I've talked with several Venture Capitalists in my day, and have a pretty good connection to a few. That doesn't mean they'll write a check for a company I represent any easier, but it does mean I can be a bit more laid back and communicate with them. I wanted more information on what mistakes startups constantly make, and avoiding them would at least put them ahead of the pack when approaching VC's.
1. Making ridiculous claims
Ridiculous is in the eye of the beholder, but take a step back and do your best. Do you really think you are the next Google and are going to beat the pants off of them in your first year? Making statements like the above (and I've heard them time and time again from company's) immediately labels you as not grounded in reality and probably with a flawed business model.
2. Ask the VC to sign a NDA
VC's aren't in the business of stealing your ideas and passing them onto other companys to execute. A VC firm easily see 500+ business plans a year, and it would be a full time job facilitating the NDA process. Asking them to sign one is an amateur move, everyones idea is unique and VC's aren't going to take them.
3. Pitching To VC's who don't invest in your sector
People don't realize but VC's are really just investment managers. They aren't investing their money necessarily, often times its a fund created by the VC which others invest in, with set parameters. One of the parameters will be the industries a VC will invest in. Don't pitch a VC who only does biotech on your new service firm, they won't listen.
4. Sending all your material in one blast
Working with a VC will not just be a transaction, you are creating a relationship. Sell them on your company. Sending them a business plan, financial forecast, presentation, executive summary, margin reports, industry reports, etc. all at once will overwhelm them and probably go in the trash.
5. Playing hard to get
If you act as if other VC's are interested in you and it's only a matter of time before someone else picks you up, so this current VC better act fast, you probably just bought your way out the door. This isn't a late night commercial, be honest and don't trump up the demand for your company. VC's hold the power here, it's your job to impress them.
6. Management is 1 person
It's going to be difficult to run a company with 1 person. Sure, your idea might be great and you don't want to let others in on it, but that's more of a issue to a VC than a positive. Saying that you can't afford to pay others yet won't necessarily work either, since if your company is as great as you say, others should surely see this and work for equity. Success attracts success, and when you are running solo, it speaks volumes about your idea and yourself if you can't get others to work with you.
7. Sending "Dear Sir or Madam" emails
Immediately this can be read as "I'm sending this email to a laundry list of VC''s hoping for a few bites". If you really are interested in a VC, approach them directly, not through a mass email.
8. Mail a hard copy of a business plan
If you are a startup, especially a dot.com, and send a hard copy business plan, you've wasted your time and postage. Be progressive, and follow the VC's rules for submission, you can find them on their sites. If not, email an introduction and ask what their process is. Chances are it won't say "Mail your Business Plan to ....".
9. Focus primarily on the numbers
Yes it is an investment for the VC and you want to show that they will earn a substantial return for their investment. Realize though the process is a bit more involved than 1. Impress VC 2. Get check. The VC who does invest in your company will be working with you, will own a decent amount of equity, and will be involved. They look at management and marketing as much as the money.
10. Tell the VC they are only getting 5% of the company at most
The correct way to go about determining what you would ideally give up for an investment is to create a valuation for your business, and compare what investment you are seeking to the valuation. If your valuation is $5million and you want $1million investment, that isn't exactly 5%. Valuation will be something you and the VC will definitely negotiate, as they want a low of a valuation as possible and you as high as possible. If both parties are grounded in reality though, the 2 should not be too far off, and you can settle on a fair amount, and what amount of equity that means for their investment.
Chris Benjamin, Rogue CFO
chrisb@roguecfo.com
www.RogueCFO.com
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