20 Top questions you should ask yourself

The Harvard Questions

The Seven Deadly Sins of Business Plans

Key VC-Type Pre-Investment Questions

Suggested Agenda for Presentation to Investors

"Ten Reasons A VC Deal Won’t Get Done"

What are the different types of funding?

How do venture capitalists value companies?

20 Top questions you should ask yourself

Anyone considering becoming an entrepreneur should first ponder some important questions. Does your idea make for a viable business plan? Here are questions that can help answer that. Some easy, some hard; answer them honestly and you will likely know better than anyone - should you accept the risk, responsibility and reward that go with a technology startup? The 20 Questions fall into 4 categories.

1. The People. Plural. While quality ideas come from talented individuals, quality startups require talented teams.

• What have the individual principals accomplished, professionally and personally, that would indicate that a new technology venture is an attainable, desirable goal?

• What are the employment histories of each principal? Senior managers or new graduates? How does it relate to the venture opportunity?

• What are the educational backgrounds of each principal? Diverse disciplines? Graduate degrees?

• Who would be the most prominent or powerful individual to speak on your venture's behalf and in support of your self assessment? Is there anyone else, individual or organization, in your corner?

• Where is headquarters? Are all of the founders based at headquarters, or in other places or regions of the state, or in other regions of the country?

• Who and what are missing? What skills or team members still need to be located for success to take place? What is the plan to recruit high-quality people to fill the holes?

2. The Opportunity. In cases where the strength of the team is overshadowed by the power of their ideas, a clear perspective on the target market and its economics facilitates risk assessment and decision making.

• Who are your customers? How do they make purchase decisions? How compelling a purchase is this product/service for them?

• What is the price for the product/service? How is that calculated?

• What are your sustained needs for capital equipment, raw materials, supplies and personnel to maintain a critical mass of available product/service?

• How will you market the product/service? Of the target customers listed, how specifically, will each be reached? How much will it cost to acquire one customer within each target group of customers?

• How much does it cost to produce and deliver the product/service? How much does it cost to provide customer support post-purchase?

• Who are your competitors? How easy or difficult will they make it to retain customers? What are their strengths and weaknesses?

3. The Things Beyond Your Control. Sometimes being smart is identifying the things you don't know. Likewise, sometimes being wise is identifying the things you can't control.

• How can you see advancing technology change the market you are targeting?

• Is there anyone else who could observe and exploit the same opportunity, and how likely are they to have a substantial competitive advantage?

• What role can or does government regulation, policy or law play in either your venture, the market it targets, or the revenues you expect to obtain?

• Can your product/service offer value to overseas markets? How do the international opportunities compare to domestic opportunities for your product/service? What additional risk does serving international markets entail?

4. The Future. Pull together information from the other categories and gauge the future for the proposed enterprise.

• What is the total amount of money needed to launch the venture? How long until the venture reaches positive cash flow?

• Once in the black, how long until the venture really gets going? What is the size of the potential long-term payoff?

• What is the probability of ever reaching that maximum payoff? Short of the maximum, what is the probability of still realizing a significant return? What is the probability of realizing a total loss for investors? Under what scenarios would each of these probabilities play out?

• What exit options are available for investors to get money out of the venture if it becomes successful?

Back to Topñ

The Harvard Questions

The following questions and associated comments will arise from professionals that are evaluating you and your company for a relationship. These questions most often appear as part of the search for investors, but can also pop up when hiring an attorney, an accountant, or when securing a strategic partner. We refer to them as "The Harvard Questions" because, without exception, every Harvard Business School graduate that we have come into contact with has asked these exact questions. Usually, these questions will start coming your way only moments into the conversation.

1. What is your business?

• You better be able to tell them in one sentence so that they understand quickly

• You should also make it clear that you know who your customer is and why he will buy your product/service

2. How big is your market?

• Pick a big one

• Very large markets are easier to understand

• Remember that in the funding hunt, those with the money have lots of options

• The $500 million opportunity wins out over the $10 million one every time

3. What market share do you expect to garner?

• If you say 2% of a $1 Billion market, you can say goodbye to their interest

• It is expected that any company, to make significant returns, must achieve substantial market share: 25-80%

4. What is your Business Model?

• Are there recurring revenues from existing customers in your model?

