Are You Sexy Enough to Attract Venture Capital?

For instance, the existence of mass-market retailers appears to offer inexpensive and wide distribution for many consumer products and even some technology products. However, hidden costs often make these channels prohibitive, such as the need to supply thousands of stores with inventory, the right to return unsold product, "slotting" fees or mandatory cooperative advertising costs.

Companies that have joint-venture marketing opportunities -- that is, the chance to move product through someone else's distribution network or take advantage of someone else's direct and proven access to the market -- are typically more attractive to venture capitalists than those that must invent their distribution or pay high fees to use someone else's resources, Martinson says.

5. Can this product be distributed without significant support? Complex products or services usually require customer-support organizations that are expensive and sometimes difficult to establish and maintain. For instance, given rising concern over security, a relatively low-tech home alarm system sold through mass-market distribution channels might appeal to an investor. But can customers install the system themselves, or must a third party be involved?

If so, says Martinson, "it's a much harder business to orchestrate and much less appealing because of the involved costs and their impact on the margins." But the need for customer support need not kill a deal. Sometimes a third party wants to get involved because it smells opportunity.

For instance, SAP, one of the world's largest applications software companies, relies heavily on Big Five accounting firms to install and support its products. For SAP, funds that might otherwise go to a massive customer-support organization go instead to the bottom line.

6. Can the product or service generate gross margins of more than 50%? Gross margins are defined as sales less cost of sales. If that number is less than 50%, it's a turnoff for most institutional venture investors. Why? Because it's difficult to pay all the selling, general and administrative expenses and generate a healthy profit at this level. It's much more likely that a company will deliver the required high-operating or net margins if its gross margin is above 50% to begin with.