Speaking of Business: Organize search to secure venture capital

Q. I have started a new company with a great technical product, but I cannot get any venture capitalists to fund me, and their rejections don’t make any sense to me. What do I need to do to get funding?

A. You may not be doing anything wrong. The fact may simply be that there are other funding opportunities that are better than yours.

Each venture capitalist has only so much money to invest. He or she will look at all the proposals they receive and pick only a few to fund.

Prior to talking to any venture capitalist, you need to check them out. You should determine the size of their fund, what type of businesses they prefer, the backgrounds of the principals and the identity of some of the companies in which they have invested. This information may be online, in a directory or available from your network of contacts.

Look at yourself and ask how you compare with other companies that have received venture funding. Look to see if these companies had more-experienced management, a bigger market target, a stronger intellectual-property position, a more-developed product, a longer sales-track record or a higher profit margin. Any difference between your company and funded companies should provide a clue for self-improvement.

If these other companies do not look any better than yours, then the problem may be in how you presented yourself.

The venture capitalist is looking for certain information in order to pick funding candidates. If you did not provide this information or the information was too long or unclear, it is possible that you did not receive full marks for your potential. Lack of clarity will be scored as an inability to effectively run your company and communicate with your customers. Your presentation will need to be revamped.

There are a lot of software packages and books out there on how to write a business plan to raise money. You must remember that a software package can only print out what you keyed in. The software package or book may present a template or checklist, but you must have the information to tell your story.

The keys to your story are:

1. A problem exists.

2. The problem affects many people.

3. You have a solution to the problem.

4. You have a plan for deployment of your solution.

5. Your management team can carry out the plan.

This story must be stated in a concise narrative and in an earnings projection.

Remember that raising money usually involves the sales of securities. Such transactions are regulated by state and federal agencies. Make sure that you comply with all laws and regulations.

It is possible that you over-priced your company. The venture capitalist must have an opportunity to hit a home run. If 20 percent of your company will at most generate a rate of return equivalent to a high interest loan, then you must give up more equity or do without venture financing. If 100 percent of your company cannot generate a 30 percent annual return on investment, then you simply don’t qualify under any circumstances.

Every venture capitalist needs an exit — a planned event that will allow them to cash out their investment in your company. This may be via a public offering or acquisition by a larger company. You must have this objective clearly in mind and be prepared to explain how you expect to achieve it. It is unacceptable to assume that if you are successful, this will take care of itself.

A common reason for rejection by a venture capitalist is that you are not his or her type of deal. Each venture capitalist has a preference for a particular stage of company growth, (i.e., concept, startup, ramp, sales, earnings, growth) and for a particular field or industry, (i.e., telecommunications, the Internet, bioscience or manufacturing). Venture capitalists also don’t like to invest outside of their own backyard. If you don’t fit this preference, save your time and try to find another venture capitalist that wants you.

It may be that you would have better success looking for funding from different sources. These include wealthy individuals — commonly called “angels” — or large companies. Because these sources use different selection criteria, you may qualify when no venture-capital financing is available. Like venture capitalists, each has preferences. You should determine these before submitting your proposal.

There are individuals and companies out there who can help you obtain funding for a fee. These include a variety of matching services, such as the Colorado Capital Alliance. Be wary of those that charge you significant up-front fees without any payment tied to successful funding.

Aims Community College is currently planning a series of free forums on obtaining venture financing.

Greeley resident Russell Disberger is a founding member of Tekquity Ventures LLC, a Louisville-based specialty venture-capital firm investing in technology development and licensing. Karl Dakin of Tekquity co-authored this column.

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