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Imagine a situation where you are at the door of a VC firm, on the threshold of your first meeting with a prospective investor. If this deal falls through, your venture could receive the backing it needs to secure its position in the market. There will be no looking back then. While you wait at the reception, your eyes fall on a poster on the wall that says, ‘Rules We Play By’. We tell you what could be on that poster.

1. Keep things simple: VC investors are busy people. They don’t have time to sift through lengthy business plans that don’t assert much. Make your point with clarity, brevity and confidence. Tell them what your company is out to do and how it intends to fill an existing gap in the market.

This is important—it could make or break your deal. Sasha Mirchandani, Managing Director, BlueRun Ventures and Co-Founder, Mumbai Angels, says, “It is always best to send a sharp presentation comprising not more than 15 slides and a single page summary. If you send me a 4MB file, I may never find the time to download it. In a concise presentation, tell me what your business is about in the first slide itself. Don’t put too many photos or crowd the slides with too much text. Keep it simple.”

2. Never cold call, go through a good reference: The idea of simply picking up the phone and calling a VC is not great; working your way through a good reference could make the task much simpler and smoother. A reference from your own industry could tell the VC about your potential, where you stand in terms of past performance, how good your team is etc. Basically, it lends credibility to the whole approach.

“The sheer volume of deals we face necessitates that you come through a reference to us,” says Niren Shah, Managing Director, Norwest Venture Partners. For access to references, it would help you to be a part of entrepreneur networks, both the online as well as the offline ones.

3. Don’t walk alone, build a good team: The importance of a good team cannot be emphasized enough. The company’s management is its face. If the people heading the various core functions can visualize the future of the company and work cohesively toward achieving it, chances are that the VC investor you are talking to will believe in your company too. “I would like to see the team structure and who’s on it right there on the second slide following the business idea on the first one. It is a crucial factor,” says Mirchandani. Shah reiterates this: “Do you have the necessary skill sets to complement each other? That is the more important question.”

4. Don’t mess up the math: The business idea you are out to sell should have a clear monetization model. “It should not be what I call a Balle Balle deal. There should be a definite revenue model,” says Shah. In the early stages of the business lifecycle, the risk associated with the venture is generally high as a result of which the VC expects a high rate of return. To convince them that your venture can take flight successfully, you need to have well-charted revenue flows, a bank of current/potential customers and ways to scale the business in a non-linear way.

Let us take the example of Facebook to understand this. At one point in its business lifecycle, the base of Facebook users grew exponentially to 100 million users, yet the company was servicing them with a mere 100 employees. If this growth was linear, Facebook may have had to hire 100 million people to serve its growing customer base; linear growth affects overhead costs and returns in the long run and may not suit the taste of VCs, who are increasingly crashing the investment lifecycle.

5. Let the product not be only an idea, get a prototype: Few VCs are interested in investing in concept-stage companies. “The days of ‘the man with a plan (on paper)’ are largely over. If you are an internet company, you better have a functional website with some customers already on it. Following the recession of the past two years, VCs are not encouraging freshers without any domain experience or expertise,” says Shah.

One thing is clear. You may have a great idea, a concept you can clearly visualize in your mind; however, till you have something tangible to show the VC, they may not entertain you. Show them a prototype, tell them how it works and give them a reason to feel excited about your product. If it’s a service, show a demonstration of how it could help them if they were your customers.

6. Don’t forget to sketch your exit options: No VC invests in a company forever. They are in the game for anywhere between five to seven years. Show them how your company will scale and what exit options will shape up. Will it scale enough to be acquired by a bigger player? Or would you rather stay in the market and get some PE funding?

Exit options are a must for a VC to know where they stand in the larger picture. Sometimes, it becomes difficult for an entrepreneur to come to terms with exit options because it could also mean loss of control at an individual level for him as the original owner of the business.

7. Don’t miss the (re)search button: Different VC firms deal with different areas of investment; some give preference to tech ventures while others are more generic. Do some research to figure out which are the VCs most likely to support your business, what are the kind of deals they do, the stage and size of deals they do etc. “Don’t be lazy about the background check, calibrate the fund. It will make your task that much easier,” says Mirchandani.

Shah adds, “It is important to understand what the VC partner is looking for and how they work. Decipher the chemistry as the deal is not a one-way street; it often works like a marriage.”

8. Don’t leave the legal loophole unplugged: Most VC deals involve standard investment policies with terms like veto rights, preference shares and tag-along rights finding place in the deal agreement. “Don’t be bogged down by these terms. They are included to protect the rights of the VC and are a standard norm which is followed by most,” says Shah.

Mirchandani thinks that it may be a good idea to appoint a lawyer to negotiate on your behalf instead of the team simply relying on term sheets (a document outlining the material terms and conditions of a business agreement) to close the deal.

9. Don’t let the performance stagger: While you are raising funds for the company, don’t let the performance suffer because of this. Fund raising could take days or even months in certain instances—but you can’t neglect core operations because of it.

It may be too risky to let the performance dip at an early stage; it’s a bad sign if you are claiming a high growth potential and showing otherwise. “The VC is just assuming that you are performing as you’ve claimed—don’t tell me later that ‘I was off the ball due to fundraising’; no VC is going to buy that kind of excuse,” asserts Mirchandani.

10. Don’t be too conservative or optimistic: When presenting your business plan, you need to walk a fine line between thinking too small and flying too high. “I see too many entrepreneurs today thinking too small. You must explore the possibilities of growth fully,” says Mirchandani. “Keep the projections realistic though,” cautions Shah. Aggressive business owners, who think they can achieve the impossible, don’t always end up as the favorites. “If no one else is doing what you are out to do, there may be a reason for it,” explains Shah.

11. Don’t focus only on technology: The technology backing your company may be unique, it may be the lifeline of your operations, yet it is not everything. A business today operates in a dynamic global environment and strategy, requiring a constant study of the market, evolving customer needs and the moves of competition. “Your technology may be the best in the world but the business cannot operate in isolation. There are many dynamics affecting the business on a day-to-day level, talk about those too. Throw light on both the customer and the competitor,” says Mirchandani.

12. Never let the passion burn out: The business idea that is your baby will always be close to your heart. The prospect of someone else rejecting that idea and not identifying with your vision can surely be putting off. But don’t get disheartened. You may have to go through a series of naysayers before getting the final VC nod. “The passion to realize the dream should never die. A VC is just a financier in the process, whether they say yes or no, you would anyway go ahead and implement your plan,” concludes Shah.

This makes it clear that a blend of persistence, patience and performance could land you that dream VC deal. Knock the door of the next VC with these rules in mind and the game should be fun.

©Entrepreneur August 2010

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investment, mistakes, smetv, VC, venture capital