According to a story passed down from antiquity, while in the bath the Greek mathematician and inventor Archimedes is said to have exclaimed, “Eureka!” when he discovered mass could be measured by water displacement. Since that fateful day in Syracuse over 22 centuries ago there have been plenty of other “Eureka!” moments generated by inventors and […]
According to a story passed down from antiquity, while in the bath the Greek mathematician and inventor Archimedes is said to have exclaimed, “Eureka!” when he discovered mass could be measured by water displacement. Since that fateful day in Syracuse over 22 centuries ago there have been plenty of other “Eureka!” moments generated by inventors and entrepreneurs alike. However unlike Archimedes, who likely had the support of Greek Syracuse city-state of his day, these visionaries had to find other sources of financial support.
In addition to banks and so-called “angel investors,” entrepreneurs can turn to venture capitalists for startup capital. However, one shouldn’t meet with any of these groups unprepared. A brilliant invention or business idea aren’t enough. A formal business plan and a clear vision for your business are also essential for success.
In a recent Entrepreneur article Kate Lister, a veteran investor, banker and entrepreneur, says anyone with an idea for a business plan should ask themselves three questions: “Can we win? Will we win? Will it be worth it?” Given that venture capitalists already know that only 20 percent of their projects at best achieve a significant amount of success, while 40 percent of the projects they fund fail outright, sufficiently answering these questions is vital to your success.
To answer the first question regarding winning, Lister asks if your business plan is capable of creating a company which can generate $50 to $100 million in revenue in a three- to seven-year time period. She recommends that you have employees experienced in such ventures as well as a set plan, specifically cautioning against “making it up as you go along.”
To determine if you will win, Lister advises to research if the market can support your growth. You should also ask yourself if larger, more established competitors can bring your product to market quicker and cheaper. You should also research what can go wrong and have contingency plans in place.
Is it worth it? To discover that, Lister recommends asking if you’re offering your investors a reasonable price and if you think they will recoup five to 10 times their initial investment within seven years. Lister stresses VC professionals look for these kinds of numbers not because they’re greedy, but because of the aforementioned failure rates they’re used to. They have to make big money on their successes just to stay in business.
If you can’t convincingly answer these three questions, you may want to consider alternate methods of funding your business plan or going back to the drawing board entirely.
The National Venture Capital Association web site has more information on the VC industry and its expectations. Although the NVCA shows VC performance showed overall improvement in the third quarter of 2010, yet another indication of economic recovery, one should still be mindful of the fact venture capitalists aren’t exactly lining up to fund the next big invention or business simply because it exists. Bringing your “Eureka!” moment to life takes more than just a bath these days.
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