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.

Funding your Business

Have you often wondered what the difference is between an Angel inventor and a Venture Capitalist?  There really isn’t much difference except for the size of the investment in your business.

Angels are private investors who are looking for a better investment and return than traditional investment schemes, like in the stock or bond markets.  The age of the company and other specifics are on their checklist: early or formation stage and they look for a payback and a return on their investment where revenues are between $2 million and $10 million.  They would usually expect preferred stock in return for their money which would pay semi-annual interest for the use of their money.  After 5 to 7 years they would expect to be paid back and exit.

Venture Capitals are on a higher plane than Angels and can be private equity funds.  They invest in early stage companies expecting a high return for the high risk involved where revenues are in excess of $10 million.  Venture Capitalists look for companies with a defensible market position, strong management team, positive EBITD and discernible growth characteristics.

So what do these Angels and Venture Capitalists look for, you may ask?  Think about the program Shark Tank seen on ABC-TV on Friday nights.  You may have seen Angel investor Kevin O’Leary quizzing the presenting owners of small companies.  He asks, “How am I going to increase my investment?”  “What are your goals for the business?”  “I don’t like your valuation!” “What are your margins?”  “What are your sales and in what timeframe?” 

What is making him salivate or not over the company’s products?  These attractions are not unlike what the Venture Capitalist looks for.  Take a look at the following:

1.        Unique or proprietary products or services.  A patent owned by you is a plus.

2.       Existing sales are evidence of consumer demand where revenue growth is greater than 20% to 50% year to year; gross margins are over 40%; and with a lean management team.

3.       Increasing sales would be the result of their investment by marketing or hiring additional personnel, which they will oversee.

4.       Realistic valuation based on your sales and profits

5.       Exit strategy must be included in your plans, like selling the company or merging with another company.

While some of you may say that seeking funding from these people is not worth it.  Think of this.  If you did not have their investment you would not be able to grow your business faster, gain market share and have the benefit of their expert opinion and management expertise.  Their contacts and relationships would help you gain clients and suppliers for increased revenue and growth.  So it is worth it, but make sure that you benefit from the relationship as much as the investor would.  It is a two way street.