Mike Sage

Article Summary:

Entrepreneurs who are successful at raising venture capital learn both to master the venture capital process and the venture capital relationship.

Raising Venture Capital - Understanding your VC

The mere sound of the words "venture capital" can elicit a whole range of emotional responses from entrepreneurs, mostly unfavorable. It's not hard to understand. The venture capital industry has done little to provide the necessary tools and educational programs to help entrepreneurs learn how to reach it.

Some financial advisers believe that the marketing model best explains raising venture capital. This model simply applies the marketing principles of the 4 P's (Product, Promotion, Place, and Price) to the sale of equity. The marketing model, however, is really most useful in explaining the venture capital process and its dynamic relationships. Entrepreneurs who successfully raise venture capital also master a personal level of communication that is best explained by a relationship model.

Ultimately, to succeed in closing on venture capital you must learn how to build a relationship with a venture capital investor ("VC"). While the marketing model helps to explain how to maneuver in the venture capital environment, a relationship model addresses the critical nuances of how to communicate with a VC. For example:

  • How do you talk to a VC?
  • How do you manage the first meeting?
  • How do you create materials that best answer their questions?
  • What's motivating your VC?

To successfully relate with a VC you must learn how they see the process and how they think during its evolution.

The first step towards getting inside the VC's head is to learn about their world and how they operate within it. You can think of it as market research. This involves learning about the brief history of venture capital and how the industry structure has evolved. Next, learn about the current trends and pressures that are affecting the investment environment for VCs. Once you learn about their world you need to learn about their individual firm structures and how it affects the way they look at you. Firm structure analysis involves understanding how to differentiate venture capital firms by their legal, organizational, investment, and fund structures. This research and analysis will prepare you for understanding how a VC will analyze you and your business, thereby enabling you to position your business accordingly.

Once you have completed this preparation you are ready to embark on the process some VCs refer to as the "Courtship". At this point you must learn how to screen prospective VCs and make initial contact, crucial to how your relationship will develop. This is where many of entrepreneurs make irrevocable mistakes. Focus on learning how to establish the foundations for building a relationship and the elements for a great first meeting.

Today, the investment climate for venture capital is more treacherous than ever as exogenous events flame the curse of all investing-uncertainty. Even during the best of times, a severe lack of knowledge and preparation caused the average entrepreneur to struggle with raising venture capital.

The onus is on the entrepreneur to figure it all out. So you can see why many entrepreneurs are frustrated with their lack of success. It's a lot to learn in a short time-pressured period and many entrepreneurs are overwhelmed - unable to acquire the analytical framework for optimizing success.

If you are able to attract a potential venture capital investor, you still need to learn a whole new language and mindset to make it through due diligence and negotiate issues concerning valuation, the term sheet and the final investment agreement. Naturally, your ability to make it through these hurdles will be greatly influenced by the strength of your budding personal relationship with the VC. Fortunately, professionals are more available at this stage to help mediate if you can make it that far.

It is indisputable, the majority of entrepreneurs who successfully raise venture capital and exploit all it has to offer, learn both to master the venture capital process and the venture capital relationship.

Mike Sage, Founder of Capital Now has been an early stage venture capital investor with two major funds as well as an entrepreneur starting businesses. For more information visit www.venturecapital guru.com.

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