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

1. 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.
2. 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.
3.   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.
4. 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.
5. 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?"
6. Answer all questions clearly and honestly. Venture capitalists do not have the time for coyness or vague answers.
7. Do not exaggerate and do not hide important problems. Venture capitalists are seasoned entrepreneurs turned investors; they can spot lies and problems.
8. 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.

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How to Approach a Venture Capitalist

Approaching a venture capital firm is a difficult and complex task that carries risks as big as the potential gains. Venture capitalists deal with hundreds of potential clients, and reject the majority of them. Follow these tips to approach venture capital firms in a professional manner that will improve your chance of raising capital.

Suggestions

1. Make professional contact with the venture capital firm. Walking in off the street, calling or sending an unsolicited email with a business plan does not usually succeed. Find a connection to a venture capital firm to introduce you or, if you don't have such a connection, use an online networking tool like Linkedin.com to make one. Coming to a venture capital firm through a mutual contact will hugely increase your esteem in the eyes of the firm.
2. Know your product inside and out. You should be able to give an hour-long lecture as easily as a thirty-second "elevator speech" about what your product is and why the market needs it. If you can't explain your product in both a long speech and an extremely short sentence, you need to get back to the drawing board before raising venture capital.
3. Develop an airtight business plan. A business plan is a rigorous document that takes a very specific format. It is generally not considered optional by venture capital firms, so you should have a professional looking business plan, complete with profit and overhead projections, before you go out to raise venture capital. Check out the Center for Business Planning for ideas.
4. Find the right kind of venture capital firm. Venture capital firms are divided by size and industry. Look for a firm that fits your project and focuses on the industry in which your product belongs.
5. After making initial contact with the right firm, send an executive summary-a one- or two-page document outlining the project's important elements. You can do this by email, but it is also appropriate to send a good-looking hard copy by mail or courier.

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