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Tips on talking to a venture capitalist

All successful entrepreneurs have gone through the concept and startup phases in their ventures, usually with the expectation of marching boldly through the remaining three stages: growth, maturity and harvest. In most cases, the concept and startup stages are self-financed or funded by friends and family and, in some cases, by angel investors.

When you reach the growth phase, your concept is proven and you have some bona fide customers with real revenue. It is now critical that you grow your business by increasing your production capacity and/or by expanding your market reach. This rapid growth will typically require more capital than you have a right to expect from friends and family or angel investors.

This early growth stage is the time that you will want to talk to a venture capitalist. Most VCs are not interested in any startup that doesn't already have a strong and predictable future revenue flow. Some VCs expect the annual revenue stream to be more than $10 million to $25 million before you'll even be invited to sit down with them.

When you do get an audience with a VC, plan to tell your whole story within 15 to 20 minutes, beginning with a bold, clear statement that provides the framework for the remainder of the presentation. If they're interested, they will take additional time for questions and answers.

It is critical that you be well prepared to provide what they are looking for. Use pictures and graphs in your PowerPoint presentation with minimal text. Your presentation should follow the message contained in the executive summary, giving a historical perspective, past accomplishments, intellectual property, description of the industry, plus your expected competitors and how you will deal with them. The goal of this part of the presentation is to clearly show that you are indeed ready to commercialize your strategy.

The historical and financial perspective should describe your current revenue, cost of goods sold (CGS), gross profit, expenses and net income. The financial data should also show your cash flow model and the projected break-even point for your business. This detailed financial data should be attached to the executive summary. You should also describe all of your assumptions and the most sensitive factors in your model along with their impact upon your success.

It is wise to role play before the presentation with a trusted and qualified associate who is not in your industry so you will be fully prepared to answer numerous "what if" questions. This associate should also help you identify and filter out any industry jargon that may complicate a clear understanding of your business plan.

Since the VC is really investing in you and your management team, it's essential that you project a passion for your business and confidence in your ability to implement the plan. It's also important that the VC develops a feeling of comfort with your character and personal integrity. The VC is a pro at reading body language and at drawing sweeping conclusions from casual comments. You can build credibility by stating the facts of your business as they really are and by taking personal responsibility for historical shortfalls while focusing on the lessons learned.

The VC is certainly interested in your product and/or service and your market development. But never forget that his primary interest is in his ability to make lots of money by investing in your business, and his time horizon is usually 3-5 years. Even if you have a great product with an unlimited market, the VC will not be interested in your company if the structure of the financial deal doesn't provide him with an exit strategy that yields a huge harvest in his desired time frame.


David M. Brown is affiliated with the BYU Center for Entrepreneurship. He can be reached via e-mail at cfe@byu.edu.