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Business of Selecting and Approaching Venture Capitalist

Thursday, January 20, 2005
Now that the Business Plan is made, Vendors are selected, next step is to approach Venture Capitalists with a Business Plan and get some finance to get the business started. Ideally a real business would first get started with their own funds and with loans from banks or angel investors, but then we are not a real business. We will follow the approach of getting the idea approved and financed.

With abundance of Venture Capitalists, there is a need to select one who fits your needs. The Pratt's Guide to Venture Capital Sources (Needham, Massachusetts: Venture Economics, Inc., 1990) documents five ways of choosing a venture capital firm.

Go Local : Whether it is you or me or a Venture Capitalist, one feels safer when investment is local. In other words, the closer the venture capitalist is to the investment, the easier it is to "add value" to it.

Phase of development: Venture Capitalists are sensitive to the stage-of-development they invest. Some have bias towards later-stage investment and very few are seed investment providers.

Amount matters: Follow the glove-fits-the-hand rule. Investment firms have limits, both upper and lower. Approach the firm that can cater to your project needs.

Go to the specialists: After Dotcom boom and bust, the venture capitalists became wiser and started specializing in the industries that they can considered profitable. So go to the firm that understands your business. This way it helps both entrepreneur and investment firm.

Go to the Leader:Smaller investors tend to be cautious and may not be equipped to understand your business. So start with a lead venture capital investor first and let this venture capitalist complete the syndication.

Tips for approaching the Venture Capitalists:

A quality introduction is a must. It carries more weight than directly approaching the Venture Capitalists with a business plan. Your plan may not get the attention it deserves. You can approach your banker, a lawyer, an accountant or even another venture capitalist to make the introduction. If your contact is not willing to introduce you, then they may not be confident about your venture and want to keep their name away from your venture. If your contact does not know any venture capitalists, in that case you must seriously consider changing them.

The best introduction may be from another successful entrepreneur who has received funding from a specific venture capitalist.

In my next post, I will write about more tips to approach Venture Capitalists
1/20/2005 10:33:00 PM :: ::
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