venture capitalists specialize in certain industries. Most will avoid very young start-ups without track records.
Prepare a terse and intriguing "elevator pitch" for the immediate encounter. An elevator pitch is a proposal that can be explained in about 30 seconds.
Be prepared to go into details on the business and how it will generate income, the management's (your) qualifications and the structure of the investment.
Give meticulous attention to the potential market for your products. Avoid making crude statement such as "All we have to do is get 1% of the market." To investors the question is "How?" or, more importantly, "Why not 99% of the market?"
Answer all questions clearly and honestly. Venture capitalists do not have the time for coyness or vague answers.
Do not exaggerate and do not hide important problems. Venture capitalists are seasoned entrepreneurs turned investors; they can spot lies and problems.
Do not press for an immediate decision. Ask an indirect question such as "If we assume what I just presented in the business plan is correct, could you please comment on it in general terms?" If you feel he is not forthcoming, try offering him certain investment terms or concessions.

Tips

Venture capitalists like to see the management team in place; statements such as "Key employees will join our team" can be a put-off to them. Avoid too much emphasis on patents. What is worth copying will be copied; the important issue is commercialization. Do not take your lawyer to the negotiations. Lawyers often are combative and argumentative and concentrate on what can go wrong.