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Venture Capital Funding
Date Added: June 3rd, 2002

By Tony Hung

   For those of you who think you have the next big thing, remember that you will need large sums of money to start it up. Depending on the idea and the industry its involved in, preliminary costs could run from a few thousand to a few million dollars. Of course, the first place to look should be close family and friends. However, if costs start to run up and going to your rich great-uncle is out of the question, then the next best thing to do is to look toward venture funding or an angel investor. These two options are some of the most common sources of money for a start-up company. While both are available resources, they are both different from each other in many ways.

   Angel investors are private individuals who provide seed capital for a start-up company. They typically provide around a few thousand dollars in seed money to help get an idea started. While angel investors probably are looking for a positive return on their money, meaning they hope to earn at least their initial investment back over time, they typically are laxer on this issue than corporate backers. Some angel investors are simply wealthy individuals who enjoy helping bring a good idea to fruition. An angel investor usually works in close contact with the start-up company and can provide some personal attention to the job of building a business team, which is always good.

   Venture capitalists (VCs) are an entirely different breed from angel investors. While angel investors are private individuals, venture capitalists are full-fledged partnerships and companies devoted to start-up and small company funding. They can range in size from tens to hundreds of people and command multi-millions in annual funding. When dealing with venture capitalists, one needs to understand that like their namesake they are "capitalists." VC firms survive and profit from making investments in companies that pay back in multiple returns over the long run. VC firms take their investments seriously so be prepared to be closely scrutinized. Of course, the pay-off is sweeter with initial funding from a few hundred thousand dollars up and further investments in the millions. To help you on your journey toward finding start-up money, here are some tips on dealing with VC firms. No matter whether you are a Silicon Valley start-up looking on Sand Hill Road or a clothing venture in Boston, some basic rules apply.

   It's important to keep in mind that venture capitalists are looking for two things: a big idea and the market to make it work. In VC definitions, for something to be a big idea it must satisfy at least one of three criteria. It can bring up a new problem and show how to solve it. The idea uses old technology to provide new capabilities that couldn't be realized before, or the idea improves on the old by a large magnitude. It's not enough just to have a big idea, the VCs are also looking for the right big idea that fits within a big market. Typically VCs fund start-ups that enter into a market with a clear potential minimum of one to two billion dollars. The reasoning behind this is simply that most VCs look conservatively for at least ten times return on their investment in five years. With a larger market it's easier for a fledgling company to capture enough of a percentage to provide the VC with a healthy return. Usually the problem is not that your idea doesn't fit into these categories, but not being able to convey this information. Be sure to look over your business ideas and highlight how it fits into the VC model before confronting them. Coming prepared with a clear idea of what they are looking for helps.

Some final tips to remember when speaking to venture capitalists

   When you present an idea before VCs, the first thing you need is credibility. Be sure you have a thoroughly developed business plan and back up the market potential of your idea if possible with research. Get a professionally looking presentation or even spend some money on consulting help. However, something that money can never buy is confidence. You must show knowledge of the industry and above all the personal spirit and potential to make a successful venture. Remember to be persistent but respectful whenever trying to sell your idea before a VC. Chances are that success won't come the first, second or even tenth time you go before a VC firm. Nevertheless, with every failure comes a chance to learn from your mistakes. In the typical hectic lifestyle of our business world, your first confrontation with a VC may last only five minutes followed by a swift rejection. However, if you ask what about the presentation they didn't like, chances are that very same person would spend fifteen minutes with you going over strengthens and weaknesses.

   The key to getting your idea from just an idea to an actual finished product is persistence. With persistence in finding funding, the right business model, and a little luck you will have yourself on the right track.

 

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