How can you convince Venture Capitalists to give you money to launch a startup?

Posted on June 17, 2007
Filed Under Business tutorials, web 2.0 news |

That’s not easy, but it’s still possible. There are few things to keep in mind:

1) Show them the size of the market opportunity, and how you plan to capture a significant part of it.

2) Identify the current and likely competition, along with your best estimate of the current market share for each, and show them how your product is different or better. How much of the market can you capture?

3) Show them that your team is well qualified to bring the product or service to market.

4) Show them a business plan with some revenue and expense projections going out at least three years, including your best estimates of when you will become cash-flow positive and then profitable. That way, they and you can see how much money you will need.

5) Describe your exit strategy: acquisition, IPO, etc., since that is the only way that they can get their money out of your company. Keep in mind that they hope to make 10x on their investment in 5-7 years, somewhere on the order of 60% annual return.

6) Make sure that you have written the plan clearly without grammatical or spelling errors, which make you look bad. You might start by sending a 1-2 page executive summary rather than the full business plan. Your goal is to get a “callback” so that you have the opportunity to discuss the idea with a partner. Make sure that you can explain your basic idea in a couple of sentences and that you can answer the points 1-5 above crisply and clearly.

Before you approach a VC, study their partners and portfolio of investments (all available on their web sites). Don’t approach a firm that has invested in something that looks like direct competition for you. It’s best if you have an intro from someone who knows one of the partners. Otherwise, all of the VCs have info on their sites about how to apply. Keep in mind that VCs don’t have to keep your idea secret and won’t sign an NDA, so be selective about where you send your executive summary and business plan.