A recent study put out by the combined efforts of the University of St. Gallen in Switzerland, and the University of Utah concludes that Venture Capitalists around the world rely on social connections to introduce them to business deals, but they base their decisions on more important factors.
I have no idea how much money the above study cost (in time and/or money), but when throwing around terms like Bayesian Methodology, Hierarchical Bayes Procedure, Monte Carlo Markov Chain (MCMC) methods, and Metropolis-Hasting algorithm, you have to assume that a great deal of time was spent arriving at the same conclusions that entrepreneurs have known for quite some time.
Anyway, here are the two main conclusions that can be taken from the study:
First—You need to have an intermediary (can be an “event”) to either refer you and your Business Plan to a Venture Capitalist, or to introduce you directly to an influential member of a VC firm. A-list Venture Capitalists don’t pay much attention to unsolicited Business Plans that come in “over the transom”—there’s just way too many of them to ever get serious attention.
Second—Your Business Plan needs to specifically address the three main interests of Venture Capitalists:
- Potential Return. This is the number one interest of all A-list Venture Capitalists. If your Business Plan doesn’t provide a realistic 10 to 20 times the VC’s investment within 5 to 7 years, you likely don’t have a shot at venture capital.
- Founder’s Experience. If the founders of the business don’t have a track record, or an accomplished “platform” to dazzle the VCs, you also are far behind in the running for VC money.
- Market Readiness. You should have a “proven” product or service ready to hit the marketplace full force as soon as you receive VC money. Venture Capitalists don’t invest in “ideas” alone.
If either one of the above two major findings of the study are weak—the other one needs to be extremely strong. There are very few venture capital deals made each year (around 4,000/yr. in the U.S.), and they are only made to the businesses with the most convincing proposals.
Of course the above study only confirms what entrepreneurs have always known, but it is always good when academia catches up to the real world once in a while.
The take-away on all this is two-fold:
- Don’t bother shot-gunning your Business Plan to lists of Venture Capitalists—they won’t bother reading it. Get a personal introduction, or at least a referral. Otherwise you’re just wasting your time and the cost of postage.
- Make sure your Business Plan (it is really an “investment proposal,” but the SEC won’t allow you to call it that) measures up to the big three of VC interests: (1) Potential Return, (2) Founder’s Experience, and (3) Market Readiness.
If you can’t meet the above requirements—you’re not yet ready for venture capital, and you may need to seek alternative methods for financing your startup.
Are any of you looking for startup financing? If so, keep checking back as I’ll have more information on various ways to finance your small startup business.