CHAPTER 10
from humble beginnings to great enterprises

“I’VE GOT A GREAT idea for a business, but I don’t have any money to get it started! Where can I go to get money from the government or find investors to help me start my business?”

If I had a dime for every time I’ve been asked this question, I’d be wealthy enough to establish my own small-business loan company. Almost every person with a start-up business idea wishes he or she had start-up money—or more money. In fact, many people use their lack of funds as an excuse for not starting their business. Here’s what I tell them: You must not really want to go into business.

Entrepreneurs know how to do a lot with very little. Some of the biggest brand names today had humble beginnings and started with very little capital. They didn’t go to the bank. They didn’t seek free money from the government. Most of them didn’t even tap their family and friends. They used their innovative minds, their meager personal resources, and a lot of sweat equity to get their businesses off the ground.

When Steve Jobs and Steve Wozniak decided to launch Apple Computer in January 1977, Jobs sold his VW bus and Wozniak his HP scientific calculator to raise their initial investment of $1,300. And as they say, the rest is history.

I’ve met entrepreneurs who have sold family jewelry, cars, and even household furnishings to raise money for their business ventures. One woman minimized her start-up expenses by bartering her company’s services in exchange for a fully equipped office. Where there’s a will there’s a way. In fact, most small businesses start with less than $10,000 in capital. How is this possible? Because technology has driven down substantially the cost of starting and operating a business, so it doesn’t take barrelfuls of cash to get your company rolling. Don’t get discouraged if you think you’ll need a load of money to start your company. If you’ve estimated your start-up expenses and it’s more than you can raise on your own, then you may just have to scale back. You can start on a part-time basis and grow your business in phases, but you can still get there.

Break Open Your Piggy Bank

When it comes to finding funds for your business, you might as well go to your piggy bank as to any other bank. My personal estimation is that over 75 percent of start-up funds are raised from personal assets and what’s known as family-friendly funding—money loaned or invested by family and friends. But when it comes to the early start-up funds, the best place to look is in your own pocket. Look under the sofa cushions. Check your pockets. Dig through old handbags and wallets. Break open your piggy bank. Forgo that daily latte and instead set aside the money for your business start-up.

Ideally, you should begin saving money for your business startup in advance, but that’s not always an option. So when you create your business plan and estimate your start-up costs, be prepared to begin with a bare-bones launch. There’s nothing wrong with scaling back your idea and starting smaller than you had originally planned. A part-time job can help you manage your cash flow while you get the business up and running. (Yes, I realize that’s difficult, but no one said starting a business would be easy.)

But, in addition to the piggy bank, here are some other financing options to consider.

Your Home Equity

Up until recently, a lot of start-ups used home equity loans as a financing source. Home equity loans are granted based on your creditworthiness—the home owner’s—and the amount of equity in your property. Equity is the difference between the balance of the mortgage and the market value of the home—what banks call the loan-to-value ratio. So if you owe a lot on your home and the market in your area has dropped, as is the case for many people in today’s economy, an equity loan most likely won’t be an option. Banks generally provide home equity loans in two forms: a traditional lump-sum loan amount or as a revolving line of credit.

Even when the economy turns around, be careful about how much equity you use for your start-up. Because starting a business is risky, there is a high probability that you will lose the money you invest in your business. You don’t want to go into debt for more money than you can afford to repay.

Retirement Savings

Many people’s second most valuable asset is their 401(k) plan or other retirement fund. Depending on your age, when you started investing, and how the market has affected your portfolio, you could have a nice chunk of change sitting there. It’s easy to be tempted to use it for your business start-up; but before you even consider whether it’s possible and/or practical to drain that resource, think about your life stage. The older you are, the harder it is to replace your retirement nest egg. And I’m not making a political statement when I point out that there’s no guarantee that Social Security or Medicare will be available when you retire. Plus, it is nearly impossible to live on Social Security alone. The question for you: Is the gamble worth it? Most experts would say it is ill-advised to use these funds, but thousands of new entrepreneurs are resorting to this type of funding; the choice is yours.

