For the past seven months, I have been trying to raise capital for a new venture. Luckily for me, I have worked for and with venture capitalists and private investors. I also wrote a book on venture capital. All of this translates into access -- but not a term sheet.
For those of you who don't know what a term sheet is, it is a preliminary agreement of what investors are willing to invest for a piece of your company.
What does it take to get a term sheet? Urban legend has it that to get a term sheet you either have to sell an appendage or become a "made man" in one of the five organized crime families in New York. The truth is that you need 10 things.
. Your concept has to have obscene revenue potential and solve the mother of all problems. The business plan has to be well thought out and succinct. The number of pages should be between 25 and 35, including financials.
. You need a credible management team. The team members' resumes have to show experience, including at blue-chip household-name companies. On my team, I have a former division president of American Express.
. You have to know the right people. Yes, your dad was right when he told you it isn't what you know but who you know. In my case, I needed a strategic investor with a strong understanding of how to build financial service businesses who could raise truckloads of debt financing.
. You need an internal champion at the venture fund to tout you and your concept as one of the best ideas he or she has ever seen. In my case, I had a young man who was rabid over our concept. He drove the whole process and got other people excited.
. The investors have to personally like and trust you. Just because you have a great idea doesn't mean the investors will open the briefcase full of Benjamins. The investor has to feel comfortable with the entrepreneur because, unfortunately, the business will have its ups and downs. Investors need to feel they would do anything to help the entrepreneur be a success.
. Your timing has to be right. This is where the stars, moon and sun all line up perfectly. Let me give you a few examples of failed deals for me:
- E-Commerce Play: Five years ago, I co-wrote the business plan for a very exciting e-commerce venture that credit card giant Advanta was salivating over. One of Advanta's top venture people read the plan, met with us in New York and invited me and the founder to present to the powers at Advanta. Three days before we were to present, our champion at Advanta, a British fellow, tragically lost his father, and the company immediately lost interest.
- Magazine: Twelve years ago, I developed a business plan for a national magazine. I lined up an internal champion at the venture fund. Unbeknownst to my champion, the managing partner had just lost $1 million of his own money in a magazine deal.
. You have to be realistic the amount of equity you are willing to give up to obtain your dream. Believe me, you are not going to be happy with the amount of equity you are going to have to part with. But if you want to get a deal done, you have to be practical and take a long-term view.
In our case, I told the investors we would sell them 60% and we would take 40%. I bet a lot of you would like to invite me to a poker game because I must be the dumbest guy who ever raised money. The reason I was readily willing to give more than half of the company to start was to get over the perception that every investor has: that the entrepreneur will be immovable and difficult to work with.
I have literally watched dozens of entrepreneurs blow their chance at funding by insisting on owning a majority share of the company. Keep in mind the endgame: Get the company off the ground with the hopes of selling it to the public or a private company for significant money.
. You must have the patience of an alligator waiting for prey. Most investors are juggling a multitude of existing portfolio companies and closing deals on other investments, so you are left staring at your Blackberry hoping to get the call that will move you forward to an offer.
. Keep sending positive information. In our case, we had prospects call us asking when our service would be up and running. We would forward the e-mails to our potential investors.
. Don't throw yourself at venture capitalists' feet begging for the money. At the same time, don't take a long time to provide information or the investors will question your desire and work ethic.
Finally, if you get a term sheet, which less than 1% of entrepreneurs are lucky enough to receive, have knowledgeable people look it over and provide feedback. My initial view of our term sheet was negative until I sat back and realized I wasn't taking any financial risk. My outside advisors, all experienced in such matters, gave the deal a thumbs up with a few suggested tweaks that turned out to be very helpful.
Kramer is the author of five business books on topics related to venture capital, management and consulting. He is a faculty member at the Wharton School of Business at the University of Pennsylvania and the veteran of over 20 startups and four turnarounds.