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Seeking Investors — What Venture Capitalists Want

“Seeking Investors — What Venture Capitalists Want”

More and more VCs are investing in emerging-growth businesses. Find out how to get some of that cash.


Because venture capital fueled much of the technology bubble that burst in April 2000, it’s no surprise that venture capitalists have become cautious.

VCs have always been in a risky business, in which the general rule of thumb is that two out of every 10 investments should pay off handsomely. Many VC companies threw caution to the winds in the period leading up to April 2000. But these days firms that put capital into entrepreneurial ventures are far more interested in a solid management team and a record of sustainable profits than an innovative idea. This trend is good news for companies in a growth or expansion mode.

In this Quick Read you will find:

  • The importance of a business plan and what it should tell the venture capitalist.
  • The relationship a VC firm will want to set up with your company.

Venture capital firms typically seek very fast-growing companies that need millions of dollars to support very rapid expansion. If you’re looking for anything less, see the Quick-Read Solution "Raising Your First Outside Capital."


Before you tell any VCs about your company, have a 15-to-25-page business plan ready. The most critical elements of the business plan are:

  1. The executive summary. This should be on the first page, and should present an explanation of the business, the size of your potential market, why this market needs your product or service, and why your company is uniquely qualified to fill the need. A brief discussion of how you plan to make money with the business should also be included.
  2. Resumes of your managers. Some VCs read this section first — without the right team, none of the rest will interest them.
  3. High-profile strategic alliances. If your company’s name is not a household word yet, VCs will be impressed if you have alliances with large, well-known customers or suppliers, as long as the terms will actually open new markets and give you a major cut of the revenues.
  4. The relevant market for your product, not the total market. "Citing the total market for health care products in the United States means nothing," says David Lavinsky, CEO of Growthink, a Venice, Calif.-based consulting firm for growing ventures. "What venture capitalists want to see is what percentage of the market is likely to buy your product."
  5. Your plans for reaching the relevant market. Discuss your publicity and prices, and show that you can set up what VCs call "barriers" around the customer to keep him coming back. The classic barrier success story is the cafe chains that have given out punch cards offering each customer a free cup of coffee after buying half a dozen.
  6. An analysis of your competition and your advantage. VCs define competition as any service or product that customers can use to fulfill the same need that your company fills, including the option of doing it themselves. Potential investors will think you are naive if you claim to have no competition. Instead show that you have an "unfair competitive advantage" because of your world-class management team, proprietary technology, key partnerships, or long-term contracts with major customers.
  7. An operations plan. Show the actual processes you will use to serve your customers, as well as the milestones you must attain to be successful, such as new product launches or revenue targets. Show that you are prepared to adapt to external pressures, such as new regulations, demographic trends, hurricanes, or political upheaval, if such circumstances would affect your business. VCs know there is always risk. If you don’t recognize serious risks in your plan, the entire plan will be suspect. Of course you will score points if you indicate how you will deal with potential problems.
  8. Financial assumptions. VCs want to know how you plan to make their investment pay off, so your estimates should be impressive but realistic. If your plan will require multiple rounds of financing, be sure to indicate what impressive objectives you will accomplish to justify each future round. For example, you may accomplish product development in the first round, plant construction in the second, and sales-force development in the third.

Don’t spam VCs by mass-mailing your business plan. Use a directory of venture capital companies to find those whose company size, kind of business, and geographic selection criteria match your business.

Don’t expect quick results. Some companies have approached as many as 80 different VC firms before successfully finding a match. Also don’t be surprised if a VC firm wants to syndicate, i.e., spread its risk by teaming up with another VC firm to fund your company.

If a VC is interested, the firm will offer a term sheet outlining the way it’d like to see the deal work. While you have a little room for negotiation, especially if several VCs express interest, every one of them will want protection against devaluation of its investment. In most cases, such protection gives them more shares of your company if the value goes down, so that you own less. Protect yourself by demanding what is known as "weighted average antidilution," which allows you to increase your investors’ holdings only in proportion to the amount of stock you sell at a devalued price, rather than doubling or tripling VC stock holdings if any new stock is issued.

While VCs invest in management teams they trust, they raise capital from various outside sources, and the law demands that the firm making the investment also monitor it. The VC firm will want one or more seats on your company’s board of directors. It will want to see monthly and quarterly financial statements and meet with your management team periodically. It might want to approve major capital expenditures and any change in your business plans.

