Speaking of Business: Great idea not enough for VCs

Q: I submitted a business plan for a really great idea to several venture capitalists and received back letters telling me the plan did not meet their criteria.  Why are they ignoring me?

A: You must first understand the situation faced by venture capitalists.  They receive many more business plans than they will fund.  Many receive hundreds of plans each month and provide funding to only a handful each year. No one makes a plan evaluation machine. A person must read each plan.  So, to begin with, they have a data-processing problem.  They must shift and sort through all of the plans.  To do this thoroughly takes time.  Time that they do not have.

You need to write a concise one-page summary that reads like a front-page newspaper story that is separate from your business plan.  If they cannot immediately understand and appreciate what you are all about, you will be tossed out.  They will take the time to read your entire plan only if they are interested.

Make sure they truly understand and appreciate your story.  You must understand that just because venture capitalists have money doesn’t make them geniuses.  It doesn’t make them engineers.  It doesn’t make them market visionaries.  You have to spell it out — simply.  Example: With an investment of $1 million, I can generate $100 million of profits in three years.

Venture capitalists will tell you that they invest only in certain industries: i.e., telecommunications.  This is because they recognize that they can’t be everything to everybody and they want to limit their focus to areas in which they have some knowledge.  So if you are trying to sell a medical device to a venture capitalist aimed at telecommunications, you are wasting your time.

How do you compare with all the other business plans?  If you get past the first cut and get a complete review, you must compete against every other plan that the venture capitalist has received.  For you to get funding, you must be in the top five to 10 business opportunities.  It doesn’t matter that you can make a hundred million out of a $1 million investment if everyone else can make $200 million.  You finish last and don’t get any funding.

Do you have a management team with a track record of growing up new businesses and taking them public?  A venture capitalist does not want to run your company for you.  They will favor a company whose management team is built of proven winners.  If your team is a bunch of rookies, you will have to prove yourself first before receiving funding.

What is the upside potential of your business?  Can you sell to every human being on the planet?  Can you sell many times to every human being on the planet?  Venture capitalists favor businesses that have markets so large that they defy quantification.  It becomes more of a question of how fast you can sell than if you can sell.

How far are you away from your first product/service sale?  If you are still working out the bugs, venture capitalists are not exterminators.  They would prefer that you have already commenced sales and possibly have earned a profit.  They invest to increase — not start — sales. This creates a paradox.  A completely new and revolutionary innovation may have greater potential, but it will almost always take longer to get into the marketplace.  If your innovation is a year away from market, it will have to be more than two times greater potential to compare with a business that is ready for market today. Time is money.

How quickly can you grow your sales?  It is much easier to sell an add-on to an existing product than it is to launch a brand-new concept.  For example, software that runs on Windows has a greater short-term potential than software that runs on Linux. Innovations that require no training to use are more quickly adopted in the market. 

If it begins to sound like a venture capitalist prefers a business that is already making a profit, has a “Dream Team” for management and can grow its sales to the moon by next week — you are right.  Put yourself in their shoes.  Wouldn’t you prefer to invest in a business that will make more money quicker with less risk?

So, step back and take an objective look at your business plan.  Can it compete?  Does it look better than any other plan you have ever read?  Is everyone envious of your potential?  If not, then ask yourself what can you do to improve it.  Hire talent.  Make a sale.  Set up a distribution channel.  Look like a business instead of a good idea.  Then figure out how to communicate that message to a venture capitalist that matches up well with the size of investment you seek and industry in which you belong.

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