That being said, if you determine you want to use your personal retirement funds, you’ll have various options, depending on the type of plan you have. If you’ve got a 401(k) plan, check with the plan administrator to see whether loans are allowed for business purposes. If so, the IRS permits borrowing against 401(k) plans without your having to pay taxes or a penalty on the amount borrowed. However, if you have an IRA, you can borrow against it, but only for 60 days. If you repay it one day late, you’ll owe taxes, and depending on your age, perhaps penalties as well.

Participants in a 403(B) plan can also borrow against the policy. The IRS allows up to 50 percent of the participant’s vested value, to a maximum of $50,000. However, the plans require you to repay the loan within a specified period of time, and if you leave your employer, you either have to repay the full amount or have the balance considered a taxable distribution to you.

There is one extremely complicated mechanism that some startups use, and that’s one that allows you to invest your retirement savings in your business, as opposed to borrowing against it. It requires establishing a corporation, creating a corporate retirement account with that new company, and rolling your existing retirement funds into that account. Funds are then invested in the stock of your new corporation. Again, this is extremely complex, and it requires the expertise of a professional CPA, investment counselor, or attorney. Some experts warn that this falls within the gray area of the law, so proceed with caution.

Credit Cards

Credit cards are a popular and convenient means of financing a small-business start-up. A 2009 survey from the National Small Business Association (NSBA) showed that most businesses use credit cards to help with business financing. Of the businesses responding, 5 percent used an SBA loan, 19 percent used no financing in the past year, and 59 percent said they had utilized credit cards for their capital needs. Seventy-seven percent of the respondents said they used more than one credit card, and 23 percent used four or more.

You don’t necessarily need to open a new business credit card account for your start-up. In fact, in most cases, the rates for business credit cards are higher than for consumer cards. (Business credit cards are advantageous, however, as your business grows.) My advice is to designate one or more of the consumer credit cards you’ve already got now for business use only. For record-keeping purposes, it’s important not to mingle your business and personal expenses.

While utilizing credit cards for business can be expensive, it doesn’t have to be. Watch for cards offering zero percent introductory rates. These can save you money because you have use of the funds without interest usually for one year. Also, use the online tools that let you compare rates, fees, and benefits of multiple cards so you can choose the best card for your needs. Remember, many cards give customer rewards, so think about what type of reward would be most beneficial for your new company. Cash back? Airline miles? General reward points?

Credit cards can be a lifeline for a small business. A number of years ago, my friend Janell started a business doing commercial window tinting. She landed a major commercial contract during her first year and took it to the bank to establish a line of credit so she could buy inventory and manage payroll during the project. The bank turned her down cold. So she maxed out her credit cards, along with those of other members of her family, to complete the contract; then she paid the outstanding balance as soon as she was paid by her client.

If you are confused about which card to use, check out Cardratings.com (www.cardratings.com). The site reviews credit cards from all major issuers as well as from many regional banks and credit unions. If you are interested in a business credit card, Credit Donkey provides free comparisons of business credit cards. You can search, compare, and even apply online at www.creditdonkey.com/business.

Tapping Family and Friends for Financing

Mixing money and relationships is, at best, a mixed bag. The Limited, one of my favorite trendy clothing stores, was started in 1963 by Leslie Wexner, who borrowed $5,000 from his aunt to open a small women’s retail shop called Leslie’s Limited. The Limited now operates in thousands of cities across the United States and boasts revenues in the billions. So, yes, there are a number of success stories that involved family financing. However, there are many sad tales as well.

Raising start-up or growth capital from family and friends—private investors—is not uncommon. But neither are the lawsuits and destroyed relationships that occur as a result. I’m not a fan of TV shows such as Judge Judy, but because my dad lives with me and enjoys watching them, I have caught a few episodes. Many of the programs deal with money issues among family and friends. One party says it was a loan, and the other party says it was a gift. Or even worse, the defending party denies having received the money in the first place. Quite simply, the potential for castastrophe is enormous.

