Ideas|Products|Startups|VCs

If you are an entrepreneur, there is high probability of you meeting a VC and discussing about your venture and business plan. VCs, you must remember is a group of individuals that are seeking to make profitable investments in fast growing companies.

Beside focusing your attention on the unique qualities of your business, spend some time and work on the anticipated return on investment. VC firms often want to see companies that will produce returns in excess of 30% per year on a compounded annualized basis.

Lets look at the common questions VC asks an entrepreneur -

How much capital do you need? – This is one of the most imperative questions asked by a venture capital firm. They want to know how much of their capital will be needed to bring your business to profitability (if it isn’t profitable already). They will also want to know how these investment funds will be used, and if additional rounds of capital will be required.

Who is your competition? – This is also a highly asked question from VC firms. Every business has some form of competition. Discuss the competitors in your industry, how their product/service is similar to yours, and how your product is intrinsically better or more usable than that of the competition. Present the SWOT analysis.

Entry Barer ? – VCs are not keen in venture which have low entry barer which implies that this business model can be replicated easily. So as an entrepreneur you should be in full command to highlight why your business model is not easily be copied and how much time it would take for a newcomer to do so. VCs are keen to know if you can have patent protection on your product or your business process.

What is the current state of venture? – VCs are keen to know the current state of your venture to understand better the progress of the venture and also where funds will be utilized. Gone are the days, simply having a great idea does not cut it anymore. Venture capital firms want to see that you have something tangible to offer rather than just a good business plan or business concept. Prior to raising venture capital, you should try to move the business along as far as possible.

Do you currently have paying customers? – Paying customers definitely brings credibility to your product since VCs perceive it as a validation for the product and would like to talk to your customer to understand their viewpoint about the product.

Founding Team Experience? – VCs look for dynamic and extra ordinary founders to back them, a great leader can develop a very good business from an ordinary idea. They will want to know if you have the proper educational background, experience, and contacts within your field to make your venture successful and profitable.  Keep your biography and your senior management team profile handy.

How will i Exit? - Lets get this very straight VC never do charity, they are business folks and would like to see a hefty return of their investment, nothing less than 7x. They would like to exit the venture either by company’s IPO or strategic sale of their equity to a large company or a PE firm.

-Hitesh, vcBytes.com

Entrepreneurs think that their business idea is very good and will manage to attract VCs. For VCs, more than the idea its scalability that matters. Its a very common reason for VC to turn down your business proposal stating your business venture is not scalable. 90 out of 100 business plans are rejected citing lack of scalability, and questions hovering around scaling. So what is scalability and why is necessary to attract VCs.

Classic example i can quote is movie rental service. I worked in a  movie rental startup company, they started with Bangalore centere and within 6 months started operating in Mumbai and Delhi, this is scaling. In order to run operations/stores in multiple location it requires a head office cost and costs to develop and deploy ERP/SCM/CRM solutions. Thats is why each additional center will contribure much higher amount towards profit. This movie rental service company scaled to 8 cities and successfully raised $21M.

The point here is that if you are seeking external investment from people other than friends or family, they will want to know how they can exit from their investment – which will be from building a business that is sellable. To be sellable, you have to be scalable. Make sure you are clear about this and your business plan should reflect that.

For dotcoms, the ability for a Web site to grow at a rate comparable to that of the business itself is known as scalability.The website should be able to serve all users request seamlessly with increasing volume of online traffic. For ecommerce its just not your technology but their complete business model has to be scalable as well by entering into new product category or new market.

So assess your business plan well on scalability factor before pitching it to VC.

-Hitesh, vcBytes.com