When you are looking for VCs to invest in your business so that you can succeed it is helpful if you know where you are headed before you begin. Here is what you should expect:
1. Communication and Due Diligence
Make sure you prefect your high concept pitch, elevator pitch, teaser email, business plan, and your slide presentation. As part of your business plan the operations plan needs significant advanced attention and the reason for this is because it displays the potential risks involved when it comes to investing in your business while at the same time showing how they will be overcome. Another essential component of the business plan is the executive summary since this is how the potential investors will get their initial impression of you.
2. Compile a list of potential VCs to approach
Obtain access to a private equity firm database program and utilize it! Insert your main factors such as location, sector, and growth stage so as to narrow down your search. Thoroughly check out the VCs websites that you have on the list to confirm the data you receive as well as to ascertain whether they are investing. You need a short-list of VC firms because this makes it possible for you to concentrate your efforts on the ones that are more inclined to match your business model.
3. Establishing Contact
Make sure you know who to contact at the firms you have on your list. While the managing partners are the final arbiters of venture deals they are invariably very busy. Partners on the other hand are more likely to be available and carry weight within the firm. Associate Partners are inclined to read business plans that have not been solicited by the firm but they have less say than Partners do. Lastly there are the Venture Partners and these people aid in managing portfolio companies as well as assessing new deals however they have the least amount of influence within the firm. Therefore you need to choose those from as high up the ladder as possible but make sure that you concentrate on your existing connections when you send the teaser emails.
4. Meeting with VCs and Due Diligence
You need to do your slide presentation and be able to field the top 3 questions that VCs ask which pertain to the amount of capital you require, the value of your business, and your exit strategy. Make sure you get an answer from them with regards to their investing in your business even if it is ‘no’. Make sure that you provide all due diligence materials such as the background of the business, management history, business plan, financials, capitalization table, leases, employment agreements, purchase or sale agreements, and so on.
5. Terms Negotiation
You can create a competitive investment atmosphere by approaching numerous investors simultaneously. When it comes to negotiating terms keep an eye out for ‘liquidation preference’. Ideally you should attempt to secure a 1X liquidation preference which ensures that the VC will recoup their investment in an IPO or buyout. This is preferable to a 2X or 3X which can double or triple their take prior to you receiving anything. Another thing to keep an eye out for is the participating preferred liquidation preference’ which provides investors with 1X, 2X, or 3X liquidation preferences as well as their percentage share of all proceeds of a buyout, again prior to you receiving anything.
Peter