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Posted September 2000 - What the VC's are looking for in a new funding proposition:

Your Business

1. Be in the market the VCs currently think is hot. B2C is dead, B2B is almost dead, enabling technology is hot, in 3 months it will be something else.

2. Be making money Investments over £1m go into companies which have developed products and are trading - that means you have a business model that works.

3. Sound convincing when you explain how you will beat the competition If you have a good idea, three other people will copy it in six months

4. Have a balanced business team. Two techies won't make it anymore.

5. Keep the structure simple. Forget your accountant's favourite off-shore tax shelter, complicated deals don't get funded.

Approaching VCs

6. Never send a business plan to someone who isn't expecting it. An introduction helps, is sometimes essential.

7. Send a 1-2 page executive summary first Imagine ploughing though a hundred 50 - page plans a week, which is what some VCs are landed with - the office junior is the one that usually sorts through them.

8. Keep the documentation short, but make it stand out from the pack. A 5 page plan can raise £1million - yes it has.

9. VCs never tell you the real reason why they reject your deal. But listen anyway, and after 10 or so a pattern may emerge, which may have information content for you.

10. Persevere. You may need to talk to 50 VCs, but it only takes one to do the deal.

a. Is completely and thoroughly thought through
b. has very good and 110% determined management
c. has strong revenue streams that exclude advertising
d. has found a gap in the market without much competition
e. has a future of more than a couple of years

In my limited experience with 4 VC's the overwhelming impression left on me was 'how much am I really willing to part with' for 'how much investment.' I was quoted 30% for the first round, 20% for the second, and I'd have about 10% left at IPO. Now, 10% of of quite a few million is better than 100% of a few tens of thousands, but it was quite a surprise how much was expected in the first round. Others may have different experiences though.

There are no standard answers to these questions. Ideally, you should have more than 1 VC competing for your investment opportunity, then you are in a far better negotiating position. It comes down to valuation though. This is more true these days, as the sizzle has gone out of the market and investors are less likely to buy something purely on potential.

If you need 200k and offer 20%, you have to demonstrate that the business immediately after the investment is worth at least £1m. From there just do the arithmetic. If there is no business, just an idea, I recall a rule of thumb they taught me at Cranfield long ago that says a business should be shared roughly a third each for ideas, management and capital. This is pretty rough and ready because of course some very good ideas need very little capital and visa versa, but it's a fair start point. You need to look at the end game though, not give away 1/3 for seed capital.

Conversely, an investor would reasonably want to claw back some or all of the management third if the management are drawing salaries. Good  VCs who find good propositions will never look for controlling interests though, so if someone asks for that either you have the wrong proposition or you are asking the wrong VC.

By: Jeremy Dent - First Tuesday North Organiser:

1. A hot new product is the most important factor in a venture capitalist's decision to invest.

Wrong. People are what matter most in the decision.  A quality management team is the most important factor to venture capitalists. Product comes in third place, behind size of the company's market.

2. You absolutely have to have a personal introduction, or referral to the venture capital company or they won't even give you the time of day, much less review your business plan.

Absolutely not. The most common way VCs find the companies that they actually invest in, is by being directly contacted by the entrepreneur. While an introduction doesn't hurt, it's not critical.

3. A small amount of money -- say less than £500,000 --  is much easier to get from venture capitalists, after all there's less for them to lose.

No. The average VC investment is =A31.5 million and less than 2% of venture capital companies  regularly invest £500,000 or less.  Only 10% said that they invest less than £1 Million.

4. Unrealistic projections are the worst mistake entrepreneurs make in their business plans.

Wrong. The worst mistake most mentioned by VCs was that the entrepreneur did not clearly explain the business opportunity, in other words, why the company was a good investment opportunity was not conveyed.

5. Well, then unrealistic projections is the most common mistake found in business plans presented to venture capital firms.

Wrong again. The overwhelming number one mistake is the lack
of competitive analysis.

6. It doesn't matter what the VCs' investment preferences are, if a great opportunity comes along, they'll invest.

No. The investment preferences are based on a number of factors including the VC's background and experience. They prefer to invest in companies that they know something about either the industry or technology. The second most common reason that they decline to invest is that the company doesn't fit their investment preferences. 

7. Venture Capital firms invest billions of pounds in thousands of companies a year. So the odds of getting venture capital must be pretty good.