Assuming that you have been reading this blog for a while, you have some interest in venture capital.  As you know from prior entries I have a pretty strong bias that VC is a tool that is best used for a small class of companies at specific points in time.  More than a few times a week I remind an entrepreneur that venture capital is not the be all and end all for a business; you can be successful without it.  And, many, many businesses are.

Of course, if you have done some heavy thinking and really do believe that venture capital is best for your business, then it is important that you get your plan in front of the right investor.  Rightness can have many aspects (as discussed elsewhere it is important that you select an investor who you can work with productively). Here, I am concerned with you sending your plan to an investor who is actually going to be receptive to receiving it. 

There are some common things that all venture investors use as an initial screen against which incoming investment opportunities are evaluated.  If you have some appreciation of them, your chances of your plan being reviewed are greatly enhanced.

Understand a Venture Fund’s Investment Focus

Venture capital funds generally have specific investment focus, sort of like mutual funds do (something you might be more familiar with).  These foci are usually categorized by industry, stage of development and geographic region. 

• Industry.  Venture funds usually specialize in particular technologies or industries. For example, life sciences or emerging software.  This is because, frankly, venture capital depends upon investors actually understanding a business and adding value.  It’s hard to have domain knowledge in everything, unless, of course, a venture capital fund is very large and has a large investment group (where individual expertise aggregate into a wide range of skills).

• Stage of Development.  Venture funds generally specialize on businesses in specific stages of development.  This is because each stage of development carries a distinct risk/return trade off, and requires different levels of time commitment on the part of the venture investor.  Seed and early stage investments provide the greatest amount of risk and require the largest amount of investor assistance, but also the greatest potential return.  Stages also require distinct skills from the investor, early stage investors tend to be more operationally focused, for example.  The stages most commonly used to describe start ups are seed, early stage, expansion stage and later stage.  Here are a few attributes for each stage for purposes of illustration:

• Geographic Region.  Venture funds tend to invest close to where they operate, particularly in the early stages.  This is because venture capital is a high touch investment transaction; we need to be able to meet with our companies regularly and be quickly available to help when needed.  This is less important for expansion or late stage companies sometimes, since they require less day-to-day involvement on the part of the venture investors.

There Needs to be a Business

Venture investors don’t invest in ideas, we invest in businesses.  A business is a combination of an idea, entrepreneurs and a distinctive plan of execution.  With a few exceptions, venture investors don’t put companies together from scratch, although we often enhance a business by adding other individual talent.  Most venture capital funds have a network of entrepreneurs that they know and have experience with, who are between businesses and looking for their next opportunity.  Sometimes, when we see a good idea, or a good idea with an entrepreneur, we will match it up with others we know.  Still, even in this circumstance, we are investing in a business, not an individual or an idea.

The most important thing is that a business proposal must compellingly show how our adding money will create significantly more money.  Venture investors like money machines – businesses that when we add our money and assistance cause explosive growth.  Generally that requires a plan – it doesn’t just happen.  In a future blog I’ll talk about some of the things that make a business likely to provide explosive growth.

Get a Referral

Venture investors are just buried in data and opportunities.  The number of deserving entrepreneurs and compelling opportunities seeking our attention easily exceeds the hours in an investor’s day. Add to that the time they spend working with their existing investments, networking, managing their relationships with their own investors (yes, gasp, venture investors have investors too—the people and entities that give them money to invest on their behalf), and the fundraising that they must do every few years (if they are lucky and good), and venture investors are seriously over committed.  I know that there is a perception that being a venture investor is an easy gig, and all we do is hang out at the pool, drive our Ferraris and taunt entrepreneurs.  But, for the most part, we are hard working entrepreneurs too.

So, that being said, it is very important that you find a way to rise above the static.  Without a doubt, the best way to do that is to get referred to the venture investor by a trusted source.  An unsolicited business plan generally will get less attention than one that is expected, or sent over by a source that the venture investor will pay attention to.  There are many potential sources of a useful referral: a CEO of an existing portfolio company, a limited partner of the venture investor’s fund, a well respected service provider (venture lawyer or accountant, for example) or a well regarded local entrepreneur.  Without question, if you do nothing else, surround yourself will allies that have contacts and credibility in the venture community.

Understand a Venture Fund’s Investment Criteria

Most venture funds post on their websites their investment criteria.  And, they do vary enough for you to pay attention to. Don’t assume that every venture investor looks for the same things. Amplifier’s investment criteria are here.  The important point is that you should see a clear connection between a venture fund’s investment criteria and your own opportunity before you ask for a venture firm’s consideration.  If there is not a very clear overlap (and not just clear to you, but clear to the less vested viewpoint of those that surround you) then don’t send the plan or request a meeting.  But, if there is a clear overlap, reference the overlaps when you submit your proposal.  The one thing that venture investors love is an entrepreneur that actually has thought through why that investor is the right investor, and reflects that consideration in the initial communication.

Don’t Visibly Over Shop a Deal

Venture investors hate it when they feel that an entrepreneur is indiscriminate on where they get capital.  It is very important to appreciate that venture capital is predicated on the assumption that when we get involved with the company we will make it more likely to be successful.  The most likely way to accomplish this is to have a trusted and close relationship with our entrepreneurs.  Therefore, we tend to favor entrepreneurs that are looking for the right investor (i.e., us) and not any investor.  People who are looking for any investor just want money, and that will chill a venture investor’s interest.  It’s not that we are motivated by ego, or need to be loved, it’s just simple human nature – if you feel that you are fungible, then you are less likely to anticipate developing a close relationship.

The challenge, of course, is that the best way to get a good venture capital deal is to create some competition.  We expect that other comparable investors are looking at an attractive deal.  What an entrepreneur should be mindful of is keeping the list of potential investors short and focused, and create the impression that the deal opportunity is targeted.  In other words, doing things like sending mass emails, or seeking a large amount of PR prior to a fund raise, could create an adverse impression.  The best advice is to use your referral sources to build a focused and clear fundraising effort before looking for venture investment.

And, this brings an unpleasant corollary: if you have done your best with a targeted search and haven’t gotten any where…… STOP!  Take the time to learn from your meetings and re evaluate your plan.  Don’t just continue ever onward, expanding the search.  Venture investors do talk to each other enough that you should assume that after a period of time the general investment community will know about your company. And, the ones that hear about the deal from you later will often assume that you are no longer looking for the right investor but any, any, any investor. Just not where you want to be.  If that happens, re evaluate, re load, and go back out to the market when your business opportunity has changed sufficiently so that you can market it as a new, targeted opportunity.