7 ways to raise venture capital in a down market
Friday, 18 February 2011 23:00

February 2011

(Editor’s note: Robert R. Ackerman, Jr. is the founder and managing director of Allegis Capital . He submitted this story to VentureBeat.)

If you’re an entrepreneur thinking about raising venture capital today, odds are you realize this is one of the most difficult funding environments in decades. The venture capital industry has been in a deep funk for nearly two-and-a-half years, and many venture firms are shutting down as their limited partners are cutting off the flow of capital.

But strong entrepreneurs with highly promising ideas aren’t doomed. There’s still venture to be found.

A medium-sized venture capital firm (like Allegis Capital with approximately $500M of capital under management today) looks at roughly 1,000 deals a year and backs 6 to 8 of them – or less than 1 percent. If you’re pitching venture capitalists in this category, remember that they are looking for opportunities that have the potential to generate a significant return on their investment. In general, that means a company that has the potential to become at least a $100M company.

You also have to expect competition and hence proactively determine how your startup will differentiate itself and become one of the leaders in its market, then communicate that to your VC firm.

To have success when raising venture capital, it’s important to target the right partner at the right firm – someone with appropriate domain expertise who understands your value proposition and will go to bat for you – and find a friend of that partner to make a warm introduction on your behalf. Ideally, this person is an entrepreneur who successfully worked with the certain VC in the past.

If you land a meeting with a venture capital firm, here are seven tips to follow. Keep in mind that the primary goal of your first meeting is to be invited back for a second meeting.

  • Allow yourself a total of no more than 60 minutes for your presentation, including 10 minutes for a product or service demonstration and 20 minutes to answer questions. Do not try to convey everything you know. Make sure you present a brief and pithy elevator pitch, one that should not exceed 30 seconds. And anticipate and be prepared for due diligence requests.
  • Establish your credentials and the credits of other members of the founding team so that you are taken seriously. At the first meeting, you are – first and foremost – establishing your credibility and the capabilities of your team.
  • Describe the size of the market opportunity you are pursuing and why there is an inflection point in that market you can capitalize on. Make sure you have picked a large market. VCs are not interested in investing in the next iPhone application unless it is truly a BFD (Big Fundable Deal).
  • Discuss what is unique about you, your team, your proposed product or service and your vision. Venture capitalists care about differentiated ideas and products that will enable you to attract customer traction while erecting barriers to competition.
  • Talk about the competitive environment – and why you have or will have an edge over your likely competitors.
  • Discuss how much capital you will require and when – and break it down round by round. In the first round, for example, you may need $3 million, and in the second round, 18 months down the road, $7 million. Delineate each round, its timeframe and what you will have accomplished in support of the financing. Make sure you note at what point in the future your startup with become cash flow break-even.
  • Lastly, present a detailed time line that describes your startup’s product development cycle, when and how it will be supported from a marketing and sales standpoint, how the startup’s revenues will grow, and how this will dovetail with VC financing rounds. By the time you get to C round financing, the timeline should depict substantial customers and revenues and probably an international expansion plan. What you are doing is painting a clear and thorough scenario so that the venture capitalist understands at a macro level how you will go about building your business.

Raising venture capital has never been easy, and today’s environment is rough. But VCs are still funding companies – and the entrepreneur who understands the challenges is better positioned to get some of that money.


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