Now that the market is unfriendly to initial public offerings (IPOs), most VCs are taking a wait-and-see approach to the exit strategy. As you begin working with your investors, however, you should be discussing possible plans for them to recoup five years or so down the road.

You should also be willing to walk away from a VC offer. You are going to be working closely with the VC firm, so if you don’t feel comfortable with its style, you are better off searching elsewhere for a match that works for you, too.


Three-year-old JustBalls in Princeton, N.J., took its catchy name from its product: it sold balls for every conceivable sport. CEO Jim Klein was well aware that he would have to prove the company had a strong market advantage to get the infusion of working capital it needed to service existing contracts.

Among the VCs he approached in late 2000 was Blue Rock Capital, which had led a $2.6 million round of financing for Just Balls that June. Virginia Bonker, a partner at Blue Rock, was impressed with the company’s contracts to be exclusive supplier of balls to a number of high-profile customers, and the firm agreed to participate in a $13 million funding round that was closed in October 2000, led by Zesiger Capital Group, and including Jafco America and Bantr
y Bay Ventures as investors.

JustBalls became the official supplier of balls to Special Olympics, which is the single largest athletic organization in the world. It also started supplying collegiate athletic conferences representing more than 500 colleges, became the authorized dealer for more than 75 brands of balls, and started providing customized balls and gifts to corporations, athletic institutions, and affinity marketers.

Klein says the VCs acted quickly once they heard about the company’s strong market presence and management team. Klein himself was previously the president of Universal Studios Consumer Products Group, where he orchestrated one of the most successful licensing programs of all time.

Klein did not try to forecast a market share of the total global sporting goods and sports affinity markets, but made it clear that these are JustBalls’ two main channels and that the company is already the world’s largest ball store. "These are such large markets that if you’ve aggregated them, you have an edge," says Klein.

Some of the VCs joined JustBalls’ board, and Klein indicated that they are "a good sounding board." They have not yet determined an exit strategy.

[After this was written, Jim Klein led the reorganization of JustBalls and its entry into the sports promotion and marketing business under the new name Integrated Sports Marketing Group (ISMG).]

DO IT [top]

  • Write a strong and viable business plan. More detailed content suggestions can be found in the Edward Lowe Foundation Business Builder "How to Develop and Use a Business Plan" and Quick-Read "How to Create the Financial Projections for Your Business Plan."
  • Network. Attend pertinent trade shows and local business organization functions. VCs and angels attend them to troll for potential investments. Watch for nearby conferences that focus on VC opportunities in the National Venture Capital Association’s "Resource Links" and "Events Calendar."
  • Expect any VC firms that are interested to present you with term sheets, and be prepared to accept most of their terms unless you are in a strong negotiating position.
  • Work out terms that ensure the investor against devaluation of your company yet don’t give away your entire stake if your value declines.
  • Plan to meet with your investors on a monthly or quarterly basis, show them all of your financial statements, and get their approval for any major capital outlays or changes in direction.
  • Work with your investors along the way to plan their exit strategy.

    RESOURCES [top]


    Fundamentals of Venture Capital, by Joseph W. Bartlett (Madison, 1999).

    Inside Secrets to Venture Capital, by Brian E. Hill and Dee Power (Wiley, 2001).

    Directory of Venture Capital Firms: Domestic and International (Grey House, annual). This directory and the two immediately below are expensive enough that you may want to look for them at the nearest library with a good business reference collection.

    Pratt’s Guide to Venture Capital Sources (Venture Economics, annual). Also available on CD and on the Web.

    Galante’s Venture Capital and Private Equity Directory (Asset Alternatives, annual).

    Internet Sites


    A portal offering resources for companies seeking capital.

    MoneyTree Survey. PricewaterhouseCoopers
    News, statistics, and a resource center for entrepreneurs seeking venture capital.

    National Venture Capital Association

    Journal articles

    "Where the Money Is," by Thea Singer. Inc. (September 1, 2000): 52-57. Grassroots sources of financing and advice about the realities of the market.

    "Run, Don’t Walk to the Exit," by Joe Hadzima. Boston Business Journal.

    Article Contributors

    Writer: Jan Alexander

    Laura McNamara, Spencer Trask Securities