Winner's circle: your chances of hitting the venture capital jackpot could depend on who you know

Entrepreneur, April, 1998 by Tomima Edmark

Your business plan is the most important tool for communicating your idea to venture capitalists. Not only does it sell your idea, but it also demonstrates your ability to plan for, organize and manage a successful business venture.

Your intellectual property rights must be clearly represented to a potential investor. All rights should be specific, protected and properly assigned to the company being formed. Any arrangement in which you or other related parties retain the rights as individuals to the basic patents or other intellectual property under a license and royalty arrangement will not be looked at favorably. The venture capitalist does not want any other agreements in place that deplete the value of the company it is helping to fund. If you have not yet received patent protection on your idea, having searches conducted and opinions rendered by a patent attorney can be very useful to a venture capitalist during his evaluation.

Most venture capitalists will sign nondisclosure agreements. However, virtually no venture capitalist will sign a covenant not to compete. At this point, therefore, you should have already filed for a patent.

A FOOT IN THE DOOR

Though you can blindly submit your business plan, the best way to approach venture capitalists is through a third party. Venture capitalists tend to look more closely at business plans that have been introduced by someone in their "inner circle."

So how do you get your name into the inner circle? Networking. If you're friendly with a successful entrepreneur who has received financing from a venture capitalist, his or her introduction of your business plan could be the foot in the door you need. Lawyers, bankers, accountants and marketing firms can also make introductions for you. Most venture capitalists have strong alliances with these professional communities. Find out with whom these professionals do business, make an appointment to see them, and sell them on your idea. If they agree that your idea is fabulous, they may provide a great introduction for you.

As a final comment, let me share with you a statistic from one of the venture capitalists I interviewed. Richard Tadler of TA Associates in Boston says he reviews an average of three business plans a day and spends anywhere from five to 15 minutes looking at each business plan before making a decision about whether to invest. That's almost a thousand business plans a year. Of the business plans he looked at in 1997, he only arranged to meet with 95 entrepreneurs. And his statistics are not unique. One venture capitalist I spoke to claimed to look at 5,000 plans a year and only picked one out of every 475 to interview. As you can see, the odds are not in your favor. Therefore, having a strong business plan and getting a third-party introduction are the most valuable things you can do to be considered for venture capital.

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Company name and description: The New Deal Playing Card Company manufactures and markets the Ergo Card, poker-sized playing cards ergonomically designed with a rounded, wavelike shape that fits the curve of the hand. The company also produces Kid Kards, which are Ergo Cards with colorful backs drawn by art students at the Lawrence, Kansas, Arts Center. A portion of Kid Kard's sales goes toward a scholarship fund for these students.