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10 tips for winning the VC hunt Featured

9:33am EDT July 22, 2002

So you've got a killer Internet start-up and you're ready to take the world by storm. There's only one problem: You don't have any money and the venture capitalists don't seem to be listening.

The problem may be with your presentation, not with your idea. But don't worry, there's hope on the Internet. American Express Small Business Exchange offers these tips on its Web site for Internet start-ups looking for venture capital funding.

1. Ask for the right amount of money.

Low-balling could put you out of the running. Venture capitalists know what a typical dot-com needs to get started and want to be sure you know as well. They'll bristle at firms whose funding needs fall below their threshold. How much to ask for depends on the investor, industry and stage of development.

2. Know the development stages.

Plan your fund-raising strategy through several rounds by presenting a realistic timeline for subsequent financing. The basic VC development stages are:

Seed financing -- Initial investment to get registered and started, hone the business plan and begin development of a sample Web site. Range: $100,000 to $500,000.

First stage/start-up financing -- Used to build a management team, ready site for launch and support the first few months of commercialization. Range: $3 million to $5 million.

Second stage financing -- Funds advertising and marketing once the site is up and running, building a customer base and sustaining fast growth. Range: $10 million-plus.

Third stage/bridge financing -- Used to reach an IPO. Range: $20 million.

3. Build your management team.

Talent is the number one thing VCs look at. Investors want previous start-up success and relevant expertise, as well as plans for how the team will evolve. Consider creating a board of advisers.

4. Financials don't really matter, but ...

Nobody can predict success, especially on the Web. That said, VCs will examine numbers to gauge how seriously you've considered the size of your opportunity and the costs of getting to market. Avoid grand growth claims -- build projections from the ground up, using customer segment data, offline spending habits and the success of similar online firms.

5. Demonstrate multiple revenue streams.

Having more than one revenue stream will provide a fallback position should your initial revenue source not develop as planned.

6. Show high-profile partners.

Strategic alliances that improve your talent pool, provide channels of distribution or increase your visibility demonstrate that respected firms are willing to work with you, reducing the amount of due diligence a VC has to undertake.

7. Sign some customers.

Show that clients support your product and company. No current customers? Establish prospect references -- ones that are willing to work with your business if certain criteria are met.

8. Snowball your funding opportunities.

Offers pending from other investors help sway fence sitters and give you greater leverage to get the best deal possible. Only use this tactic if genuine term sheets are in the works -- VCs will call around to confirm claims.

9. Be prepared to vest.

VCs want assurance that you and your team will be around for the long haul -- or at least until they're able to cash out. Expect vestment requests to key managers to stay with the business for a set time before shares take effect.

10. State the exit strategy clearly.

Investors used to plan their exits four or five years out. For Internet ventures, they look for more rapid paybacks, often as little as two years. Explain where your company will be at that time and provide a rationale for this vision. How to reach: American Express Small Business Exchange, www.americanexpress.com/smallbusiness

Daniel G. Jacobs (djacobs@sbnnet.com) is senior editor of SBN.