• What are your margins? Are there higher margins associated with ongoing support or services?

• Will your product need to be supported? What will that cost?

• Is training necessary? What will it cost?

5. How much funding do you need?

• Over the next year?

• After one year?

6. What do you need funding for?

• Development, marketing, establishing distribution channels are all good places to start

• People and salaries are not a good place to start. They know that marketing and development require people, and that people must be paid

8. Tell me about the competition that your are facing or will face?

• Who are they?

• Why will you be able to beat them?

9. What is your distribution strategy?

• What channels will you use?

• What other options are there?

• Do you have any commitments from possible channels?

10. What is your exit strategy?

• Is your company a viable IPO candidate? When? At what valuation?

• Since most companies are not IPO candidates, how will you make your investors liquid?

• If you intend to sell, who will you sell to? At what valuation? For cash or stock?

11. Do you have any strategic partners/customers?

• Here they are looking for market or industry validation

• If they do not have a strong industry tie, they must be able to turn to some one large/significant to tell them that you have a valuable solution

12. What is your capital structure?

• How much of the company do you expect to keep?

• Are there option plans for employees in place?

• What is the make-up of your current Board?

• What do you expect the make-up of the Board to be after investment?

Back to Topñ

The Seven Deadly Sins of Business Plans (By Stephen Fleming, Alliance Technology Ventures)

1. Don't Insist on a Non Disclosure Agreement up front

Venture Capitalists typically read a hundred business plans for every company that they fund. It would be impossible for them to process this kind of deal flow if every one expected an NDA. You don't have to reveal all of your technology in the first document you send the VC. Describe enough to get them interested and consider an NDA later if funding conversations progress.

2. Don't Focus on the Technology and not the Market, Competition and Customers

Remember your business plan is selling your company, not your product. A meeting with an investor is not the same as a sales call to your customer. An investor wants to know how you're going to build, sustain, and run a profitable company. A VC will generally assume you have good technology, they want to know why lots of people are going to pay you a profitable price and that you can deliver it to them.

3. Don't Practice Top Down Sales Forecasting

"2% of a billion dollar market will make us a $20 million company" - WRONG! Markets typically shake out to a company with 50% market share, another with 30%, and a whole flock splitting the remaining 20%, none of which are making any money. You need to define a market where you're #1 or #2 in market share. Build your sales forecast from the bottom up:

• # of sales people you can hire x # calls they can make x conversion rate x revenue per sale = Projected Revenues

• Projected Revenues/Target Market = Your Market Share

• You need to define your market and sales channels so this "bubbles up" to > 30%

4. Don't use Four Significant Digits Everywhere

Projecting market growth, product roll out schedules, and sales costs are at best educated guesses, don't crunch the numbers forever. They're estimates everyone understands that.

5. Don't position Investors as necessary-but-unpleasant "mushrooms"

You need to face it, accepting VC funding is like getting married. At the very least, you're going to be sitting across the table from each other once a month for 3-5 years. You need to accept your investors as part of your management team.

6. Don't Fill your plan with typos, errors, chartjunk, repetition, or inconsistencies

Your plan makes your first impression and often your only impression with an investor. Spelling counts as does accuracy, conciseness, and clarity.

7. Don't Expect to acquired by Microsoft

They're only one company, they can't buy everybody. Likewise not every company in a portfolio will do an IPO. For every one IPO company, five are acquired. Keep your options open and be realistic with your exit strategy keeping in mind that companies need to generate 50% year after year return on assets to be VC attractive.

Back to Topñ

Key VC-type pre-investment questions (By Larry Duckworth, 11/13/93)

Here are some high level points VC’s will want to hear responses to:

1. Does strong top line upside potential exist, to potentially provide the needed growth rates?

2. How do you differentiate from whom (present and future competitors, plus existing inertia in the market(s))?

• Product features, now and planned.

