Thursday, February 28, 2013

What Venture Capitalists Want: 4 Tips

Venture capitalists look for very specific items when determining whether to invest in a business. Use these tips to make sure you have a leg up on securing their funding.

A funny thing occurs when your business makes the Inc. 500 list a few years in a row–you become very popular as a potential target for venture capitalists. Although we at The Trademark Company are always flattered by the attention, we have traditionally steered away from outside investment in our company.

However, without exception every time a potential investor calls we graciously listened to what they have to say.  To that end, over the years we have learned what venture capitalists are looking for in target investments, or at least those that we have spoken with. As such, if you run a start-up and are looking to attract venture capital here are four tips to peak their interests in your company:

1.  Your products or services must be proprietary or unique.  

Do you have a proprietary or unique product that creates barriers to entry and/or precludes copying by the competition? Such interests could be protected, if you have a product, by patent rights (venture capitalists love investing in products that are protected by a registered patent). In the alternative, if you have a service model, is there something so unique to that model that makes it difficult for the competition to easily copy?

For instance, our business is a service model and, accordingly, cannot avail itself to the protection of the patent system. However, our proprietary trade secret systems developed over the course of a decade give us a unique advantage in the marketplace in the field in which we exist. This is the type of uniqueness or proprietary nature, outside of patent rights for a product, you should try to emphasize whenever speaking about your own business model.

As such, when attempting to attract venture capitalists to invest in your business always be prepared to discuss how your product or service could not be easily replicated by a competitor and, as such, the market for said product or service will remain exclusively yours for the foreseeable future.

2.  Use existing sales as evidence of consumer demand. 

Proprietary or not, venture capitalists want to see that your product or service is being received well by the relevant consuming public. In this regard, what better proof of this is there than sales? For instance, you may have a patent on the latest version of the iconic widget. But if you have been open for business for two years and have only sold 20 units for $50 this is a big red flag that a market for your product, even if proprietary, simply does not exist.

As my old coach use to explain to us every day at practice, "Potential doesn't mean sh&%t!" Real sales, proof of consumer demand, this is what venture capitalists are looking for. So be prepared to discuss how your goods or services have hit the ground running and offer proof of consumer interest and validation in the form of hard sales numbers.

3.  Be able to answer the question how their money will increase your sales.