How To Attract Investors For Your Small Business

By MoneyShow.com | April 19, 2010 AAA
How To Attract Investors For Your Small Business

Let's face it – your million-dollar business idea is never going to get off the ground. You'll push it on company after company until you've drained your piddly seed money and your network's resources. Eventually, you'll end up eating Dinty Moore Beef Stew on a futon in your parents' basement, complaining about how nobody "gets" you.

At least, that's what will happen without a little financial help. Venture capital firms are comprised of private investors who research, negotiate and (hopefully) fund businesses in their early stages of development. Even some of the leaders in business today - Home Depot, Starbucks and Google, to name a few - relied on venture capital in their early stages. (To learn more, check out Cashing In On The Venture Capital Cycle.)

In Pictures: 8 Tips For Starting Your Own Business

Studying the Competition
Applying for venture capital isn't quite as informal as the ABC TV show "Shark Tank" would have you believe. Before you have the opportunity to present your idea or invention to the sharks, paperwork filing, business-plan writing and demographic analysis must be conducted. Many of these firms receive up to 5,000 business plans per year, all competing against your business plan for funding consideration. Only 10% of these plans are seriously considered, and 1-2% are actually picked up and funded. And this process can often take years.

In a situation like this, the smallest details (punctuation, accurate bookkeeping and sentence structure) could mean the difference between the inbox and the paper shredder. Obviously, attention to detail is a quality that will pay off tenfold.

Who Is Eligible?
Individual firms have their own criteria for funding. Since venture capitalists are private investors and boards, they have the freedom to alter conditions in order to suit their own causes. Think of venture capital funding as educational grants or bursaries – certain benchmarks must be met on the applicant's end before funding will be considered.

  • Edit, edit, edit
    Considering the volume of business plans that venture capitalists weed through every year, it's often the low points - not the high points - that stand out. Punctuation, grammar, appealing graphics and concise writing may not bring your plan to the front of the pile, but at least it won't wind up in the recycle bin right off the bat.

    Consider the last time you updated (or created) a resume and the amount of editing and revision work was put into those few pages before even daring to send it to a prospective employer. Business plans are often 25-50 pages long, and it's easy to let a typo slip through the cracks. With a document as important as a business plan, it's worth the expense to hire a professional copy editor and save on the anxiety felt with a spelling error that's discovered down the road.

    When writing a business plan, it's best not to rely on page count to determine length. As with any good story, the number of words is irrelevant – it's over when it's supposed to be over. Ensure that your plan has all pertinent information and answers any questions that may arise. Making the business plan as thorough and clean as possible will appeal to the reviewers' senses of meticulousness, and gain the firm's trust in your abilities. (To learn more, see 4 Steps To Creating A Stellar Business Plan.)

  • Do Your Research and Know Your Audience
    Some of the "best" ideas lose their luster between the brain and the paper. When we realize how difficult or involving a new idea may become, frustration and defeatism set in. The only way to avoid this is to cover all avenues of research in your business plan. Not only so you fully understand what you're getting into and can answer any questions that may arise, but also so the venture capitalists can grasp the concept without over-thinking or speculating.

    If a similar product to yours already exists, focus on the aspects that make yours different. Pinpoint your target demographic and the level of competition for that audience, and consider your return on investment (ROI).

    Yes, the technology (or science, or mechanics) of an idea is important to explain, but not as important as to whom the idea will be sold, how much it costs and its competition. Work on those factors before you outline 15 pages dedicated to the uniqueness of the hydrogen-fueled internal combustion engine that will power your invention.

  • Round Peg in a Round Hole
    Most venture capital firms focus on one type of business or product, such as: wireless technology, health care, alternative energy, etc. Your idea for a series of children's books that are pre-packaged with Ritalin probably wouldn't fare too well in an automotive-focused firm. Due diligence is required here, to ensure that you're not just wasting time and money by sending a great idea to the wrong firm.

  • Team Up
    It's tempting when starting a business or introducing a product to try to brave the waters alone. But having a group in on the idea will allow you to be as creative as possible, while filtering or revamping the loose ends. Don't think of this as profit sharing – think of it as a group of co-workers acting as a bouncing wall for ideas. (Learn more in Should You Have A Business Partner?)

If at First …
Remember that the face-to-face meetings between young inventors and venture capital boards don't come on day one. If an idea is worth hearing – and luck and timing collide at just the right moment – a well-written, thorough and appealing business plan can catch the eye of just the right person. And if it doesn't, wash, rinse and repeat.

Check out last week's business highlights in Water Cooler Finance: My iPad Beats Your Toyota.

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