When you are pitching your idea to a venture capitalist company, one of the most important things you can do is figure out what you need ahead of time. The last thing you want are surprises, and the following steps will help you to avoid them.
1. Preparing communications and due diligence materials
Perfect your high concept pitch, elevator pitch, teaser email, business plan, and slide presentation. The operations plan, which is part of the business plan, deserves special advance attention – because it lays out the risk factors of investing in your business and how you will overcome them. The executive summary, another business plan element, is also key – because it is one of the first impressions you will make on potential investors.
2. Creating your Master List of Venture Capitalists
It would be in your best interest to ensure you have a database of your private equity firms. You may start out with a long list, but over time you will need to make sure you narrow the choices down. It is important to ensure that you list venture capitalists that are actually interested in making an investment so as not to waste your time or theirs.
3. Making Contact with the Venture Capitalists
You will have a number of firms on your list, but you need to know just who to call. Managing partners will tie up the loose ends, but they are typically unavailable until the very end. Speak with partners, and speak with associate partners. The higher you can climb the better off you will be, but make sure you can establish the connections first.
4. Meeting with venture capitalists and fulfilling due diligence
Once you have your slide presentation ready, it would be in your best interest to complete it. In addition to that you will want to make sure you have prepared yourself with the three most common questions that VC\’s are going to as. For one, how much capital do you need? What is your company worth? What is your exit strategy? In addition to this your due diligence materials will be required which will include company background, capitalization table, business plan, financials, leases, employment agreements, letters of intent, and other items requested.
5. Terms
Created a competitive investment atmosphere from the very beginning, by approaching multiple investors at once. When actually negotiating terms, look out for \”liquidation preference.\” Try to secure a 1X liquidation preference, which guarantees the VC will recoup their investment in an IPO or buyout – rather than 2X or 3X, which doubles or triples their take before you see a cent. Also beware of the \”participating preferred liquidation preference.\” This gives investors their 1X, 2X, or 3X liquidation preference, plus their percentage share of all proceeds of a buyout, before you see a cent.
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