• "Whole product" depth, breadth, competitive position.

• Partnerships strength.

• Entrepeneural drive.

• Quality of management team.

• Faster organization, with quality.

• Best target markets expertise concentration.

• Best reference accounts.

• Other

3. Is the right team in place?  

• Strong active founder, able to bring in leadership and enable their power?

• Excellent CEO, with key abilities, experiences and track record.

• Strong functional leaders (Finance, Engineering, Sales, Support, Marketing).

• Strong stock options participation by key people.

4. How much money is needed, and how will the money be used?

• Is its use factored into projections? If not, what will be the accrual impacts short term, and longer term?

• For what Working Capital uses? Paybacks projections exist at the margin?

• Acquisitions plans?

• Are the cash uses targeted toward the core plan (targeting, leading, expanding)?

• Will other VC’s be involved? Should they be?

• Will follow-up financing rounds be needed?

5. How do we get liquid within five years?

• Is management devoted to rational liquidity within five years?

• Is an IPO potential (>$20M, 20%+ NI, 40%+ growth; leader; other)?

• Is an acquisition possible (for niche access, technology, competition, other)?

6. What will be the Board structure?

• Are the right insiders on the Board?

• Will a majority be outsiders?

• Will the Board be strong?

• What will be the VC allocation (ties to valuation)?

7. What is the proposed valuation?

• What are the comparables?

• What is the multiple of revenues, pre-money?

• What is the multiple of NI, pre-money?

• Other?

8. What are the prospects of a 5X return in five years?

• Is the Plan reasonably achievable given the above performance factors?

• Will a "bad case" 2/3 result be sufficient?

• What will be the range of possible values of the base investment plus re-invested dividends, on a fully diluted basis? Probable value?

• What is the expected IPO market status in three years?

• Are there plausible acquirers? Who? Why?

9. What is the effort’s timing?

• Does it meet the VC’s timing?

• Does it tie with the Plan?

• Does it relate to external factors?

• Other

10. What business and customer references can I talk to?

• Customers, including unhappy ones.

• Lost deals.

• Industry analysts.

• Lawyers, accountants.

• Employees.

Back to Topñ

Suggested Agenda for Presentation to Investors

Expected Length:          20-30 minutes, ~ 30 minute Q&A

Intended Audience:       Angel or Venture Capital Investors

Prior to Presentation:    Business Plan Executive Summary & Management Team Resumes

Goal of Presentation:    To interest investors in your company to spend an afternoon learning more.

1. Product or Service Summary (30 - 60 Seconds)

• A brief Intro here. This is not a customer sales call. You're not selling your product, you're selling your company, and in many respects yourself.

• Sum up your product offering in 3 or 4 sentences and move on. The presentation should concentrate on the business model and how you're going to make money for the investor.

• Investors will assume you have a product and good technology. Investors have more great technology than they know what to do with, what they need is great business opportunities.

• Be succinct and clear. Maintain a focus.

2. Management Team Review (4 Minutes)

• Who is on your team and why are they qualified to execute your plan?

• Provide key points about team, relevancy of experience.

• How does the team's achievements, education, & experience (both functional & entrepreneurial) reduce the risk for the investor?

• You don't need to prove that you know 5 programming languages, or that each team member has been working for 20 years. You need to convince the investor that you're capable of building a business around your idea.

• Has the team worked together before? Another startup? Another corporation? As partners, vendor/customer, etc.?

3. Market (8 Minutes)

• Investors want to hear that your market is big & growing (>$100 million, growing >20%)

• Industry dynamics, drivers, where your company will compete, why and how.

• Demonstrate that you thoroughly understand your market and have targeted a segment that you can dominate (i.e., obtain >50% market share). Know the scope of opportunities and hone in on segment that is profitable & approachable. Once you "establish a beach head" you can expand, but trying to be all things to all people is a recipe for failure.