Most of these financial problems occur because the transactions were handled poorly. Therefore, to avoid a relationship disaster, before seeking funds from family and friends, do the necessary preparation—it is vital. You need to approach a family/friend loan as professionally as you would any other source of funding. Be prepared with your business plan and a professional presentation. Demonstrate to your potential investors that you have a well-thought-out plan with defensible strategies and projections.

Before you begin dialing for dollars, make a list of potential investors: people you know, including family, friends, and business associates. At this stage, don’t worry about whether you think they’ll be interested; simply make the list.

Once you have your list, you can narrow it down. Here are some things to consider:

• Affluence. Can this person afford to lose the money? Keep in mind the high degree of risk involved in investing in a small business, and consider the individual’s financial well-being.

• Business experience. The best investor is someone who understands the entrepreneurial process and can evaluate your business opportunity. Often successful entrepreneurs are interested in learning about new ventures and helping new businesses succeed.

• Emotional baggage. Avoid approaching someone with whom you have had conflict in the past. A precarious relationship could lead to problems in your business. Additionally, don’t ask someone who may have to deal with repercussions from others in the event he or she loans you money. For example, a spouse who might become angry about the investment could create serious problems, and you don’t need more issues to deal with when you’re trying to get your business off the ground.

Once you have your list of top potential investors, schedule meetings with them to discuss the opportunity. (Don’t ambush them and ask for the cash at a cocktail party or family gathering.) After you meet with them and review your plan, give them time to digest the information and think it over. Never put pressure on anyone to make an immediate decision. Ask them when would be a good time to follow up, and make sure you do.

Be careful about getting your hopes up just because someone agrees to meet with you. People will often say “no” regardless of their feelings toward you. Don’t take it personally. There may be issues in their lives of which you aren’t aware, and those may make them uncomfortable loaning or investing at this time. Never get angry or make someone feel guilty, and don’t resort to emotional blackmail. Maintain your integrity. Things may change and you never know when you might need to approach someone again in the future.

Keep It Legal: Get It in Writing

If you find someone who agrees to lend you money for your business, you’ll need one critical legal document to formalize the arrangement: a promissory note. Many people, because of their relationship with you, will tell you that it’s not necessary. At the time of the initial loan, they feel good about being able to help you, so they are comfortable giving you the funds without any documentation. Not smart! It is for your protection as well as theirs that the loan is properly documented. People have short memories.

You can find templates for promissory notes online or in office supply stores. Basically, the promissory note identifies both the borrower and the lender by name, states that the lender has given the borrower a specific amount of money, sets out the repayment terms of the loan, and requires the borrower’s signature.

You will need to negotiate an appropriate interest rate for the loan repayment terms. A good place to start is using the Applicable Federal Rate (AFR) as your base. The AFR is set by the IRS as a minimum for private loans, and if you use anything less, the IRS will consider the difference between your rate and the AFR to be a gift and will impute interest on it, putting your lender at risk for gift-tax liability. The rate changes monthly, but can be found on the IRS website. Just type “AFR” into the website’s search engine.

Because the AFR is very low, your lender may want a higher interest rate. What’s the appropriate rate? Good question. That’s where you’ll need to negotiate. Most institutional investors want a higher return because of the substantial risk they are taking by investing their money in a start-up. But because you have a personal relationship with the lender, that’s probably not going to be the case. However, it’s a good idea to suggest an interest rate that will make the loan an attractive transaction for the lender. For example, if someone has money in CDs earning a very low interest rate, you could offer a higher rate for the use of those funds, which could make it an attractive investment option.

Most money from family and friends is in the nature of unsecured loans; however, you should be prepared to offer your lender collateral. Make a list of the personal assets you have that could secure the loan.

To establish a loan repayment schedule, you can utilize loan calculators on sites such as Bankrate.com. Decide when you will start repaying the loan and what, if any, penalties there may be for late payments or prepayment of the loan.

