Venture capital firms differ in size, geographic focus, industry specialty, and funding stage. Most firms stay closely involved with their portfolio companies, taking board positions, recommending management candidates, providing advice, and identifying valuable contacts.
Entrepreneurs approaching venture capitalists must have a business plan; however, it should be short and concise, rather than presenting the business in full detail because venture capitalists will conduct exhaustive due diligence. The plan should spell out the amount of funding the entrepreneur is seeking but should not detail the terms.
Venture capitalists consistently emphasize the importance of the management team in an entrepreneurial venture and focus much of their due diligence on the key people involved. They assert that a good idea is only executable when implemented by a top-notch executive team. Personal introductions are the best way to give your plan a chance. Use your network to find mutual acquaintances. Introductions give both sides an immediate reference point and raise your request above the incoming noise.
Video from the 2008 Entrepreneurship Conference:
Video from the 2007 Entrepreneurship Conference:
Top 10 Lies that VCs tell Entrepreneurs and Entrepreneurs tell VCs
iinnovate offers a podcast interview with Andy Rachleff, co-founder of Benchmark Capital and a GSB lecturer. The interview includes how to get funded, the worst part of being a VC and what makes a great entrepreneur.
Alternatively, this video from the 2004 Entrepreneurship Conference contains advice on developing your VC Pitch.
Submitting a Plan for Funding
Prior to submitting your company for funding, you should create the following documents:
- Executive Summary: About two pages long. This is usually sufficient for an initial submission. The venture capitalist will ask for other documents if they decide to proceed.
- Business Plan: Up to 30 pages long. Most venture capitalists will ask to see a copy of your business plan.
- Resumes: Keep them to one page if possible. Venture capitalists like to see resumes for all members of your key management team.
- Financial Projections: Make sure these are realistic and explicitly describe the assumptions supporting the model.
- Capitalization Table: Describes the current ownership of the company, including number of shares and percentage. Include the employee option pool in this calculation.
What should my executive summary include?
An effective executive summary is typically one to two pages long and answers the following eleven questions:
- What is your business?
- Who is your management team?
- What is your business model (primary source of revenue)?
- What need are you fulfilling or what problem are you solving?
- Who are your competitors?
- Who are your customers?
- What is the status of your development?
—Product or service available to customers
—Have raised some revenue
—Have raised significant revenue and are looking to ramp up business
- How much money are you looking to raise?
- What is your target valuation?
- Who are your current investors?
- Where are you headquartered?
What topics should be addressed by my plan?
The full business plan should cover the following:
- The business a) Short description of company's business b) Mission statement
- Market a) Historic and projected size b) Market trends
- Product Offering a) Product description b) Current development status and projections c) Differentiation d) Revenue generation
- Distribution a) Key customers b) Sales channels c) Partnerships
- Competition a) Key competitors b) Barrier to entry
- Management Team a) Team background b) Board composition
- Financials a) Current balance sheet b) Projected cash flow (first two years by quarters) c) Projected head count by functional area (G & A, sales, marketing, Product Development)
- The Deal a) Amount to be raised b) Valuation asked c) Use of proceeds
Common firm-related reasons plans are rejected
- Insufficient expertise—the product or service lies outside the VC's focus.
- Conflict with existing portfolio company.
- Money being raised and/or valuation does not fit in our portfolio for 'balance' reasons.
- Appropriate general partner is at capacity with other deals.
Typical Questions Asked by Venture Capitalists
If you really want to impress a venture capitalist, you have to be quick with answers to the grueling business questions they ask. Being prepared is your best defense. The following questions are among those most likely to be asked. (Source: Rainmaker Capital Group)
- What type of business experience does the management team have?
- Are the members achievers?
- What motivates each team member?
- Can the team accomplish the job outlined in the business plan?
- How does your company and product fit into the industry?
- What are the current market trends?
- What are the keys to success in your industry?
- How did you determine total sales of the industry and its growth rate?
- What industry changes most affect your company's profits?
- What are the seasonal effects in your industry?
- What makes your business different?
- Why does this business have high growth potential?
- What makes this business situation special?
- Why will this business succeed?
- Why is this product or service useful?
- What will the product do for the user?
- What is the expected life cycle of the product?
- How do advances in technology affect your product and business?
- What is the product liability?
- What makes this business and product unique?
- Why will your business succeed when it must compete with larger companies?
- Does the product meet a specific need or perceived need of the customer?
- Does the product have brand-name recognition?
- Are there repeat uses for the product?
- Is this a high quality or low quality product?
- Is the consumer the end user of the product?
- Does this product have mass appeal or single large buyers?
- Who is your competition?
- What advantages does your competition have over you?
- What advantages do you have over your competition?
- Compared to your competition, how do you compete in terms of price, performance, service and warranties?
- Are there any substitutes for your product?
- How do you expect the competition to react to your company?
- If you plan to take market share, how will you do it?
- What are the critical elements of your marketing plan?
- Is this primarily a retail or industrial marketing strategy?
- How important is advertising in your marketing plan?
- How sensitive are sales to your advertising plan?
- How will your marketing strategy change as the product/or industry matures?
- Is direct selling necessary?
- How large is the customer base?
- What is the typical demographic of your customer base?
- What is the lag time between initial buyer contact and the actual sale?
- What is the capacity of your facility?
- Where do you see bottlenecks developing?
- How important is quality control?
- What is the current backlog?
- Is the product assembly line based or individually customized?
- What are the health and safety concerns in producing this product?
- Who are your suppliers and how long have they been in business?
- How many sources of suppliers are there?
- Currently, are there any shortages in components?
- How many employees do you have?
- What is the anticipated need in the immediate future?
- Where does the labor supply come from?
- What is the employee break down, i.e. full time, part time, managerial staff, support staff, production/service?
- What is the cost of training?
- Is the labor force primarily skilled or unskilled workers?
- Is there a union and what is the company's relationship?
- How old is your company's equipment?
- What is the yearly maintenance costs?
- What are your capital requirements over the next five years?
- Do your competitors have an advantage due to equipment?
- Do you lease or own the property/facilities?
- What are the terms of your lease?
- How much do you owe on the mortgage?
- Are the facilities adequate for future expansion based on your business plan?
- Will the expansion require relocation?
- Who owns the patent?
- What licensing arrangements have been made between you and the patent company?
- Does anyone else have licensing arrangement? If so, how does this impact your company?
- What is the current research and development?
- What is the annual expenditure on R&D?
- How does R&D impact future sales?
Please refer to our Helpful Links section for other websites on Funding / Venture Capital.
The GSB Library
The Library at the Stanford Business School has a number of excellent resources on the venture capital industry. The Internet also offers good sources of information on the industry, individual firms, and advice on getting venture funding.
PriceWaterHouseCoopers Money Tree Survey
The MoneyTree Survey is a quarterly study of venture capital investment activity in the United States. The survey is the definitive source of information on emerging companies that receive financing and the venture capital firms that provide it. The study is a staple of the financial community, entrepreneurs, government policymakers and the business press worldwide.
Avce.com and the accompanying magazine American Venture have been pioneers in helping technology start-ups receive funding since the early 90's.
National Venture Capital Association
The National Venture Capital Association (NVCA) is the trade association that represents the venture capital industry. NVCA's mission is to foster the understanding of the importance of venture capital to the vitality of the U.S. and global economies; to stimulate the flow of equity capital to emerging growth companies by representing the public policy interests of the venture capital and private equity communities at all levels of government; to maintain high professional industry standards; facilitate networking opportunities; and to provide research data and professional development for its members.
Venture Capital by Bloomberg Businessweek