Q: I
own a small but growing manufacturing firm. I'd like to seek
some additional funding to help grow my business, but with so many
venture capital firms to choose from, I don't know which ones
to approach or how to do it. What advice can you offer?
A:
Once you figure out that there are virtually hundreds of venture
capital firms out there that could potentially do a funding deal
for your firm, your next goal should be getting your business plan
in front of the appropriate investors. The screening process for
funding emerging businesses is already a difficult series of hoops
to jump through. To increase your chances for success, it's
crucial that your business plan have the correct introduction to a
funding source specifically matched to your area of expertise. I
have always told my clients, "Given all the sources and levels
of funding groups in the capital markets, getting hooked up with
investment partners is in many respects a relatively easy step in
the overall deal process, if you know how to do
it."
Think about these figures for a moment. In 1998, more than 3,000
equity funds, investor groups and venture capital firms across the
United States provided more than $150 million in growth capital
deals. But trying to piece together the perfect structure and terms
for your company's plan will ultimately come down to who you
know much more than what you're asking for, or what kind of
performance you think your company can deliver to outside
investors.
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There are two different paths that your written plan can take in
getting into the hands of a potential deal partner. First, you can
send it "cold" to dozens of investor groups with a cover
letter introduction and one of your firm's glossy product
brochures. Someone at the funding firm will then open the envelope
and check your letterhead to see if they recognize you. When they
don't know who you are, you may get nothing more than a
two-minute skim of your executive summary, which is rarely enough
time to attract investor attention, so this process usually ends
with a "thanks, but no thanks" form letter sent back to
you.
The preferred route for funding can go one of two ways. You hand
off your growth plan to a close referral, probably a business
associate, who personally sponsors the proposal to an insider at a
venture funding company. This person will directly represent your
concept and venture prospects to one of the key decision-makers
within the funding group. Or you could provide a copy of the
business plan directly to a principal at the capital group, after
the referral has already personally introduced you to a key
insider. If this initial meeting goes well, the funding principal
will personally solicit the plan and circumvent the normal review
process for unsolicited entrants. These
"sponsored-solicited" plans have an advocate who
initiates and maintains dialogue with a key insider to further
represent the strengths and attractions of the investment
opportunity.
This personal referral is crucial to initiating serious
investment negotiations. Decades of research have confirmed time
and time again that sponsored-solicited plans are more likely to
get a second read-through and serious due diligence by the capital
firm vs. those that are received "cold" by the funding
group.
The typical business plan is perhaps 30 to 40 pages in length
and clearly communicates five things:
- Who you are and what you do
- The size of your target market and who else is out there doing
something similar
- Why you are different enough to be the targeted buyers'
choice
- Who's on the venture team that can make this enterprise
meet its objective
- What kind of performance you can deliver for those willing to
back you
Submit your proposal cold, however, and your thorough business
plan might not get the careful consideration it deserves. On the
other hand, a sponsored-solicited plan has already piqued the
interest of a key insider before you even get your first meeting
with the potential investors. That first round of face-to-face
dialogue positions the business plan well ahead of unsolicited
proposals. You want the plan to initiate a thorough due diligence,
and if all goes well, it further improves the likelihood of
receiving a funding offer. An outside sponsor will receive a
finder's fee, but that's money well-spent to get your
proposal in front of insiders who want to learn more. The key point
in getting your proposal out to investors is never to leave your
growth plan out in the cold.
David Newton is a professor of entrepreneurial finance and
head of the entrepreneurship program, which he founded in 1990, at
Westmont College in Santa Barbara, California. The author of four
books on both entrepreneurship and finance investments, David was
formerly a contributing editor on growth capital for Industry
Week Growing Companies magazine and has contributed to such
publications as Entrepreneur, Your Money,
Success, Red Herring, Business Week, Inc.
and Solutions. He's also consulted to nearly 100
emerging, fast-growth entrepreneurial ventures since 1984.
The opinions expressed in this column are those
of the author, not of Entrepreneur.com. All answers are intended to
be general in nature, without regard to specific geographical areas
or circumstances, and should only be relied upon after consulting
an appropriate expert, such as an attorney or
accountant.