Depending on the sum you’re trying to raise for your business, you may need to consult with an attorney, as there may be state or federal regulations governing the transaction. Also, an attorney or CPA can advise you about any tax liabilities that you may incur.

Commercial Loans and Lenders

So you want to go to a bank for your financing, either now or in the future. It’s never too early to strike up a relationship with people in the financial community. Get to know people in the business by attending networking events and programs for small-business owners. Just as with any type of business dealing, it’s easier to get in the door when you already know someone.

Doing the Groundwork

Remember, banks don’t make loans—people do. So if you establish a relationship with a banker, you’ll have an advocate on your side. Even if the bankers you know aren’t the right ones to help you with your financing needs, they are good referral sources and can potentially assist you in identifying financing options.

It’s also important to know that, when it comes to making small-business loans, not all banks are created equal. You need a bank that is active in the market and is creative about putting deals together. Ask for recommendations and introductions from other businesses in your area. Your local SBA office may have recommendations as well, and on the SBA website there’s a lender tool kit to help small-business owners identify SBA lenders in their communities.

In addition to identifying those banks with a small-business orientation, you need to know whether the bank lends to businesses in your particular industry. For example, a bank may have gotten burned by too many loan defaults in the construction industry, so it may not be open to loan applications in that field right now. If you’re in construction and you know that going in, you won’t waste your time.

It’s also a smart idea for your business to establish a banking relationship prior to submitting a loan application. This means that you’ll need to find a bank that offers the types of services you’ll want for your business. The size of the bank isn’t as important as the relationship you can develop with it. In fact, small community banks today are stepping up to the plate and becoming excellent resources for small businesses.

If you don’t need a loan right away, try to establish some credit history for your new venture anyway. The bank might provide a small credit line with a personal guarantee that you could use and pay back quickly. Demonstrating the creditworthiness of your company will be helpful down the road if and when you apply for a business loan.

Your Friendly Local Banker—Not Always So Friendly

The funny thing about banks is that they are happy to loan you money when you don’t need it, but when you do need it, they’re not so eager. It has gotten even tougher to get a loan since the recent economic downturn. A July 2010 report from the National Small Business Association found that 41 percent of respondents said they couldn’t get adequate financing. That number was up from 22 percent from just two years ago.

Banks have very strict underwriting standards and guidelines. So for a start-up company with no credit history, or a small business that is struggling financially, it is nearly impossible to obtain financing from a bank—even a loan backed by the Small Business Administration (more on SBA loans later). So be prepared to hear a lot of “no”s.

As with any type of financing source, bankers need to review and analyze your business plan. Bankers don’t make quick judgments, so the process can take considerable time. If you haven’t done a good job of crunching the numbers, this is when you’ll pay the price. Loan officers may not completely understand your business, but they understand numbers, and you won’t be able to fool them. Bankers see numerous business plans and they know what makes sense and what doesn’t.

Because you won’t have any historical data for your business, you’ll need to convince the bank officer that you and/or your team have the right experience to start and grow this venture. You’ll need to be specific about the types of experience and success you’ve enjoyed, and how they apply to your ability to build your new business.

Also, banks look for a financial commitment from you, the owner. There is no way around it. You should be prepared to invest in your own business. No bank is going to loan you 100 percent of the money you need; and while the amount varies, you probably won’t be able to get a loan for more than 50 percent of what you actually need.

The bank needs to know what collateral you have available in case you default on the loan. Collateral is property or personal belongings that are pledged to the lending source to secure the interest in the loan. Every loan program, even “microloan” programs, requires some form of collateral to secure the loan.

Don’t be discouraged if you initially get rejected. Many successful entrepreneurs heard “no” many times before they finally got a “yes.” Keep in mind that a “no” answer doesn’t necessarily mean “never.” Get past the “no” and listen to the reasons the loan request was denied. Sometimes simple adjustments in your loan package, such as more personal investment, additional collateral, or revised projections, may be all it takes to close the deal.