• Mention any Intellectual Property advantage - any patents or defendable IP that will be a barrier to entry to competitors

4. Customers

• Who are your customers? What relationships do you have with them? What is their compelling business reason to buy your product/service? Better technology is not enough, it has to significantly impact your customer's business.

• What is the revenue model: purchase?, lease?, purchase & annual maintenance?, subscription fees?, licensing fees?, etc.

• Do you have any revenue generating customers now? Are they profitable?

• Investors like products that "remove pain" & have an obvious ROI for the customer at a price that is profitable for you

• Do one or two large customers dominate you? If so, what is your plan to diversify?

• Exactly who in the company is the buyer? CEO?, VP of R&D?, Director of Sales?

• Who writes the check? Is there an intermediary selling your products to the end user?

5. Sales Channels

• How are you going to get your product to the customer? How does the cost of distribution compare to the cost & profitability of the product? For instance, if you use a direct sales force, your average purchase needs to be >$100K.

• Do you have any partners or alliances to help distribute your products?

• Is there a well known company that compares/contrasts your business model?

6. Competitors

• Who are they? Please don't say you don't have any. If there is money to be made, someone will enter the market. Explain who this is and why you are in a better position.

• Who are your competitors? What differentiates your company and why? How is this distinction sustainable?

• What’s unique to your technology? Why is it sustainable? What are the barriers to competition? After your initial product, what are the follow-ons?

• If your competitors are large, well financed companies, be prepared to talk about licensing your products or selling your company to them.

7. Financing History (2 Minutes)

Show top level revenue, expense, & profitability history. Be very concise, a high level table is appropriate at this meeting. For instance:

8. Financing Projections (4 Minutes)

• Create another table of the same detail projecting 2-3 years forward. Show the timing and amount of the investment you are requesting. Be prepared to explain how you will use it. You need to demonstrate that the investment will allow you to grow into a substantial company.

• Build revenue projections "bottom up" not "top down." (i.e., # of sales people x customer calls x conversion rate x revenue per sale = Revenues; "We'll capture 20% of a $100 million market" does not equal $20 million in revenue)

• Investors are risk averse. You need to identify the risks facing your business and your strategies for overcoming them. Investments should be allocated to reduce/eliminate the risks.

• Try to estimate how long the investment will last (i.e., "This $2 million will support our product development and marketing for the next 18 months")

• Have some idea of your company's valuation and how much equity you'll have to give up to get the amount of money you want. You're an illiquid security with risk, not a public company. Your valuation is probably around 1-4 times last year's or next year's revenue, depending on the stage of your product, your management team, your market, and a myriad of other factors.

9. Exit Strategy (1 Minute)

• Acquisition is 5 times more common that going IPO and sometimes more lucrative to the investors

• Try to be specific as to who might buy you. Saying "Cisco has acquired X# of network hardware companies over the last three years and is one potential buyer" is better than "Then someone could buy us."

10. Questions & Answers

11. Finally, before meeting with an investor - Rehearse, Rehearse, Rehearse!

• Practice your pitch in front of knowledgeable people and take their advice!

Back to Topñ

"Ten Reasons A VC Deal Won’t Get Done"

By Ernie Perazou, Norwest Ventures, and Tom Crotty, Battery Ventures (both from Boston). Sponsored by Deloitte Touch, Kirkpatrick and Singleton, PLC and Silicon Valley Bank 9/9/97, 8am (notes by Larry Duckworth)

 Philosophies (By Ernie Parizeau, Norwest Ventures) :

• They do not want to operate companies; they want to invest in full, quality management teams, with an excellent CEO (who might have to be found)

• They look for large market opportunities; but look for niche leadership potential first

• Clients need to be references for both the company and Norwest

• Likes earlier stage companies; customers have had much input to the product, even if revenues are low due to early timing; and other factors are in place (CEO, management, market, position, plan)

10. "It is the 10^th plan for remote access (or some other technology) where the differentiation is price (‘cheaper’)."

