The three rules of growing a successful business is "never run out of cash, never run out of cash, and never run out of cash". Using Venture Capitalists is one way of obtaining capital for funding growth.
The average Venture Capitalist Firm looks at 2,000 Business Plans a year and may consider 20. They will perform due-diligence on 10 and actually invest in 2 or 3. So, how can you increase the probability that your business plan will even get to the due diligence stage?
Venture Capitalists are looking for huge returns from defendable and sustainable revenue models. They are looking for proprietary technology and large barriers to entry from competitors. They are looking for experienced and successful management teams who have great references from sources they trust.
The following is a Venture Capital Test that will tell you if your Company and Business Plan have a chance of being considered for an investment. Before you consider using 2Merge to search of venture capital, please take the test. If you score above 80, then seeking venture capital may be right for you. If your score is less than 80, then seeking Venture Capital has a much lower probability.
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Venture Capital Eligibility Test
Take the test below and rate yourself from 0 to 10 on each question with a score of 10 if you have maximum certainty or scale down to 0 if you feel the question is impossible:
1. Does your business have some unique technology or service?
Score 0-10
This question will identify if you have a unique product or service that can clearly address a large market. Have you developed new software, hardware, services, distribution systems, bio-med solutions, energy solutions, or unique technology? Be prepared to defend your answer with supportive market data.
2. Can your business carve out a significant and sustainable market share against existing market leaders? Score 0-10
Venture capitalist will not invest in your company if your plan is to go up against Microsoft, Cisco, or IBM, unless of course you have innovative and proprietary technology. The risk is too great to justify the capital investment. You must justify your technology positioning and communicate how your software will open up new markets or that will give you that all important "first to market" position. If your software or services are just an add-on or variation of an existing technology where all the market leader has to do is make changes to their existing product or service, then you have little hope of being considered by VC's.
3. How much money do you need for R&D and to reach the market? Score 0-10
The typical Venture Capital fund wants to see that you require between $500,000 to $5 million funding. Above $5 million and most Venture Capital funds will want to bring in other VC's to spread the risk, and the deal gets much more complex. Venture Capital firms will want to see that you are going to maximize every penny for market and profitability growth.
4. What is the level of difficulty (10 = easy; 0 = impossible) to reach the market potential? Score 0-10
What level of difficulty will it take to reach the projected growth goals? Will you need a direct and indirect channel sales team? How much sales and technical training and consumer education will be required?
Is brand awareness required?
5. What level of customer support will your product require? Score 0-10
Venture Capitalists won't care if you have an outstanding product if it is going to cost $100 million to teach the public why and how to use it. Very complex products can require very expensive customer support. If your software requires an expensive third party install and is difficult and complex for the consumer to use, the appeal of your investment may be less. The requirement for expensive customer support may not be a deal killer if your answer to number 6 is a 10.
6. Is the market that you will serve huge? Score 0-10
In our example above, the Venture Capitalist may not care so much about customer support if the market is so large that it out weighs the cost to educate the consumers. Your software may have such mass appeal that after development it can be sold to IBM or Microsoft for re-introduction into the market under their brand.
7. Can your product produce gross margins greater than 50 percent? Score 0-10
If your profit margins are below 50% then the margin for error may be too low. If business does not operate as planned, you may not have enough margins to sustain operations or enough profit to make it worth
venture capital consideration.
8. Does your management team have the experience and skills to succeed?
Score 0-10
Venture Capitalists are not interested in your learning curve and they certainly aren't interested in risking their money on your education in growing a business. They are interested in experienced management teams with proven track records.
9. Are you and those now in your business committed to its success? Score 0-10
Has your existing Board of Directors or executive management team invested? Do you have Angel Investors? Venture Capitalists hate to be the only one with skin in the game. They are more likely to invest if they see a number of private investors already in; maybe an Angel Investor they know, or maybe a law firm they have had dealings with.
10. Can your company achieve gross annual revenues of $25 million in 3 years and at least $50 million in 5 years? Score 0-10
You must score a 10 on this question or you are wasting your time seeking venture capital. Venture capitalists are looking for investments where they can make 10 times their investment, therefore they only invest in companies with large revenue potential.
If your business cannot reach $25 million in gross annual revenues in 3 years, then STOP RIGHT HERE. You have little hope of obtaining institutional Venture Capital.
YOUR TEST RESULTS
If you scored an 80 or above with a definite score of 10 on question number 10, then you are deemed an eligible candidate for a Venture Capital Firm's review process and should engage 2Merge to seek Venture Capital funding for your company. If you scored under 80, this means your probability for VC investment is greatly reduced and you should consider alternative methods that may include engaging 2Merge to seek an acquisition of your company by a strategic Buyer.
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