15 Things You Need to Score VC Funding

A veteran entrepreneur tells you what venture capitalists are really looking for before they'll make a deal

by Vivek Wadhwa

I've often said that instead of soliciting venture capital for your new startup, you're better off buying a lottery ticket. You'll save time, money, and spare yourself a lot of heartache. But when you've reached the stage in your business where you have a product that customers love, a business model that works, and a strong management team, everything changes. Now the venture capitalists knock on your door, and the odds of getting a deal become much better.

You need to consider your options very carefully at this point. VCs can be the best thing that happened to your company or your worst nightmare (see BusinessWeek.com, 7/18/06, "Venture Capital: The Good, Bad, and Ugly").

If you choose the venture route, prepare yourself for the mating dance that's about to begin. In this first article, I'm going to tell you what the VCs look for and some of the big hurdles you'll face. If you overcome them, you'll likely get offers from multiple firms. In my second article, I'll discuss what you should look for in a firm and the importance of being picky.

VCs take pride in being risk-averse. They receive hundreds of business plans every month and typically consider only a handful. They are more likely to look at companies that are well known or come with strong recommendations from people they trust. Their due-diligence process often takes months and is extremely rigorous. Most companies don't make it through. To prepare, you should look at your company the way they will.

Here are the 10 things they'll be looking for that you'll need to have in place:

1. Market-ready product. You need to have gone through the trials and tribulations of building a product that works well and meets customer needs. It is not enough for your product to work for one type of customer; it must be able to satisfy the needs of many (see BusinessWeek.com, 5/4/06, "Countdown to Product Launch (Part I)").

2. Solid business model. You must have a proven business model with a clear path to long-term profits. You need to have worked out all the details of what you are selling, to whom, and at what price; and how you are going to reach your customers, persuade them to buy from you, and support them when things go wrong (see BusinessWeek.com, 5/12/06, "Countdown to Product Launch (Part II)").

3. Brilliant business plan. A well-written business plan must credibly forecast high growth and explain your business strategy. It must show a thorough understanding of the market, competitive positioning, growth potential, and new market opportunities. And your target market must be sizeable enough to make an investment worthwhile.

4. Management team. You need to have all the key members of your team in place or document your hiring plan (see BusinessWeek.com, 5/19/06, "Countdown to Product Launch (Part III)"). VCs know that business models will evolve and things will go wrong. They are looking for a team that can navigate rough waters.

5. A clear and well-defined exit strategy. VCs invest strictly for the financial returns. When the time comes, they will want you to support their decision to sell the company, merge it with another firm, or take it public. You may want to change the world and take the company to greater heights, but they will want to make sure there is an out.

6. Board of directors. VCs exercise control and protect their investments through a board that the chief executive reports to. They will want a number of seats that are, at the least, commensurate with their stake in the company. Your challenge will be to balance this board with members who protect your interests and those of other shareholders (see BusinessWeek.com, 11/8/05, "Integrating Ethics at the Core").