Venture Capital

THE IMPORTANCE OF PLANNING

Although there is no way for a small business to guarantee that it will be able to obtain venture capital, sound planning can at least improve the chances that its proposal will receive due consideration from a venture capital organization. Such planning should begin at least a year before the entrepreneur first seeks financing. At this point, it is important to do market research to determine the need for its new business concept or product idea and establish patent or trade secret protection, if possible. In addition, the entrepreneur should take steps to form a business around the product or concept, enlisting the assistance of third-party professionals like attorneys, accountants, and financial advisors as needed.

Six months prior to seeking venture capital, the entrepreneur should prepare a detailed business plan, complete with financial projections, and begin working on a formal request for funds. Three months in advance, the entrepreneur should investigate venture capital organizations to identify those that are most likely to be interested in the proposal and to provide a suitable venture capital agreement. The best investor candidates will closely match the company's development stage, size, industry, and financing needs. It is also important to gather information about a venture capitalist's reputation, track record in the industry, and liquidity to ensure a productive working relationship.

One of the more important steps in the planning process is preparing detailed financial plans. Strong financial planning demonstrates managerial competence and suggests an advantage to potential investors. A financial plan should include cash budgets—prepared monthly and projected for a year ahead—that enable the company to anticipate fluctuations in short-term cash levels and the need for short-term borrowing. A financial plan should also include pro-forma income statements and balance sheets projected for up to three years ahead. By showing expected sales revenues and expenses, assets and liabilities, these statements help the company to anticipate financial results and plan for intermediate-term financing needs. Finally, the financial plan should include an analysis of capital investments made by the company in products, processes, or markets, along with a study of the company's sources of capital. These plans, prepared for five years ahead, assist the company in anticipating the financial consequences of strategic shifts and in planning for long-term financing needs.

Overall, experts warn that it takes time and persistence for entrepreneurs to obtain venture capital. In the best of economic times, venture capital is difficult to secure. In slower economic times it becomes ever harder. It is not unusual to work on obtaining venture capital for years before an agreement is met, according to Brian Brus who studied the subject for his article "Starting a Business is Harder then Ever in the 21st Century." The hardest thing to communicate to enthusiastic entrepreneurs who come to venture capital firms looking for help, explains Brus, is that they can't just get started making their new product or service. Venture capitalists may be risk takers but for those lucky few with whom they invest, it may not feel that way once all the paper work is done and an agreement is in place.

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