Small Business Administration Loans

A common misconception among new business owners is that the SBA is an agency with money to loan to small businesses. The truth is that, in most situations, the SBA does not make direct loans; rather, it guarantees loans made by banks and other lenders as a means to encourage small-business lending. Therefore, to obtain an SBA-backed loan you must go through the loan application process and review with a financial institution.

The most popular SBA loan program for small businesses is the 7(a) program. It is available for a variety of general business purposes and is designated for both start-up and existing businesses. In addition to the 7(a) loan program, the SBA has other programs for microloans, export loans, disaster assistance, and long-term loans for fixed assets such as real estate. The SBA website provides a complete listing of all of its programs (www.sba.gov).

Other Sources of Money

Money may not grow on trees, but there’s more out there, available to you, if you look beyond the obvious and traditional sources.

Peer-to-Peer Lending

With the increasing popularity of social-networking sites, we’ve seen a new type of lending emerge on the Internet—peer-to-peer lending. These sites are similar to dating sites: They match people who want to borrow money with people who have money to lend.

Currently, two of the most popular sites are Lending Club and Prosper (www.lendingclub.com and www.prosper.com, respectively). Lending Club says it replaces the high cost and complexity of bank lending with a faster, smarter way to borrow and invest. Prosper notes that it allows people to invest in each other in a way that is financially and socially rewarding.

Both sites boast impressive results. As of this writing, Prosper’s website claims it has over one million members and has funded over $208 million in loans. At Lending Club, loans funded to date were $173,271,375.

Crowd-Funding

Another innovative approach to small-business funding is what has become known as crowd-funding. Would-be entrepreneurs pitch their ideas on a variety of crowd-funding websites, and people who belong to the site’s online network can decide whether or not they’d like to donate to the concept. Yes, I do mean donate. As of this writing, the Securities and Exchange Commission (SEC) does not permit these sites to provide an ownership interest—or equity stake—in the business ventures; however, it is in the process of reviewing its decision, so that may soon change.

Crowd-funding emerged about a decade ago as a way for artists, filmmakers, and musicians to raise donations from a community of online supporters. The idea has now spread to small businesses, which have watched traditional financing sources dry up in the past couple of years. IndieGoGo.com, ProFounder.com, and PeerBackers.com are a few of the most popular sites. There is no charge to post your business idea; however, the site makes money by taking a small percentage of the funds raised.

Microloans

For start-ups or small businesses looking for growth capital, micro-loans are another popular funding source. Microloans are just as the name describes: small amounts of money, generally under $35,000. Typically, microloan borrowers are categorized as prebankable—meaning their companies aren’t strong enough to obtain traditional bank loans. The loans are provided by private, public, and nonprofit organizations. For example, the SBA makes funds available to certain designated lenders (nonprofit community-based organizations with experience in lending), as well as management and technical assistance. These organizations in turn make the microloans to eligible borrowers.

While the most well-known microloan programs are likely in the United States, the concept did not originate in America. Rather, it originated in Bangladesh as a way to combat poverty. In fact, the economist who devised the program, Muhammad Yunus, won the Nobel Peace Prize in 2006. Given this history, people often refer to a microloan as a “poor loan.” Although microloans are made to people and businesses that are not considered bankable, their success rates are impressive. If you’d like to learn more, read the excellent and inspiring book Banker to the Poor by Alan Jolis, which tells the story of Muhammad Yunus and his program. It illustrates what a tremendous impact one person can have on the world.

While microloans are generally easier to obtain than conventional loans, business owners who apply for them must provide a sufficient guarantee that the loan will be paid back through cash flow, collateral, or a reasonable amount of personal credit. To find a microloan program in your area, check with your local Chamber of Commerce or economic development council.

Grants

The idea of “free money” is seductive. Many small-business owners ask me about how to obtain a grant to start their businesses.

