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!

Your Prime Business Goal

I address thousands of business owners each year. They own businesses in the United States, Brazil, Peru, Africa, and other nations. They may gather in Chambers of Commerce, business associations, international conventions, and other groups. I ask each group the same question "What is the number one goal you have set for your business?"

Sadly, too many small-business owners respond that they have not set a goal. The chaos of running the business, the extinguishing of business brush fires, prevent them from analyzing their business, setting an annual goal, or implementing a plan to achieve the goal. Their plight resonates with many of us, doesn't it? As a result, too many of us frantically rush wherever that day's crisis drives us. We respond to our business storms like a ship without a rudder, then wonder how we arrived at unplanned destination.

Other business owners respond "introduce a new product", "refine our service", "increase traffic to our shop (or site)", "lower overhead"and "stay in business". While I commend those who took the time to plan a goal, I grieve that they missed the prime goal. The goals they set represent means to an end. They cannot survive if they consider these the prime goals of their business.

Let me share the story of Annette who ran a home-based craft business. She set her goal to "triple my sales", a worthy goal. Plus, she accomplished her goal and tripled sales in one year. Unfortunately, Annette failed to do an effective cost analysis of her product. Unknown to her, she lost $1.45 on every $5.00 she sold. So, tripling her sales also tripled her losses and ran her business into $78,000 debt in one year. She not only lost her business. She lost the home that they had mortgaged to finance the business.

The prime goal of any business is to make $XX profit.

Business owners must focus on that prime goal, or lose their business. All other goals or objectives (subsets or small goals that lead to the prime goal) remain subservient to the prime goal "make money". "Making money", however, cannot remain unqualified. You will notice that I qualified my statement with "$XX". Successful business owners not only focus on "making money". They set a goal of how much profit they will earn.

Large businesses calls this weekly, monthly, or quarterly earnings projections. Sam Walton created a worldwide brand by establishing and evaluating daily earning projections. He built systems that gave him the information he wanted every evening. He established 10 rules for business and shared them with every person in the company. Stephen Covey calls this habit of effective leaders "Beginning with the End in Mind".

So, ask yourself "How much profit do I want (plan, need, or desire) to make this year?". If the answer eludes you for even four seconds, to set an amount. Then, post it on your bathroom mirror, tape it to your desk, make it your screen saver, and ensure that you and everyone in your business see it constantly.

After all, that is the prime goal of your business.