Pursuing Venture Capital
William J. Link, Co-founder, Versant Ventures
Seventeen years ago, I worked with a stellar team to build Chiron Vision, a company I founded in 1986. It took several long months and hundreds of edits before we felt our business plan was ready to be presented to potential investors. Our goal was to focus the company on ophthalmic surgical products primarily for cataract and refractive surgery and position it for an eventual sale.
These days, I am a venture capitalist. Some 10 to 20 entrepreneurs as hopeful as I was at Chiron approach me every week, and I read more than 50 business plans and executive summaries a month. Despite all the news about venture capital shrinking, I see that investors are still making deals. In fact, the most knowledgeable entrepreneurs with the best deals still receive multiple competitive offers from financiers vying for the chance to invest in their companies.
Based on my venture capital experience, I now recognize more of the major elements of building a business and approaching investors that could have helped me at Chiron. Securing venture capital - the major source of money for growth - is a matter of entrepreneurs understanding that they need to approach this market as both sellers and buyers. What follows is a look at the steps necessary on each side.
You, the Seller
As an entrepreneur seeking venture capital, you are, at the most fundamental level, a seller. You are selling your business idea and your ability to execute on that idea. Securing the funding you need is a matter of taking specific steps, namely the following:
One of the biggest challenges entrepreneurs face when pursuing funding is gaining access to venture capitalists. Submitting your business plan is not as simple as shooting off a few dozen e-mails. In most situations, it is crucial that you begin by networking with the right people. Most venture capitalists are looking for new business ideas that have been endorsed by people they know and trust, such as other entrepreneurs, lawyers and accountants who understand the funding business. Unfortunately, due to the number of plans we need to review, an unannounced e-mail from an entrepreneur may not get our attention.
Endorsement is a critical part of beginning the venture capital relationship, and gaining the respect of well-connected professionals should be a major first step for any entrepreneur looking for capital.
Prepare an Arresting Executive Summary
Once you have an introduction to a venture capitalist, your executive summary is the second door to open in the process. Your summary should be brief -- no more than three pages -- but should encapsulate the thrust of your full plan without going too deeply into the details. A good executive summary includes an overview of your company's goals, the market you will be targeting, the competitive advantage the company has, the people involved in the business, the projected timeline, and financial projections and cash requirements.
The bottom line is that if you want to get someone to spend time reviewing your lengthy business plan, you need to hook the reader with this essential first document.
Write an Excellent Business Plan
Once you're in the door and the venture capitalists have recognized your executive summary as exciting enough for consideration, you need to begin the true selling portion of your relationship. Selling your ideas to a virtual stranger is not exactly comfortable, but it is crucial that you explain your business model thoroughly and passionately. That said, do not think that a good business plan is a long business plan. Complete information communicated thoroughly but with brevity is more important to success than extraneous information added for no reason other than increasing length.
To be truly excellent, your business plan needs to demonstrate the market for your product or service, including information about the competitive landscape. It must also clearly outline the necessary research and development and the risks involved.
The plans that stand out in my experience are those that raise a question in the reader's mind and then go on to answer it. For example, if there are some major risks related to the competition, mention them and then address them directly. Remember, the venture capitalist reading your plan will conduct independent research to make sure your information is accurate, and you can consider the deal over if you have left out any significant details or failed to address them completely.
Address Financial Needs in the Plan
Your financial needs are another important element of the plan. It is essential that the venture capitalist know how much money is required to fund the project to self-sufficiency, which is the ultimate goal. You should also align those needs with timing goals and valuation expectations. Again, we will figure it out if it's not there, so it's better to answer the questions before we notice that you did not do so. Your financial needs should be clearly laid out on a year-by-year basis.
Venture capitalists will conduct extensive risk assessment - we will independently evaluate opportunities and risks. Personal references are a crucial part of this fact-checking period, so make sure you have credible sources that will vouch for you. Also note that we will conduct independent research by speaking with our contacts in the industry to determine their take on your market and potential.
Sell Your Most Important Element: You
When approaching venture capitalists, you need to demonstrate the passion and dedication to your venture that you undoubtedly feel. Hopefully, the investors will recognize your ability to build a company based on your plan and your proficiency and extend an offer.
Venture capitalists look for entrepreneurs with experience leading a management team in the chosen market, as well as proven expertise in operations, research and development, finances and marketing, or a solid plan to attract top talent to those positions. The investor is betting on you just as much as the business opportunity, so don't sell yourself short when presenting your capabilities.
You, the Buyer
Once you have garnered the interest of the venture capitalists, remember that you are a buyer of their services as well as a seller of your dreams to them. So turn the tables and make sure you see the passion in their eyes and feel that your company will be an important addition to their stable of investments.
At the most fundamental level, you should not look just for the highest bidder or the biggest name - you should look for a partner who can help build your company. This is a relationship that needs to be productive for years, so seek out investors with a strong understanding of your market and domain, proven track records, and references that will speak to their skills in financial and strategic contributions.
There is no doubt that venture capitalists must assess risks and financial rewards, and that legalities and negotiations will be uncomfortable and distressing, but you should not enter a relationship with a venture capitalist that you do not trust on some level. Remember, this person could very well hold an active and high-ranking seat on your board and add significant direction to your company, so chemistry and trust are crucial. To determine if the investor is right for you, consider the following checklist:
The references you ask for should relate directly to your market sector and the lead investor in your company. Call the references - you can bet that the investors are calling your references, so make sure you do your own due diligence. Ask them carefully planned questions about the negotiation process, the first few months into the deal, and the ongoing relationship. Listen carefully for hidden clues. You should expect some level of discontent - almost every type of business deal has faults, but the overall feeling should be of confidence and respect.
Check the Passion Quotient
Does the lead investor appear sincerely passionate about your company, or is the person just going through the sales motions? You should be very careful to ensure that the investors feel an affinity for your product or service, since they will likely be actively directing your company.
Have the venture capitalists you are working with ever built companies on their own? Do they have the experience of securing financing for their own companies, or are they straight from business school? Look for people who recognize entrepreneurial spirit and respect it.
Evaluate Interim Expectations
Many current venture capital deals are made with built-in "milestones," which predetermine steps that your company needs to take prior to receiving portions of money. Determine whether the milestones that you will be forced to meet are reasonable. Do not get stuck in a no-win situation in which you cannot possibly make the sales goals outlined.
In 1997, I achieved my goal of selling my own company, Chiron Vision, which was bought for $310 million by Bausch & Lomb, a global eye care company that had made the strategic decision to enter the ophthalmic surgical field and saw the potential for the products we developed.
Such an end game is within reach for entrepreneurs who secure venture capital, the type of funding mostly likely to position a company for substantial growth. So pursue these critical financiers, keeping in mind that you are both a seller of your dream and buyer of their services. Ask a lot of questions, do all your homework and choose carefully.