Entrepreneurs setting out to raise venture capital face a daunting task and must understand the venture capita process to have a chance of capturing VC financing.

First and foremost, it is critical to understand that the process is acutely competitive. The typical venture capital firm reviews hundreds, even thousands, of opportunities each year and invests in only a tiny fraction of them. The vast majority- perhaps 90% -receive little more than a cursory review before rejection. The remainder are explored more deeply, but even less than half of those receive deep consideration.

So, how does an entrepreneur "crack the code" and capture the attention of quality venture capitalists? Luck plays an important role, but a great deal of the process is within the entrepreneur's control.

Over the Transom ...and into the Trash

It is axiomatic in the venture capital industry that good opportunities do not get lobbed over the transom. As such, unsolicited proposals are viewed with skepticism and receive little attention. Instead, entrepreneurs should seek a referral from someone familiar to and respected by venture capital firms. These might include accountant and lawyers, intermediaries, other entrepreneurs, angel investors, etc.

The Business Plan ...Don't Leave Home Without It

It is essential that the company has a coherent, thorough and understandable Business Plan. Although many venture capitalists prefer just the Executive Summary at the time of introduction, it must be based upon a complete plan. A venture capitalist views this plan as both a "blueprint" of the business and a measure of the management team's ability to plan, organize and communicate its strategies, tactics and rationale.

Don't Try to Drive Square Pegs into the Venture Capitalist's Round Hole

Venture capitalists have tightly defined investment profiles; if an entrepreneur does not fit the profile there is no chance of capturing venture capital financing. The key characteristics of companies attractive to venture capitalists are:

• Management with relevant experience. If the full team is not in place, agreement as to the empty slots and when they will be filled;
• Proprietary products or services, preferably with an "unfair" competitive advantage;
• A large, growing and established market;
• The opportunity to build a large company relatively quickly. Typically, venture capitalists prefer opportunities where revenues can reach at least $50 million within the first five years;
• Projected investment liquidity within a few years -usually an IPO or sale of the business.

Realistic Valuation Expectations

Valuations are driven by two major variables -the private equity market environment and the venture capitalist's return requirements. Obviously, the first is outside the entrepreneur's control, but should not be outside the entrepreneur's awareness. Nobody pays $10 per pound for steak if it sells for $5/pound everywhere else.

Each venture capital firm has its own return requirements, largely based upon the perceived risk of the investment -maturity of the company, management experience, how proven the product, demonstrated sales, etc. All terms are negotiable, of course, including valuation. But a venture capitalist will want to know early in the process that the company and the investor are at least in the same church, even if not in the same pew. There is little reason to proceed if the venture capitalist's early take is that a company's value is in the $10 million ballpark and the management team believes it to be $100 million.

Raising venture capital frequently is a long and arduous task...and it is not appropriate for many young companies. But for those that fit the venture capital profile it can be very rewarding and, often, the key to success. Institutional venture investors not only provide significant risk capital -far beyond the capacity of individual investors -they are patient investors familiar with the challenges of building a business and are prepared to provide ongoing financial support. Perhaps even more important, by dint of having funded and supported many small enterprises, they add value and support to the entrepreneurial management team in a host of ways.

This article is provided by Anthem Capital Management through the efforts of Bill Gust. Managing General Partner. For more information go to Anthem Capital Management’s web site at www.anthemcapital.com.