For the most part, there is no such thing as free money. Grants are difficult and time-consuming to obtain, although not impossible. Typically, grants are available only for specific types of businesses or particular economic initiatives. Grants.gov is a good place to find and apply for federal grants. However, check with your state and local governments as well.

Angel Investors

An angel investor is someone who invests in a business venture by providing capital for a start-up or expansion. But don’t be fooled by the name. They aren’t necessarily benevolent people doling out cash to needy businesses. They are typically affluent individuals who are willing to invest in high-risk, start-up business ventures in return for equity (ownership in your business) and a high return on their investment.

Generally, small businesses turn to angel capital after they’ve exhausted their personal resources and “family-friendly” funding. According to the Center for Venture Research, during the first half of 2010, total investments made by angel investors were $8.5 billion. About 25,200 entrepreneurial ventures were funded.

How do you find these so-called angels? Today, more and more individual investors are joining angel investment groups. The Angel Capital Association is an excellent resource to help you locate such a group (angelcapitalassociation.org). Also, the Angel Capital Education Foundation provides information, seminars, and resources to help you learn about the angel investment process.

Learn as much as you can before you begin your quest for angel funding. Angel investors tend to invest in ideas and individuals who show passion and a strong desire to succeed. But enthusiasm alone won’t put money in the bank. Angels also expect you to present a solid, realistic business plan. They’re looking for good financials along with high-growth potential. Finally, if the angel invests in your business, he or she is going to hold you accountable for producing results, and will most likely want a seat on your board of directors.

Venture Capital

Of all the types of business funding, venture capital is the least understood, and it is not for the meek. Venture capital—also known as VC—is a type of equity financing typically used for high-risk and high-growth companies. A typical VC investment is for five to seven years, and the investor will expect a return on the money either from the sale of the business or by offering to sell shares in the company to the public, which is known as an initial public offering (IPO). Unless you have already owned a successful venture-backed company, it is highly unlikely you’ll be able to attract venture capital for a new start-up.

When a VC firm invests in a company, it receives a percentage of ownership in that company. The percentage depends on how large the investment is. Of course, a venture capitalist who decides to invest in your company isn’t about to hand you a check and walk away until it’s time to cash in. Rather, the VC will expect to have some control over your business.

The amount of control a venture capital firm will expect to wield varies. Depending on the size of the investment, a venture firm generally requires one or two of your company’s board seats to be filled by its members. It also often seeks to protect its investment by actively overseeing the management of your company and requiring that certain fundamental business decisions receive its prior approval. In some respects, instead of being the captain of your own ship, with VC funds you’ll find yourself “reporting” to a board of directors that will hold you accountable and expect results. Many entrepreneurs who are mavericks by nature bristle at the thought.

Worse yet, a venture capital investor may decide you aren’t the right person to serve in the CEO role! The VC firm may want to replace you with someone it believes is more experienced. Pascal Levensohn, the founder and managing director of Levensohn Venture Partners, a San Francisco-based early-stage venture capital firm that manages $200 million in assets across three funds, says most venture-backed companies experience at least one chief executive officer change as they evolve from a start-up to a fully integrated company. Typically, this situation occurs when the VC firm believes the founder does not have the operational skills to grow the company. For most company founders, that’s a difficult pill to swallow. Even when you know going into the deal that it’s a possibility, if it actually happens it can be traumatic. In some instances, the founder not only loses the CEO title but also gets fired from his or her own company!

But venture capital funds can spur major growth in companies. Think of many of the big names such as Google, Facebook, and Twitter; all have grown with VC funds. Whether or not it’s right for your business depends on one critical question: Do you want all of a small pie or a small piece of a really big pie? It’s up to you.

The Perfect Pitch: Knowing How to Present

When you’re on the money hunt, whether you’re pitching to family and friends, bankers, or equity investors such as angels or VCs, you need to know how to “sell” the opportunity just as you would learn how to sell any product or service.

