When launching a new small business, the entrepreneur will often look to venture capital as a source of funding. Here are 3 tips to ensure you can secure venture capital funding when submitting your business plan:
- Send your business plan to the right people
- Make sure your business has the potential to be profitable enough
- Remember to include an exit strategy for your investor
Venture capitalists tend to specialize in certain types of businesses. Some will specialize by industry, investing only in energy startups, for example, while others will look for a certain size of company to invest in. It pays to do some research to determine who the venture capital backers are for your industry, before you start submitting your business plan. Venture capitalists who are not specific to your industry can provide recommendations to make your plan more attractive to other venture capitalists. However, it would naturally be a mistake to send your plan to potential investors who won’t even consider it.
Most venture capitalists are looking for a return of around 5 to 10 times their initial investment. For example, a $2 million investment in a business should generate a return of $14-20 million after about five years. To satisfy these requirements, it is generally necessary to have a business that has the potential for a high rate of return on the amount invested. If the rate of return can reasonably be expected to be lower, as in the case of a clothing retailer, it is probably best to seek an alternative source of financing, such as a commercial or investment bank.
Venture capitalists generally don’t want to be involved in a new venture for an indefinite period of time. Most plan to leave the new company after about five years, so you should provide a clear explanation of how this can be achieved. There can be a variety of reasons for this; Some venture capital managers require that shares be periodically sold to purchase other offerings. However, by showing you understand the limited time frame for many venture capitalists, you automatically make your plan more attractive than those who don’t.
In short, by sending your business plan to the right people, recognizing what rate of return is necessary for venture capitalist involvement, and including an exit strategy, you can improve your chances of obtaining venture capital funding for a business. new and growing business.