How do you find venture funding? I have to start with a major negative: if you have to ask if your startup can get venture capital, then it almost certainly can’t. Venture capital is a very rarified atmosphere of high-end startups and emerging businesses with experienced management teams, high potential growth, secret sauce, and so on.
People without track records don’t get venture capital. Business that don’t look like they can grow extremely fast and to an extremely large size don’t get venture capital. Service businesses don’t get venture capital.
So before you read these tips, first understand the difference between venture capital and angel investment and then you can add in 5 essentials for angel investment. And keep in mind, as you read the second article, that venture capital demands everything that angel investors do—and more. And, most venture capital wants to invest larger amounts in later-stage startups.
Are you still with me? Good. Here are my 10 tips (oh, and by the way, I did raise venture capital for Palo Alto Software at one point, and I’ve been a consultant to venture capital for 35 years).
1. Don’t say venture capital when you mean angel investment, or friends and family. Many people do that. Venture capital is a subset of outside investment, and the hardest to get. If you have to ask whether your startup is a venture capital candidate, then it probably isn’t.
2. Don’t do anything in bulk. Avoid email templates like the plague. Don’t think for a minute that any serious investor would ever read a summary memo, or watch a pitch, much less read a business plan, when it looks like it’s being sent in bulk to multiple investors. That idea dates back to the 1980s when people imagined that VCs were looking at business plans coming in unsolicited. Actually, they weren’t, but sometimes they pretended they were. Not anymore.
3. Do your research first. Identify a select few VC firms that invest the amount you need, in your industry, at your stage of development, in your region. Venture capital firms each have their unique interests, identities, and personalities. They have preferences about where they invest, at what stage, and what amounts. Most of them have websites, and most of the websites announce their preferences. They don’t want to deal with people who aren’t in their category and don’t know it. They expect you to know.
The National Venture Capital Association website is a wealth of information. It has general information about venture capital, advice, statistics, book lists, and even a listing of regional venture capital associations. You can also search the web for local leads (search “venture capital [your location]” ) and industry-specific leads (search “venture capital [your business type]” ) The site at thefunded.com gives you both reviews and comments from entrepreneurs about the investors they’ve dealt with, plus a database search to find investors by region, size of investment, and some other variables.
4. Forget the businesses that prey on hopeful entrepreneurs by selling databases and leads and such. Those contacts are already rubbed raw by unsolicited emails and phone calls. It doesn’t work that way; it has to be one at a time.
Furthermore, on a related subject, those businesses that take your money with the pretense that VCs will browse your summary and find you are cheating you. The deals chase the money; the money doesn’t chase the deals.
5. Approach a select few target VC firms only one at a time, carefully. Be patient. Look first for introductions by checking out people you know who might know them, alumni relationships, business associations, their public speaking dates, any contacts in the companies in which they’ve already invested. Don’t be afraid to submit using their website form or call their switchboards, but keep that as a last resort. Your chances are way better if you fit their normal profile and you’ve been able to meet one of the partners, or get an introduction from somebody they know.
6. Have an extremely good tag line and instant summary. Start with the elevator pitch and get the key points down, but the theoretical 60 seconds of the classic elevator pitch is too much. You need to be able to describe your business in a sentence or two and that sentence has to be intriguing. People have had success with “the [some well-known business] of [some new business area].” For example, Alibaba was called “The Amazon.com of China.” I ran into a company calling itself “the Netflix of kids’ toys,” and with that, the idea was instantly clear. For more on this: my five-part series in this space that starts with Personalize Your Pitch, also 7 Key Components of an Elevator Pitch, and 5 Things Missing from Most Entrepreneur Pitches. But don’t count on 60 seconds. Be able to do it in three sentences.
7. Have an extremely good quick video or a one-page summary, and send that as the follow-on email when you talk with a VC or get an introduction. Expect the real information exchange to happen in email. The expected follow up to that quick three sentences is a summary, in email. These days a great video works better than an email summary. Keep it secure, not public, and a simple password system like Vimeo or one of its competitors is best. The YouTube email-based permissions are risky because everybody has too many email addresses these days, and confusion is risky. Make it seamless. And I like the liveplan pitch too, but I also have to disclose, as I write that, that I’m biased. I have an interest in LivePlan.
8. If your summary video—or summary memo—works, then the next step is a pitch. In practice, what happens is there is a contact, you send the follow-up video or summary, and then you wait, anxiously, to be invited to pitch. The pitch is a slide deck, yes, but that’s not what matters; it’s the VCs chance to meet you, check you out, see your team, and hear your story. There’s a lot about the pitches on this website. Check this out. Still, don’t think success or failure depends on the pitch. It doesn’t. It depends on the story, the credibility, and the VCs assessment of your future prospects.
9. Have a business plan ready before you finish the summary or the pitch. The business plan is the screenplay, the pitch is the movie. Don’t do the plan too big or too formal because it’s not going to last and should never be older than two to four weeks.
Don’t swallow the myth about investors not reading your plan. The truth at the core of that myth is that investors will reject your business without reading your plan. But they won’t invest in it without reading the plan. No business gets money without going through rigorous study and examination first (they call that “due diligence”) and the plan is the active document for the due diligence. Although, for the record, there are some exceptions. When a well-known successful entrepreneur, the people we read about in the headlines, takes a new business to VCs those people will often get the investment without the same due diligence. VCs do compete for those deals. And unfortunately, those people, the stars, will then tell the rest of us that investors don’t read plans.
10. Expect the process to take way longer than you think it will. Due diligence alone will be several months of unending request for more documentation. When VCs say yes they really mean maybe, and when they say maybe they really mean no.
11. (Bonus tip) Never EVER spend investment money before the check clears the bank. Deals fall through all the time.
12. (The most important tip in the entire list, even though I put it last) Choose an investor like you’d choose a spouse.
So that’s my advice. And let me finish with this recommendation, as a last word: Read 10 good reasons not to seek investment for your startup.
This article is part of our Business Funding Guide: fund your business today, with Bplans.