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Venture Capital Selection Tips and Guidelines

Preliminary Considerations

Have your business plan reviewed by someone with expertise before you present it to investors. The reviewer might be an entrepreneur, an executive with an entrepreneurial bent, a venture capitalist you won't be approaching, or someone who specializes in preparing business plans.

Consider making the entity a limited liability corporation or a limited partnership; this allows the pass-through of profits and losses (avoiding the "double taxation" that occurs regarding a C corporation) and it allows corporate investors (unlike a Subchapter S corporation).

Selecting a Venture Capital Firm

Ideally, you want a venture capitalist:

One source book for venture-capital financing is Pratt's Guide to Venture Capital Sources (Venture Economics, Needham, Mass.) Also, lists of venture capital companies are available from:

The National Association of Small Business Investment Companies
1156 15th Street, Suite 1101
Washington, D.C. 20005
(202) 833-8230

The National Venture Capital Association
1655 North Fort Myer Drive, Suite 700
Arlington, VA 22209
(703) 528-4370

On the Web, lists of venture capital firms can be found at:

http://www.capitalventure.com/cvvclinks
http://www.entrepreneur.com/listings/vc100/0,5946,,00.html
http://inventors.about.com/od/venturecapitol/

Note that venture capitalists will generally refuse to sign confidentiality agreements--but they will maintain confidentiality as part of maintaining their reputations.

What Investors Look For

Frequently the investor is looking for the following:

Some items that particularly excite investors:

Here are the ranges for compounded annual rates of return that investors often expect, based on the stage of the venture. However, these ranges may well vary depending on the what the investor perceives as the degree of risk involved.

Generally, the usual negotiation ranges are 50_70% or more for the investor who provides all the required funds when the venture is a start-up. However, on start-ups, if the entrepreneurs provide 10% of the investment they may be in a position to keep 50% of the equity; if they provide 1/3 of the investment they may be able to retain 2/3 of the equity.

Some factors that may persuade an investor to take less than the usual range are:

Oral Presentations to Investors

The oral presentation to the investor should:

Be prepared to answer all conceivable questions about the venture.

Whenever rejected, try to determine the true reasons for the rejection--it will be useful for the next time.

Negotiations and Agreements

Despite any claims to the contrary, everything is negotiable. The essential negotiables are:

The management team should decide these issues in advance. On price per share paid by the investor, the entrepreneurs should decide what they would like to get and what they will accept.

Logical persuasion is generally the best negotiating tactic.

The investment agreement should:

The following are usually burdensome conditions to be avoided if possible: