Venture Capitalists Beware?

This continues our series on funding or financing your business

The term venture capitalist (or VC) refers to people who provide capital (money) to business ventures. Whereas, angel investors invest without wanting to assume a strong ownership or day-to-day operational responsibility, venture capitalists will quickly step in to correct a  struggling business.

Differing Perceptions of Venture Capital Investors
Many people possess bad ideas about venture capitalists. Most heard stories of VCs forcing founding business owners out of office. People hear that VC's look for businesses they can take over. Many know stories of venture capitalists that changed the direction of the business, expanded for global markets, or spending money the business owner never envisioned budgeting.

A closer reality exists. Venture capital investors look for businesses they perceive can give a good return on their investment. In other words, they put their money into companies that will give them back a lot, and I mean a lot, more money than they invested. They do whatever they need to do to get the business showing significant profits. Sometimes, that means changing management that will not, or cannot, make the changes needed.

In addition, venture capital firms focus on firms that can generate a large return. Therefore, they look for businesses looking for $1+ million investments, rather than smaller investments.

How to Find a Venture Capital Investor
The good news: you can find venture capital investors easier than you can find an angel investor. Like many small business resources, you can start with the Small Business Administration (SBA), your local Small Business Development Center (SBDC) and SCORE. The SBA also offers their  New Markets Venture Capital Companies. The SBA also maintains a list of Small Business Investment Companies (SBIC). You can also use business magazines like Entrepreneur or Inc. They frequently publish articles analyzing venture firms. Your local economic development agencies also provide information about Venture Capital firms. In addition, even Wikipedia lists major capital firms.

I suggest that you talk to former clients of any venture capital firm to explore their experiences both bad and good. Also, talk to the SBA, SBDC, and SCORE to identify any concerns.

The Venture Capital Process
The Small Business Administration summarizes the venture capital process into the following steps (follow the link to read the details):

• Submit Business Plan: the venture fund reviews an entrepreneur’s business plan and talks to the business if it meets the fund’s investment criteria.
  
• Due Diligence: If the venture fund is interested in the prospective investment, it performs due diligence on the small business
  
• Investment: If at the completion of due diligence the venture fund remains interested, an investment is made in the company in exchange for some of its equity and/or debt.
  
• Execution with VC Support: Once a venture fund has invested, it becomes actively involved in the company.
  
• Exit: While venture funds have longer investment horizons than traditional financing sources, they clearly expect to “exit” the company.

Read Saturday’s posting about bank loans guaranteed by SBA or other loans.

Have you had an experience with a venture capitalist? Please share!

Angels with Checkbooks? Perhaps

Note: Larry on Business now offers shorter blogs (easier to read) more frequently (Tuesdays, Thursdays, & Saturdays).
Today we continue our exploration of funding sources for your business. Please share your experiences.
Definition of a typical angel investor: (1) a successful entrepreneur, (2) that sold their business, (3) with money to invest, that (4) does not want day-to-day operational responsibilities.
Angel investors provide funding to ventures they feel will succeed and give them a high return on their initial investment. Unlike Venture Capital groups angels usually do not want to own or operate the company. They may serve as advisors using their own entrepreneurial experience to guide business owners. You can learn more about angel investors through a series of articles in Inc. Magazine, through Gust, and angel networks.
How to Find Angel Investors

• Angel investors tend to network together. Google “angel investment network”. You will find geographic networks “newenglandinvestmentnetwork.com”, special groups “minorityangelinvestornetwork.com”, or industry “Startup Nation’s Food Section”
  
• Talk to your local Small Business Development Center (SBDC), SCORE,  Chamber of Commerce,  or Center for Entrepreneurship at your local college or university
  
• Google “angel investors in (your state)”

Convincing Angels to Invest in You
Typically, you will present your business idea  to a group of investors (remember they like to network). Watch the television program Shark Tank to see real presentations (though they like to be slightly more contentious for the ratings). Most angel groups schedule a certain day each month, quarter, or year (depending on the size) to review presentations. You submit a written proposal for them to review prior to the meeting. You will be given 5-10 minutes to make your pitch. They will interrupt you with questions as they occur to them.
The Tri-State Private Investors Network provides 10 Tips to Appeal to Angel Investors. In addition, you can also find great tips on YouTube for presenting to angels. Carolyn Brown quotes Mike Levinson as he outlines four questions you must answer in How to Pitch to Angel Investors:

1. Is the business idea simple enough for me to understand and buy into?
2. Does it solve a problem or meet a need?
3. Is it a big enough market and customer base for the idea?
4. Does the entrepreneur have the right people on the team to pull it off.

You can get the angel’s money if you answer those questions better than the other entrepreneurs.  Good luck. I hope you get what you want.
Join me Thursday when I review the pros and cons of Venture Capital investors.