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Saturday, January 11, 2014

How to Talk to a Venture Capitalist

Many times I have been asked by my entrepreneur students and those who have small businesses about talking to and impressing a venture capitalist.  What questions should I ask them;   how I should respond to the questions they ask of me, they ask.

There are a few things you should keep in mind when discussing your business with a venture capitalist.  What a venture capitalist wants is to hear the story of how your business is doing, how profitable it is.  Telling them how many downloads you have or how many customers visit your site will only generate a “yawn” from them.  So make sure that you have read and re-read your business plan and be able to answer the critical questions of what your profit margins and gross margins are.

Other than the above, the following are some things that you should not say to a prospective investor:

  1. “The Market is huge.”  Never say this.  This merely indicates to the listener that you haven’t done your market research.  Be able to indicate how large your target market is for your product or service.  You must be able to carve out of the total market your market segment so that you can focus on their wants and needs.  Remember, you must know everything about your target market, right down to the size shoes they wear!
  2.  “I have no competition.”  This also indicates that you haven’t done your competitive analysis well enough to identify your closest competitors and to examine their strengths and weaknesses.  There is always competition, whether direct or indirect.  What is your strategy to capitalize on your competitors’ weaknesses and gain market share?
  3.  “I am going to capture 1% of the market.”  This is the kiss of death to the listeners’ ears.  A venture capitalist wants to invest in a business that will grow and yield a return on their investment of, say,  10, 20 or even 30 times.  These sophisticated investors have to reach their goal or hurdle rate targets and want to invest in a business that will achieve their hurdle rate.
  4.  “Our product is viral.”  Believing that word of mouth will help the entrepreneur increase his sales is not the way to go.  A venture capitalist wants to hear the plan that will take in not only viral marketing but also other forms of communication and advertising.

Ponder this:   how are you going to mitigate the risks involved in starting any business.  Many students will gloss over this in writing their business plans.  They either aren't aware that there are risks or think better of not addressing them.  Clearly, different businesses have different risk profiles, but what is yours?  Be able to identify the risks or threats involved in starting your business and relate how you will overcome them. By being able to communicate the risks/rewards of your business will offer comfort to a venture capitalist and generate his keen interest.

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