• Large companies can crush small ones if price is the only factor

• Must be clearly differentiated in a major way that can be sustained and built on

• The market segment(s) must be large and fit the differentiation; even if just starting

9. "It is a $2B market, so only 1% will generate $20M."

This company has not truly segmented the market(s) into niches, defined the intrinsic needs of selected niches based on expertise, and has not come up with a unique value proposition that is target-stimulating, valuable, sustainable and executable. Too much risk. Without segmentation, no leadership can exist, which is vital to upside.

8. "Three engineers have started the company; the chosen CEO is the one whose basement was used; the VP-Marketing was the one that made a customer call."

This company does not have the depth, breadth and experience needed to lead a company anywhere. They will be too technology focused and a focus imbalance will exist.

7. "References say the CEO is ‘too pollyanish.’"

• They want a realist, who knows what can go wrong and is pre-prepared for it.

• The characteristics and track record of CEO are key factors; a "checkered past" and has grown as a result is not a negative; they will be supportive.

• The initial business plan is "not believed." Not matter what, things will change. But, the plan does reflect completeness of thought and cause-effect definition; these are key barometers of how truly "smart" a CEO will be.

6."CEO approves all major decisions."

No delegation exists, so no strong people will be on team and growth will not happen.

 Philosophies (By Tom Crotty, Norwest Ventures) :

• Looks to market size potential, even if only niche focused now

• Wants companies positioned well in new, emerging market segments (not taken)

• Successful early revenues and bootstrapping success; shows a valued benefit exists

• Skill sets, balance and attitudes of the management team is his key focus

• Wants to be in the first financing round (less expensive than later rounds)

5."CEO likes to practice "mushroom management" with team members and investors; keeps them in the dark and throws manure occasionally."

4. "The CEO has gold chains and says Donald Trump is his hero."

The CEO must be marketing savvy; focused on supplying benefits to others, versus taking; realistic; and down-to-earth.

3. "The CEO has asked his neighbor, a personal injury lawyer, to review the term sheet."

Having good accountants and legal counsel is a must.

2. The CEO’s valuation is too high.

No valuation standard exists today. It always trades off upside potential with downside risk. It is a subjective process. Risk evaluation includes the CEO’s quality, the management team, the positioning (leader?), the market size, the product, the plan.

1. "It’s August and the VC is out playing golf."

VC’s get over-extended, so the company must evaluate this factor; someone with time must be found.

Other points:

• "80% of deals that die are due to people issues"

• Niche positioning is critical; leadership

• References and contacts from bankers, auditors very helpful

• Valuations are up in general; more money chasing the same number of good deals

Back to Topñ

What are the different types of funding?

1. Personal Funds/Family & Friends ($1,000-$100,000+) The first source of money is your personal assets: Savings, 401K, second mortgage, credit cards, etc. Even if other options are feasible, most outside investors will want to see some level of commitment from you. If you’re at the seed stage trying to turn an idea into a business and haven’t done it before, you’re probably going to have to start here. Additionally, the longer you delay outside investment, the higher the valuation of your company and the less equity you’ll have to give away to raise money. If it’s your own money, who better to invest in than yourself? Furthermore who else is going to invest in you if you don’t? Of course the downside is that you have less/nothing to fall back on if things don’t work out. Getting the family involved lets everyone benefit from the great success that you’re going to have, but if things head south Thanksgiving dinner becomes an uncomfortable proposition. Bottom line, lots of companies were started on the founder’s credit card and there’s very few options for the initial start-up other than you and your family and friends.

2. Corporate Partnerships ($25,000-$1,000,000+) Don’t overlook your customers or large companies interested in your business model as sources of funds. If what you’re doing is unique, someone may be willing to help you bring it to market. Large corporations have deep pockets and diverse resources that could support your R&D, marketing, and reputation if it’s a good fit.

