Reprint from June 9, 1997 "Daily Business Review"

Meeting with venture capital firm need not be a hazardous adventure

by Jeffrey M. Stoller, JD, CMA, MBA, MBT

You just walked through the doors with the brass lettering that says "Venture Capital Company" for your opportunity to present your brilliant new idea for a business that will revolutionize life as we know it. You’re confident as you finish your presentation and ask if there are any questions, even though you really expect them to jump up and hand you a check. To your surprise, there are questions…

"How many years have you been in business? Do you have audited statements? How much sales have you done in the last 3 years? How much money have you made in the last 3 years? What kind of collateral can you give us?"

This is not some entrepreneur’s dream, but it can be a nightmare. This scenario repeats itself time and again. It is a situation all too common when people get upset and angry that one or more venture capital companies "led them on," "lied to them," etc. The result can be that a truly great idea is never pursued because the entrepreneur decides to not let it happen again by not trying again.

Did the "venture capital company" lie when they put "Venture Capital" on their door? Why did this happen and how do you, whether you’re the entrepreneur or the venture capitalist, avoid it?

The Why is simple to state, though frustrating to accept: mutual misunderstanding. The general public thinks of "venture capital" as something people use to get a new business started -- to fund that great new idea and build a better mousetrap. Many venture capital companies, though, define "venture capital" as something they give to established businesses to expand, build a new plant, buy a competitor or something like that. An established company could, unlike the entrepreneur pitching a great idea, have several years of operating history, a balance sheet and collateral to offer.

So, while it was perfectly normal for the entrepreneur to not expect to be asked for three years financial statements and collateral, it was just as normal for the venture capital company to ask for them. It would be like going to a country where they call oranges "apples", and when you ask for an apple, they give you an orange. What makes the situation so difficult is that if, for instance, you were speaking English and the venture capitalist were speaking Russian, you would know to ask about the meaning of what each is saying. Since you are both speaking English, you are lulled into a fall sense of security that you understand what the other person means; which, in fact, is not the case.

How do we avoid the problem?

Understand that potentially different interpretations may exist. If you are not in the same business as someone else and do not use the same technical terms, etc., do not assume that the other person means the same as you.

While developing your business plan, whether it is for internal purposes, a prospective sale of the company or raising capital at any stage – start-up or expansion – realistically assess your goals and what you can expect from each prospective capital source. You may want to consult an objective professional for guidance in this area. After all, the greatest frustration occurs when you have the greatest expectation. Here are some suggestions:

Select a number of prospective sources. There are many directories available, there are some web sites and there are a few professionals and firms that can help in identifying potential sources.

Prioritize these sources based on how likely you think each will be interested in your deal based on the information you already have.

Before you send anything, start at the top of your list and call each one. Ask to speak to one of the partners so that you can make sure you do not waste their time. Do not ask, "Do you do venture capital?" If the answer to this question were "yes," you might find yourself right in the position described in the beginning of this article. Tell the person you speak to exactly what stage you are in and ask if their firm can help businesses at your stage and in your particular field. If the answer is "no,", you’ve saved yourself the time and expense of sending them a package.

If the firm can service your needs, ask what materials they would like to see. You do not want to send too much or too little. Last, ask who the right person would be to send this information to. For example, if all you have is an idea, say that. If you have been in business for two months, say that. Each company will have different things they look at and for.

Do not waste your time with a company that says they do "venture capital" if you learn the only companies they have given money to are medium to large established companies … and yours is not. Certainly, there is always a chance they will do your deal where they have done no others; but you want to focus those energies and resources on your best possible choices.

As you go down your list, give each one a rating of 1 to 5, 5 being the most likely to be interested. Re-do your list and put your packages together starting at the top and go as far down the list as you think is necessary. This is not a science so there is no one who can tell you exactly how many prospective sources to send to. Obviously, though, do not waste your time or money on "1"s and, probably, not "2"s.

Follow up in a few days to make sure the person you sent the materials to received it, and ask whether you should follow up or when you might expect some feedback. Too many people who do not ask this either call the firm so often the staff may begin to feel harassed, or they sit waiting for the phone to ring, and get angry or panicky when it does not.

If a meeting is set up at this point, you can at least feel a little more confident that you will not be surprised.

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