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Creating a Proposal for Raising Venture Capital

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Most investment officers worth their salt won't meet with a potential business until they've seen a business proposal. This chapter will help you put together a winning business proposal that will have investors falling at your feet.
This chapter is from the book
  • Can You Put Together an Interesting Proposal?
  • A Complete Proposal Is One That Sells Your Company.

Many people telephone an investment officer of a venture capital fund and try to set up an appointment so they can explain their financial needs and the potential of their company. Most venture capitalists will resist such visits until after they have received the business proposal. Without the proposal, or at least a summary proposal, the venture capitalist has no idea of the details of the business. If you do meet, the venture capitalist will not be prepared to ask intelligent questions. So what is the point of the meeting?

Some people show up at the office of the venture capitalist with an inadequate business proposal in hand and want to talk about their business. Sitting in a meeting with them, the venture capitalist fumbles with the papers and stumbles through the business proposal before understanding the situation. Such visits make it difficult to have a productive meeting.

On the other hand, after reading a sound business proposal, the venture capitalist usually knows if the partners at the fund will want to invest in the business you are presenting. If the venture capitalist (VC) does not wish to invest, the VC can save the entrepreneur a trip to the venture capital company. If the venture capitalist wants to invest, then the VC is prepared to discuss the company in detail when the meeting occurs.

Some entrepreneurs believe that if they can only meet with the venture capitalist, they can "sell" their idea. This attitude is especially common in cases where the venture capitalist has read the business proposal and notifies the entrepreneur that the VC does not have an interest in investing. I have never seen a "sale" happen in such circumstances.

Entrepreneurs often believe they can meet the venture capitalist, present their idea orally, and receive financing. A meeting with the venture capitalist cannot substitute for a well-prepared business proposal that has a compelling story. After reading a strong business proposal, the VC knows precisely the type of investment they will want to make, as well as what questions still remain unanswered. For most venture capitalists, then, the business proposal is the turning point in the decision to go forward, to invest time and energy in trying to analyze the situation, and to work out a deal with the entrepreneur.

If the entrepreneur is invited to the office of the venture capitalist to discuss the business proposal, the venture capitalist is probably seeking a way to make the investment. The entrepreneur is 50 percent on the way to obtaining funds if the entrepreneur is invited to meet with the venture capitalist. Because of the emphasis placed on the business proposal by the venture capital community, every entrepreneur must understand the vital importance of having an excellent business proposal with a compelling story.

The business proposal is similar to the business plan, except that it is shorter and contains fewer details. A full-blown business plan could be several hundred pages long. It would have sections on the financial plan, the marketing plan, the production plan, and personnel needed to carry out the plans. It would discuss the strengths and weaknesses of the company in all business segments. It would discuss strategies, long-range objectives, and short-run objectives.

A business proposal is much like any other proposal in that it proposes something to someone. In the case of a venture capital proposal, it suggests how the venture capitalist and you can both make money. A business proposal is an abbreviated business plan with an emphasis on showing an outsider how the company will succeed. In many ways the business proposal is a promotional document meant to sell your company to an investor—in this case the venture capitalist. When you write your business proposal, remember that it's a promotional document. It is the sales literature for your company, and it must be compelling.

Should You Use a Broker or Consultant?

Many "consultants" and "financial brokers" prepare business proposals. The business proposals prepared by these people are known by their generic name, "packages." Brokers usually charge a great deal to assemble packages. Unfortunately, this fee is normally required in advance, and when the consultant is finished with the package it is usually a poor imitation of a business proposal. Many financial brokers merely send out sketchy information supplied to them by the entrepreneur. This usually ensures that the venture capital management will turn down the proposal.

The reason a financial broker cannot prepare an effective business proposal is simple. Brokers rarely know your business as well as you do. The business consultant cannot write a proposal without the help of the entrepreneur. By using Chapters 2 – 4 of this book you can create a business proposal that will present your business in its best light. The proposal will be submitted to a venture capital company, not a bank. Bank proposals are different, and there are many good books on preparing them. By using this book you will be able to deal directly with the venture capital source.

Of course, it is wise to have your banker, your accountant, and friends review the proposal. They may be able to suggest another point of view for you to consider. If you must use a business broker or consultant, please read Chapter 11 before you pay out a single cent to them.

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