3. Angels ($10,000-$500,000) Angel investors are wealthy individuals who invest in privately held companies. Sometimes they can also serve on a board of advisors and make introductions to people you wouldn’t otherwise meet. You not only get their money but also their network. Angels will usually want a well thought out exit strategy, but may be more patient than a venture capitalist. Anyone with a little extra cash to invest could qualify as an angel, from your dentist to a retired telecomm executive interested in your new switching technology. Given the choice, someone with industry experience and a network of contacts can help your business, and understand your spending, a lot more than the person filling your cavity. Angels tend to keep a low profile, but networking in your industry’s professional associations, and with other entrepreneurs, will help you identify them. Many have joined Netcelerate to prospect for investment opportunities. Some of them are anonymous and others are listed in the Directory of Investors. Typically the more money you ask for the more sophisticated the investor and the more probing their questions are.

4. Venture Capital ($500,000-$3,000,000+) Venture capitalists are professional investment managers investing institutional money in alternative assets. They typically form limited partnerships with the institutions (pension funds, corporations, universities) with a life of 10 years. They make initial investments for the first 3-4 years, follow on investments for 3-4 years, and then harvest their investments over the remaining 2-4 years. At the end of a 10-year fund, all investments MUST be publicly traded stock or cash. They can supply larger sums of money than other sources, but it usually comes with a high equity price tag and aggressive milestones. There are over 700 venture capital firms in the US. The types of investments that they prefer vary widely. Knowing these preferences and only approaching investors that have an interest in your industry and the stage of your company are critical to successfully obtaining funding.

5. SBIR ($100,000-$750,000) (Small Business Innovation Research) Certain federal agencies are required to designate a portion of their R&D budget for qualifying small businesses. If your company is developing a technology that interests one of the following agencies you may be eligible for technology development grants. Departments of: Agriculture, Commerce, Defense, Education, Energy, Health & Human Services, Transportation, EPA, NASA, & the National Science Foundation. Phase I grants are $100,000 and Phase II or follow on grants can be up to $750,000. These are outright grants, not loans or equity purchases, so they don’t have to be paid back, although the sponsoring entity will desire access to the technology.

6. Debt ($1,000-$3,000,000) Debt lenders will require collateral and income to secure a loan, which makes it difficult for many start-up businesses to qualify. However, for certain assets debt financing is an option. If other funding sources are pending (such as a venture capital infusion, or confirmed purchase orders) some banks will extend credit. In addition, Small Business Association programs help small companies obtain financing under certain conditions. The most commonly used programs:

• SBA 7(a) Program-Under this program, the SBA will guarantee loans up to $1 million made by SBA approved lending institutions for working capital, machinery & equipment, and real estate.

• SBA 504 program-Both the SBA and the approved lending institution contribute funds of up to $3 million for real estate & heavy equipment.

Advantages of an SBA backed Loan:

• Greater eligibility- an SBA guarantee sometimes makes it possible for a bank to lend to a company which otherwise fails to meet the bank’s credit standards

• Long maturities- up to 7 years for working capital, 10 years on equipment, and 25 on real estate

• Competitive interest rates- generally lower than non-guaranteed loans

• Greater financing flexibility- SBA guidelines permit substantial borrowings and financial leverage relative to non-SBA guaranteed loans

Disadvantages of an SBA backed Loan:

• Collateralization- Like conventional loans, SBA loans are subject to approval by the lending institution and generally will not help a borrower with insufficient collateral

• Time & Paperwork- A borrower must receive two credit approvals, one by the sponsoring bank and one by the SBA. In addition, the SBA requires a substantial amount of up-front documentation

• Personal Guarantees and Restrictions- A personal guarantee is almost always required to obtain an SBA loan. In addition, limitations will be imposed on the utilization of the proceeds as well as other aspects of your business operations (i.e., compensation levels, perks, etc.). Most lenders require such guarantees and limitations anyway, so these probably should be considered neutral elements when considering SBA assistance.

© Gregory B. Sneddon & Jay K. Turner - Pratt’s Guide 1997

What one is best for the amount of money I need?

