What do Venture Capitalists Want?

Posted by: Amy Barrett on August 3, 2009

In talking to several entrepreneurs over the last few weeks I heard major frustration over the lack of vc funding available in the marketplace. But it made me wonder: Do entrepreneurs really know how to go hunting for venture capital?

University of Maryland associate professor David Kirsch says the business plan entrepreneurs put together-and obsess over-isn’t the key to landing funding. Kirsch co-authored a paper in the 5th issue of 2009’s Strategic Management Journal http://www3.interscience.wiley.com/journal/122239730/abstractthat looked at whether certain factors in a business plan could be correlated to the funding decision. The answer was no. “The business plan is not an effective marketing tool to get funding,” Kirsch says.

So what should entrepreneurs focus on? One key factor determining success with vc’s was whether a startup came with a referral. So those launching a new business might be better off focusing on networking to bring in the right advisors who can in turn connect them to venture investors.

That’s not to say a business plan has no value of course. Putting that document together helps entrepreneurs think through how to make their business a success in the marketplace. Just don’t expect it to open doors with vc’s.

Reader Comments

Vivek Wadhwa

August 3, 2009 5:09 PM

Amy, you've got this backwards. VC's don't lead innovation they follow. They go where they smell "safe" opportunity.

Prof. Kirsh is right that business plans are irrelevant. Here is a piece I wrote about this -- http://www.businessweek.com/smallbiz/content/sep2008/sb20080930_920684.htm.

Bottom line: entrepreneurs need to follow their guts and build products which change the world. They need to understand their markets, build solid management teams and learn to execute with precision. I also wrote a series of articles about how to do this -- http://www.businessweek.com/smallbiz/content/may2006/sb20060504_121889.htm.

Regards,

Vivek

Anne Field

August 4, 2009 10:15 AM

I've increasingly heard investors say that business plans are useless. References, track record and networking are more important.

But, for most entrepreneurs, this issue is beside the point. A very small percentage of entrepreneurs get VC funding at all. You wouldn't know it from press coverage, which conveys the opposite impression. And, writing a business plan is an important exercise in, well,planning. You just have to recognize that it's a living document and likely to change almost as soon as it's written.

I wrote about this in my Not Only for Profit blog a few times.

http://trueslant.com/annefield/2009/05/14/hey-lazy-entrepreneurs-you-dont-need-to-write-a-business-plan/

Derek

August 12, 2009 4:02 PM

The statement "business plans are useless" is, as written, untrue. While they may not be the most important thing for a VC to see in order to fund a company, they (in one form or another) can be extremely useful for an entrepreneur to figure out what they do and what they don't know about where they are going.

Perhaps the notion of using a business plan solely as a device for marketing your company to a VC is outdated, but, especially now that VC deals are getting slightly more scarce, a management team that knows their plans inside and out, and has an in depth knowledge of their opportunity is far more fundable than one less polished.

Post a comment

 

About

What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

BW Mall - Sponsored Links

Buy a link now!