It’s exciting to have your business being pursued by a venture capitalist (VC). Many entrepreneurs seek out such investors and dream of the success that is told to accompany their backing. Be careful in your decision to accept VC money. There are some risks involved. So if you are approached by VCs, look before you leap.

Venture capitalists (sometimes called “vulture capitalists”) are investors with lots of money who look to fund businesses anywhere from one million to over ten million dollars. In fact, there is now a distinction between “lower-end” venture capitalists (providing funds from $1 – $10 million) and “higher-end” venture capitalists (funding over $10 million). While there are a few higher-end deals being made, the majority of VC investments fall in the lower-end. No matter how much money you may receive, plan to give up 50% or more of your company to a VC. In my personal experience, the best ownership negotiation I heard about was a 40/60 split between VC/entrepreneur. Know this before pursuing VC funds.

Where Does the Money Come From?

The absolute most important and first question you must ask any VC is: “Where did you get your money?” Does the VC already have the money in the bank? (This is the ideal situation). If not, is some of the money raised? In this instance, the VC can give you partial payment up front and more as you grow. Remember: you deserve to have answers to your questions, so don’t be intimidated by venture capitalists who wave money in your face and refuse to give you the information you request. Often times, the money they say they have is really not there.

How do you get interest from a Venture Capitalist?

Find out the VC firms in your area and then keep your eyes open for their important meetings/events. Where I live in Columbus, OH, the group to watch is called “Ohio Partners.” On a quarterly or semi-annual basis, they will announce a big event where you can submit a 1-page executive summary (lifted from your business plan). If they like what you have, they will invite you to give a 10 minute presentation at their scheduled event. You must be well prepared, polished, clear, and concise. This takes practice so make sure to do your homework.

Find a Venture Capitalist

The best way to find a VC that will meet your needs is to find them through your personal or business network system. An introduction from a mutual contact is always best. In this case, your first contact with the “big dog” may be by telephone or in an informal meeting situation. The venture capitalist is interested in hearing your “elevator pitch”. This is a 1-3 minute description of your business plan. It is difficult to boil down what you do and what you are planning for the future in this short amount of time. Learn to be concise, interesting, and convincing. Tell the VC why they should invest in you. These investors’ time is precious and if you take too long, you’ll be out of luck. If the elevator pitch goes well, you’ll submit a business plan. Make sure it includes solid research, a ready-made client base, and a plan to multiply the VC’s investment ten times over in the next 3-4 years. This means, if a VC offers you $2 million, be ready to explain explicitly how you will make $20 million for them.

Most VCs do not want to come into your company and manage it from day to day. What they want from your business is a rapid growth cycle and an experienced management team. VC’s should be able to open doors in your marketplace to increase the chances of your success. So while venture capitalists often get a bad rap for the amount of control they demand, it’s not all bad. There is definite “give and take” in the relationship.

The Real Deal or a Scam

The Real Deal or a Scam
There are scam investors so be careful. One way to do this is to do some research on the venture capitalist. Don’t just take them on their word. Ask for the names of other companies they have funded and then contact them. Do not spend your own money to conduct legal or financial audits for the VCs before a deal has been struck. This is a sure way to lose your own money. True VCs are different in that they are more regimented and are known to the public. Check to see if they offer public stock by contacting the SEC (Securities Exchange Commission). They have an electronic registry, the EDGAR database, you can access at: www.sec.gov/edgarhp.htm.

If you are suspicious of a scam, contact the State Attorney General’s Office of the state where the venture capitalist is based. This is not always the state they are located in. Learn more about Internet scams.

Other places to check up on venture capitalism include:
Upside Magazine (www.upside.com) – use their power search to find articles about this topic.
Venture Capital Access Online (www.vcaonline.com) – post your business on this site if you are interested in attracting VC dollars.