• $1K - $20K:      Personal/Family, Angel

• $20K - $250K:   Angel, Corporate, SBIR, Debt

• $250K - $500K: Angel, Corporate, SBIR, Debt

• $500K +:          Venture Capital, Corporate, Debt

What are my options based on the stage of my company?

© Gregory B. Sneddon & Jay K. Turner - Pratt’s Guide 1997

Are my options different based on what I want to use the money for?

If you’re using the money for Research & Development, or Real Estate, Machinery & Equipment, or Working Capital you may qualify for funding under more favorable terms.

What will a Venture Capitalist ask me about?

1. Does your company have patents and/or defendable Intellectual Property? Venture Capitalists always like to see defendable IP as a barrier to market entry although this is very industry dependant. In the medical field it’s a basic requirement, but in the fast paced software & Internet industries speed is of the essence.

2. How large is your target market? Venture Capitalists usually won’t invest in a market smaller than $50 million and growing at 20% per year.

3. What market share do you expect to capture? Venture Capitalists invest in companies that possess a strategy to capture at least 30% - 50% market share. 2% of a billion-dollar industry won’t interest them.

4. What is the unique technical capability that you bring to this market? Venture Capitalists usually invest in quantum leap technologies, not refinements of existing models or a copy of something that’s out there. They want to be first, fastest, far superior, and preferably have patented or defendable Intellectual Property.

5. What sales channels will you use to reach your customers? How are you going to get your product to the customer? How does the cost of distribution compare to the cost & profitability of the product? Direct Sales Channels are difficult to build and expensive to maintain. If your average sale isn't <$100K, you probably can't support a direct sales force. Do you have any partners or alliances to help distribute your products?

6. What is your exit strategy? Venture Capitalists will want to liquidate their investments in 3 –5 years with a target yearly ROI of 50%. This usually means being acquired or going public, either is fine with acquisition five times more common than an IPO.

7. What is the relevant experience of your management team? Venture Capitalists will only invest in companies that have a complete management team (management, technical, finance, and marketing) with experience in the target market, and/or have started a company before. Furthermore, they prefer if the team has previously worked together.

8. Who are your current and potential competitors in this field and how will you differentiate your company? Venture Capitalists will not accept an answer of none. If there’s a market that makes the kind of return that they will fund, there will be competitors. You need an angle that makes your company better and erects barriers to all follow on competition.

Back to Topñ

How do venture capitalists value companies?

Superior management, a large market, and unique products create value

One of the most often asked questions by entrepreneurs relates to how VCs calculate the equity share they demand in exchange for the funds they invest. How do they arrive at 20%, or 50%? We asked Venture Capitalists to rate a number of factors they use to value the investment, with a rating of 5 being the most important, and 1 being the least important.

• Quality of management: 4.5

• Size of the market: 3.8

• Product qualities (uniqueness, brand strength, patent protection): 3.7

• Rate of market growth: 3.5

• Competition: 3.5

• Barriers to entry: 3.4

• Stage of development of the company: 3.2

• Industry the company is in: 3.0

Quality of management was emphasized by the VCs to the extent that 7 out of 10 gave it a rating of "5", and nearly 9 out of 10 gave it at a 4 or 5. There were a few mavericks among those surveyed, however: 7% gave management quality an importance rating of only 1 or 2.

No other factor came close in importance. The next most important, size of the market, was given a rating of 5 by only 30% of the respondents, followed by product qualities, which received a 5 from about one out of four respondents. Note that all of the factors received an average score of 3 or higher. All of these factors were viewed as significant, and entrepreneurs should take care to clearly articulate each of them to investors.

In the Profit Dynamics Inc. 1998 survey, VCs overwhelmingly chose "quality of management" as the most important factor in their decision to invest. The lack of a highly qualified management team was the number one reason they declined to invest as well.

Back to Topñ

Copyright © 1998-2009 MSI, Limited. All rights reserved. Unauthorized duplication or usage is a violation of applicable laws.