Joe has a small computer networking business and has an idea to create a new software product that he believes is needed in the market. After going through the introductions, here is where our conversation went:
Tom: Have you put a business plan together?
Joe: I have sketched out some ideas but nothing has been formalized.
Tom: OK, how big is your market for this?
Joe: Oh, I don’t know. I can probably sell 1,000 to 2,000 packages this year.
Tom: How are you going to sell this?
Joe: I talked to an internet marketer and he thinks I could sell 5oo units per month buying google adwords.
Tom: How much is that going to cost?
Joe: He wasn’t sure………
There was a lot more to this conversation but you can see why he came to me. There is no one that will give him money with a plan like this.
The rules and requirements of a venture capital firm are the gold standard by which you should follow if you are trying to raise money for a new project. If you meet their requirements then you will have a much better chance of success getting money from any of the standard money sources.
Here is what all venture capital firms are looking for:
- A market large enough to support the investment they are making in your company.
- A high margin business – this cuts way down on working capital needs
- The belief that they can profit by 10 – 20 times their investment
- There is a top notch management team in place
- You have to have very well defined milestones.
What, then, are your calls to action? From Berkey’s Raising Venture Capital for the Serious Entrepreneur.
- Identify the primary prize that the company is going after.
- Find other, potentially larger, prizes that may present themselves.
- Work out the stepping stones (milestones)
- In broad strokes, define the resources (cash) needed to jump to each stepping stone.
- Define the exit. Your investor does not want to be in your company forever.
If you can make a compelling case following these guidelines you will be able to raise money. But you also need to avoid the pitfalls – those potholes that will stop you cold the second you step into one:
- You have not clearly described the pain you are going to eliminate in the marketplace.
- Don’t say that you are going to garner a large market share.
- Don’t talk about how easy sales are
- Don’t ignore the competition. Every consumer of your product has options. Talk about them.
- Don’t make big statements you can’t back up with facts, statistics, case studies.
It isn’t easy to raise money – especially with someone that does not already know you. But there is money in the marketplace. You have to be smart, use the right advisors and make a very compelling argument. Then you will be successful.
Stay tuned for part two of this article. Next we will talk about the “J Curve” and the uses of capital you are raising.