You need to be able to tell your story and share your vision in a compelling way. You also need to learn how to speak the language of the investment community. Making presentations and speeches in front of thousands is a regular part of my life, so I thought pitching to investors would be a piece of cake. Wrong. It was an entirely new ballgame. Fortunately, I participated in a venture capital “boot camp” for CEOs seeking equity investors. It was an intense six-to-eight-week training program, but it was well worth the investment of time and money. Without the great coaching and knowledge I gained from the program, I never would have stood a chance in front of investors. At the end of boot camp, the participating companies presented to a group of Silicon Valley venture capitalists. Frankly, I was a nervous wreck, but the hard work paid off; SBTV.com was selected as the best investment opportunity. It was an exciting moment for my partners and me.

Now, you’re probably wondering what makes investment presentations so different from others. As the founder of your company, you could probably speak for hours about your business and how great your idea is. But if you get a face-to-face meeting with equity investors, you won’t have more than 10 to 15 minutes to convince them that your business is worth their investment. So you have to understand what their hot buttons are and then focus on those elements. Here are some tips based on my experience in making VC presentations:

• Identify your business. Explain your business concept in the context of how it solves a market need. As I mentioned earlier, some experts refer to this as the “pain.” What’s the pain, or problem? How is your business the solution? Talk about the experience your business will deliver to the market and why this is important to your target customers.

• Explain the big vision. Because VCs are interested in high-growth companies, they want your take on the big picture. What is the big potential of your business—and why do you see it that way?

• Pitch the market potential. When I discussed business planning, I talked about understanding the size of your market. When you pitch to a VC, this is where the “no kidding around” rule applies. In Chapter 6, I talked about the size of the pet industry and its growth projections. For a VC, you need to be specific about how much of that market is going to be interested in your product or service, and why. Your numbers must be well thought out and defensible. In other words, be prepared to explain exactly how you made your calculations. Vague extrapolations are insufficient. Hard data is a must.

• Describe your secret sauce. What is really going to drive your success? Is it your team? Is it proprietary technology? Is it a new process that is more streamlined and cost-effective than others? The same old way of doing business isn’t going to capture the attention of a VC.

• Provide the revenue model. How is your business going to make money? For example, with ItsYourBiz.com, our business model was based on advertising. Therefore, we demonstrated how every visitor to our site created revenue for the company.

• Present realistic financials. In a VC presentation, financial projections are critical. While they should demonstrate impressive growth, they must also be realistic. In this economy, companies that project hockey-stick growth are most likely not living in the real world. By hockey-stick growth I mean revenues that go from nothing to hundreds of millions in a few short years. Remember, VCs analyze companies all the time. They can quickly size up any deal, so you want to make sure your financials are plausible.

• Outline your use of funds. Your presentation needs to describe how you’re going to use the money you raise, and how those expenditures will drive revenue. Again, you’ll need to be specific.

• Name the price. You are asking for an investment. How much money do you need? Will this be the only round of funding you expect to need, or will you need additional rounds to build your vision?

Chances are good that you’ll make your presentation with the aid of PowerPoint. But don’t use PowerPoint as a crutch, and don’t make it too busy. Keep it simple and to the point. Try to limit the number of slides you use to between eight and ten. Make sure the last slide contains all your contact information. Practice your pre -sentation so that it sounds professional, but not memorized.

Venture capital firms don’t roll out the red carpet for everyone. If you don’t have the right connections, it is difficult to get in the door. Leverage your professional networks to identify people who may be involved in the VC world. While you can find a list of venture capital firms through the National Venture Capital Association, your chances of getting in without a warm introduction are slim to none. It’s a tough game. And keep in mind that the venture capital process is time-consuming. It can take anywhere from six months to a couple of years to secure the funding you need.

•     •     •

As you have seen in this chapter, understanding your revenue model and demonstrating how you will make money are integral factors in raising funds to build your business. In the next chapter, we will discuss pricing and process for your business to help you execute on your business growth strategy.