“Get an introduction to the venture capitalist. " It’s good advice. It just isn’t always possible, or even likely. Many outstanding entrepreneurs with equally outstanding financing proposals simply don’t have The Introduction.
Unsolicited, and un-introduced, financing proposals are typically tossed into the dog pile or slush fund or circular file. In most venture capital firms it is the job of a new member of the firm, typically someone with a freshly scrubbed MBA, to weed through that pile, toss out unlikely candidates and pick out any projects that are worth looking at. So the first barrier is a young, ambitious, very well educated, inexperienced person who wants to make a good impression on the partners in the firm.
Getting out of the Dog Pile
About 90% to 95% of the proposals in the dog pile are tossed. Some of the top reasons for tossing proposals at this stage include:
Sloppy appearance. Loose pages held together with a paper clip, smudges on the pages, yucky colors – these are all quick “toss me" clues. This is typically the very first thing that the reviewer notices, so the appearance has to be commanding.
Too little information. A 1-2 page summary is very nice IF it has been specifically requested by the venture capital firm and IF it really does include the information requested by that venture capital firm. A generic 2-page summary sent to 200 venture firms is pretty much a waste of time. A 50-page dissertation on a new patent is equally ineffective – it just doesn’t provide all the information that a venture capital firm needs. The length of the proposal is considerably less critical than the quality of the information provided. Rarely can sufficient information be provided in less than 20 pages, and rarely is it acceptable to present more than 30 pages. And all of the pages – no matter how many pages there are - must be responsive to the needs of the specific type of venture capital firm.
Too much information. There’s a myth with some truth to it: When confronted with a huge pile of proposals to read, the reader will toss them up in the air, and the heavy ones that fall to the bottom of the heap will be read last. A financing proposal with three binders attached, with everything from incorporation documentation to copies of patents for competing companies, is too much. Like Scheherrazade’s stories, the financing proposal entices the reader to want more. Dumping everything in the venture capitalist’s lap before ever meeting him gives the venture firm no reason whatsoever to ask for more. In fact, presented with such an overwhelming glump of information, most venture firms would be extremely leery about asking for more.
Wrong format. There is a structure to a financing proposal: the beginning (the cover sheet, the Front Page and the Table of Contents), the middle (the guts of the information divided into logical sections), and the end (absolutely essential attachment, such as copy of critical patent). Omitting sections, or writing in the format of a novel, does little but confuse the issue. Leave the creativity to the presentation itself and keep the structure pretty basic.
Information that is too technical. Scientists and engineers waft poetic about inventions that are all but incomprehensible to everyone else. While it is safe to assume that the venture capitalist is intelligent (and he is!), remember that the first line of defense is someone who isn’t terribly experienced. So explanations really help. Pretty basic explanations help even more.
Lack of a concise Summary Page, with specific funding needed specified. The Front Page, or Summary Page, contains very specific information: the industry, the status of the company, the amount of money needed, the type of funding requested, and The Hook. The Hook is a brief note of whatever it is that distinguishes this company/invention/concept from the thousands of others on the market. Lacking ALL of this information on the Front Page, most venture capitalists won’t go further.
Lack of information on the principals. It is axiomatic that venture capitalists invest in people, not in ideas. There are tens of thousands, if not hundreds of thousands, of patents languishing in the Patent and Trademark Office. There are very few unemployed skilled leaders. Make certain the venture capitalist knows how truly talented your management team is.
Wrong level of investment or wrong industry for venture capital firm. Venture capital firms receive dozens of business plans every day that are simply inappropriate for them. Venture capital firms specialize. Some like small startups; some only invest in mezzanine stage companies. Some prefer investments under $2.5 million; some will only invest over $2.5 million. Some specialize in communications or biotech or energy. Find out what the venture capitalist wants before sending the proposal – you will save yourself a bundle in printing and shipping costs, not to mention the time saved in going after the true targets.
Accentuate the Positive
There are some things you can do that act as a catalyst in getting your proposal noticed (in addition to having a great business plan, which I assume you do have).
First, address the plan to a person, not to the company. In your research, you learned about which partners sat on which boards, which ones gave speeches at which industry event. Use that knowledge now to target the proposal to just the right person.
And, perhaps most importantly, in your cover letter tell why you are sending this business plan to this lender/investor at this point in time. Perhaps it’s because they funded a company that will be a major supplier of yours. Perhaps an associate recommended that firm. Perhaps you heard the principal speak at a convention. The fact that you got his name out of a book doesn’t count. Make the reason real.
Making the Second Cut
Depending on the size and culture of the venture capital firm, the initial reader, a mid level associate or even top partners may make the second cut. Criteria here focus on the specific needs of the venture capital firm, such as:
Emphasize symbiotic relationship with existing portfolio companies. Any company that can demonstrate a strong relationship to a successful existing portfolio company, or provide a means of creating profit in existing portfolio companies, is way ahead of the game. Not only will the venture capital firm be well aware of the industry, but it will welcome the influx of influence on the bottom line of its other companies as well.
Create strong ties where slender threads exist. So an Advisory Board member and the venture capitalist went to the same graduate school. It’s a slender thread of connection. But that graduate school needs to be listed prominently in the bio of that Advisory Board member. (As an aside, contact the department chair or known professors to see if there is a direct introduction available somewhere. ) Create a database of all advisory boards, schools, publications, companies and associations that all of your key people, contacts and potential investors have. Cross reference those to everything you can discover about the venture capitalist. There probably are slender threads that can be brought to the forefront.
Demonstrate an in-depth knowledge of the industry and its profit structure. It never ceases to amaze me how many people think they know the retail business without ever having sold so much as a pair of shoes. The same holds true for every industry. Each industry has its quirks and foibles. Each industry has unique profit centers and modes of operation. Each industry has its true leaders and its falsettos, those who talk loud but don’t truly know anything. Nothing can beat actual experience in the industry.
The Final Cut
The top 2-10% of the proposals remain in contention here. About half of the entrepreneurs will be invited to present a dog and pony show. While the early stages of elimination are driven by industry standards, at this level it gets very personal. The selection process here caters to the needs of the specific venture capital firm at that specific point in time, and can change from day to day, or from week to week.
You can do everything absolutely right and be eliminated here. Perhaps the other companies in their portfolio have hit snags that haven’t reached the public yet. Perhaps the venture capital firm is in the midst of over committing to certain industries. Perhaps an IPO that was previously scheduled got pulled back, so the venture capital firm doesn’t have the money it expected to have.
Perhaps there truly is something amiss in your financing proposal that one of the partners picked up on.
The one consolation is that, if you have reached this high, you will likely get a call from someone at the venture capital firm expressing some type of explanation for not proceeding. At the earlier levels of elimination you probably heard nothing at all. Listen carefully to what the venture capitalist has to say, and proceed accordingly. And be encouraged. You ARE in top contention, even if this is not quite the right firm.
Look at your financing proposal again – this time from the perspective a first reader, and then from the perspective of a top partner in a venture capital firm intent on making money. Revise. Target. Send it again.
MaryAnn Shank, a recognized expert in the business plan field, devoted many years to sifting through business plans to find the real gems. She regularly contributes to http://www.businessplanmaster.com with advice to emerging entrepreneurs.