Pitching Venture Capitalists: The Top Five Deal-Breakers

Raising capital for a start up or an early stage company is stressful and challenging even in the best of times. Venture capitalists (VC's) invest in only a small percentage of the opportunities they evaluate, and in the current capital constrained market, the odds are even more dismal. Nevertheless, innovative ventures are being funded on a daily basis. In fact, says Geoff Oblak, General Partner at Boston-based Ascent Venture Partners, "investment activity picked up in the second quarter of 2010. 774 deals were funded for a total of $7.7B, 32% of which were classified as seed or early stage investments. " So how can you hop on the VC gravy train? I asked Oblak to share with BNET the five most common mistakes that entrepreneurs make when they approach venture capitalists. Here's his list of potential deal-breakers:Contacting every venture capitalist in the directory. "A common mistake is to assume that an idea is so compelling that any VC would be interested. The venture industry has become increasingly specialized, so you need to research which firms are the best fit for your specific business. All venture firms have public information that describes the firm, investment strategy and the firm's active portfolio. Spend time to identify the firms that have recent investments in your related markets."

Setting unrealistic expectations, especially during the critical due diligence process. For revenue stage opportunities, venture capitalists expect to see evidence of sales momentum. Presenting unnecessary, aggressive forecasts can easily backfire. A typical due diligence process by a VC can take two-six months. Far too often, entrepreneurs miss badly on the milestones in this period. Don't set yourself up to fail; this mistake can easily terminate the investment process.

Falling in love with your technology. "Entrepreneurs are technologists at heart - and that's a good thing. But you need to be able to step back, look at the greater picture and understand the customer requirements that will drive the market. Spending half of a 60-minute introductory meeting on your product demo is a big mistake. Clearly articulate the problem your company is addressing from the customer's perspective and how the potential funding will justify purchasing the solution internally."

Dismissing current and future competitors. "Don't ignore your competitors. This includes existing companies and potential threats. Avoiding this step can be interpreted by the VC as either entrepreneurial ignorance or arrogance. You have to show an appropriate level of respect for other emerging competitors and established vendors that may enter the market as it develops."

Viewing the venture funding as a transaction instead of a partnership. "Venture funding should not be viewed as a single transactional event. The VC will become a business partner with a board seat and important control provisions over key corporate decisions. This makes it even more imperative that you select the right partner for your business. Take the time to get to know your funding partner and check references:

  • What deals were successful and which ones were not?
  • How did they behave under duress?
  • Did they deliver on the "value add" promises that were made?
Quality VCs will not be offended by these questions, in fact they are welcome. It proves that you are serious about the success of your business and the relationship with the VC."

Have you raised venture capital in the past year? Tell us how you did it.