4 Big Ideas for Attracting Venture Capital to a Small Company

David Worrell
Tue, 01 Jan 2013 00:00:00 +0000

It seems like every entrepreneur’s dream: a big VC firm writes a giant check and the business quickly rockets to success.

For most business owners, of course, reality will never match the dream. Saying that most businesses will not be funded is to understate the obvious. In fact, less than 1 in 1,000 companies are funded by VC -- and that is of those that bother to apply.

Nonetheless, just as athletes dream of Olympic gold and climbers pine to scale Mt. Everest, entrepreneurs will always strive to attract VC dollars. If you find yourself dreaming of venture capital, dream big, and follow these simple rules.

1. Spot the Big Trends

Venture capitalists succeed by staying ahead of the curve. The nature of their business demands that they invest in markets and industries that are rapidly expanding. If you are not in today’s hot markets, it’s unlikely you will get the attention of early stage investors.

It’s generally accepted that technology firms make good venture investments, but those in the fastest growing segments, like biotechnology or nanotechnology, will have an even better chance of attracting attention. Industries that are in vogue with VC change, however, so beware. Keep an eye out for the big trends that will shape your market, and align your business to take advantage of these trends.

In the end, even if a venture fund does not take a shine to your company, this strategy can pay off in faster growth. So keep the wind at your back and your eye on the horizon.

2. Target a Big Market

The corollary to being part of a big trend is having a big market. To justify a large venture investment you’ll need to project a big return in a small amount of time. There’s no way to do that without selling in a large, lucrative market.

Most VCs will tell you up front that a $100 million dollar market will not be enough to justify their investment. If you’re looking to grow your business rapidly with venture money, remember this: It’s easier to launch a big ship in a vast ocean than in a backyard swimming pool.

3. Make a Big Difference

While even VCs sometimes follow the crowd, the businesses they invest in do not. Differentiation is an important concept in many ways. The most fundable companies will not only be different from their competition, but they will also be fundamentally different kinds of businesses. Starbucks was unlike any coffee company the U.S. had ever seen. Amazon and eBay created fundamentally new business models. And Netflix radically changed media delivery.

Each of these businesses took familiar products – coffee, books, junk, and movies – and made a big difference in how they were sold or delivered. And while consumer adoption was not always obvious, by unlocking new ways of looking at old businesses, each company captured the imagination of investors.

4. Start Small

Rome was not built in a day … and neither are relationships with investors. Start your search for an investor with a small number of prospects. Learn everything you can about them. And then approach each one individually, with caution and respect.

Remember, before they give you a big chunk of change, busy investors will afford you only a small amount of time. Be courteous by preparing several bite-sized pieces of information about your company.

Start with a short “elevator pitch” – a 30-second sound bite about your market and the problem your company solves. If that gets an investor's attention, follow up with a small executive summary – 1 or 2 pages that describe your strategic approach and the key strengths of your company.

Finally, be prepared to follow up with a brief business plan – say 25 pages of details about your market, management, and momentum – and a short PowerPoint presentation that encapsulates all the reasons why an investment in your company will make everybody rich.

The odds are long, but if you’re betting on venture capital to fund your company, the best bet is a big one.

Dedicated to your profits,

David

P.S. I am a business owner just like you. I'm also a finance geek. I live and die by the numbers. If you're looking for clarity and direction in your business, readers of AllBusiness.com have a special page on my website with exclusive access to free business finance resources.