Here's what Venture Capitalists look for.... the results of my latest "experiment"....

About 1 ½ weeks ago, at the last minute, I entered into Pitchfest 2000 - a competition for the best "investment ready" business proposal.

Because of the short time we had, we threw an entry together over the weekend. But even so, it was quite a lot of work. However, we figured we had nothing to lose, and everything to gain, so why not go for it! If nothing else, we'd learn something.

The first prize was something like $5000 in business advisory services, and to have your proposal looked at by Venture Capitalists, who may wish to invest....

So, a friend and I worked hard to put something together and sent it in.... Kind of as an experiment, just to see what would happen.

I later found out that there were 85 entries. 5 became semi-finalists, and unfortunately our proposal wasn't one of them. 3 went on to make their "pitch" to a panel of investors, today! As an entrant, I was invited to be in the audience, so I went along. I'm glad I did - it was VERY educational!

So, this morning I went to the ASX (Australian Stock Exchange) building in Sydney. It started at 7.30 am (believe it or not!), so I had to get up bright and early.... :)

I learned what are the main thing that Venture Capitalists look for in a business proposal.... And I'll share that here....

I also got to hear the "pitches" of the 3 semi-finalists, and got to hear the comments on them from the investment panel. It was a great education!

So.... In case you think at some stage you may want to grow your business, through gaining angel investor funding or venture capital funding, here is what they tend to look for....

Well, the reports from everyone who spoke were consistent. Investors in your business essentially tend to look for 6 things:

1. A good management team
2. A good management team
3. Did I mention a good management team?
4. That a market exists for your product
5. The marketing of your product and addressing your competition
6. A "frictionless" investment

Here they are in more detail....

A good management team

Yes, this was rated as numbers 1 to 3! It was considered by far the MOST important thing that outside investors tend to look for. If you have a management team in place with experience and a good track record, it certainly can help with getting funding. Of course, there are exceptions, though I thought it was interesting that so much emphasis was placed on a good management team....

But when you think about it, it makes sense. An investor wants to maximize his or her chance of getting a return on his or her investment. And a good management team with a proven track record certainly goes a long way towards proving that.

An existing market for your product

I think this is kind of clear.... Unless you can show that a market exists for your product, it will be hard to convince outside investors that you will be able to sell your product.

Marketing your product and addressing your competition

They want to know exactly how you will get your product to your customers around the world. And the competition aspect was a big one, since you could be trying to compete with a big multinational company with bottomless pockets -- that is, with access to much more money than you have.

Big multinational companies don't like to lose market share, so they'll do all they can in their power to crush you, if they feel you are trying to step on their territory. It's something that angel investors and venture capitalists take into account....

A "frictionless" investment

By this they meant that nothing else needed to be done. All they had was to give you money in return for equity in your company. They didn't have to do anything extra - like change your management team, or anything like that. They want you to have done all your preparation first.

I'll go more into these details - with examples - later....

Here are some more interesting facts I learned....

* Every venture capitalist probably gets around 1000 business plans sent to them, applying for money, per year.

* Out of that 1000 business plans, only 100 are read past the executive summary.

* Out of those 100 business plans, only 10 will get funding.

* Out of those 10, around 7 of those businesses will fail

* Around 2 of the 10 will break even.

* And only 1 will end up making money. But they'll make so much money that it will be worth it to the Venture Capitalist....

They gave the example of Yahoo!, the "gold standard" that they look to. It's not the average, but the best example they've come across....

Apparently, when Jerry Yang and David Filo went to Venture Capitalists to fund Yahoo!, the Venture Capitalists invested $1 million.

And only 2 years later, they got back $800 million!

That's the kind of returns they'd *like* to get!

Well, that was my day.... It's been quite educational -- getting up so early was worth it....

I learned much more too, I hope to share it later, mainly with some examples....

Dien Rice

After my experience yesterday, today I came across this article in Business 2.0 magazine, exactly about the kind of competition I had just participated in.... See the link below....

They call it a "Capitalist Beauty Pageant" -- or (more seriously) a "business plan competition." There are several around the USA....

Representatives from Venture Capitalist firms regularly attend.... Read about them at the link below.... :)

Dien Rice




Click here to read the article from Business 2.0 magazine....