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Lay Groundwork Carefully Before Seeking Venture Capital

March 15, 2000|JUAN HOVEY

If you're like hundreds, maybe thousands, of people in Southern California, you think you have a good idea for a start-up, and you want some venture capital to get it off the ground.

First the good news: As outlined in this space in the last three weeks, there is now more venture capital available in Southern California than at any time in the past. Most of it targets start-ups and early-stage companies in a variety of new-economy industries, along with a few old-economy enterprises, and in all likelihood more will become available over the next few years.

Now the bad: All that notwithstanding, Southern California is not the Silicon Valley, and you can't expect venture capitalists to throw money at you just because you have a good idea. Instead, you must flesh out your idea with a solid business plan and prove yourself capable of turning the idea into the humdrum nuts and bolts of a going business enterprise--because venture capitalists don't back people who can't.

What does this mean to the entrepreneur who needs venture financing? It means you have work to do before you start looking for venture backing. More specifically, you must write a business plan detailing:

* Your product or service.

* The problem it solves.

* The size of the market opportunity.

* The means by which you intend to seize the opportunity.

* The skills and background of your management team.

If that sounds simple, it isn't; writing a good business plan may well be the most difficult part of the exercise, in large part because it requires that you think your way through your idea very carefully. But you don't have to fly solo. The shelves in your favorite bookstore groan under the weight of books on the subject, including these:

* "How to Write a Business Plan" by Mike McKeever, Nolo Press, 1999.

* "The Ernst & Young Business Plan Guide" by Eric S. Siegel, Brian R. Ford and Jay M. Bornstein, John Wiley & Sons, 1987.

* "The Prentice Hall Encyclopedia of Model Business Plans" by Wilbur Cross and Alice M. Richey, Prentice Hall, 1998.

* "The Complete Book of Business Plans" by Joseph Covello and Brian J. Hazelgren, Sourcebooks, 1995.

* "Adams Streetwise Complete Business Plan" by Bob Adams, Adams Media Corp, 1998.

In these books you may find sample business plans and spreadsheets, even software to help you in launching your idea. Use the material deliberately, however. Somebody else's words can't describe what you have in mind as well as your own.

The next step: Boil your plan down even further into an executive summary of three to six pages--again, not an easy task, but crucial if you want to show yourself to be a serious player who merits the attention of a financing source.

Next, identify your likeliest sources of financing from among the many venture capital and private equity firms looking for opportunity in Southern California.

How? Check the Web pages of the firms described in this space over the last three weeks. All of them detail the industries in which they concentrate; many also list the specific businesses they back. Study this information. Don't waste time trying to sell your e-commerce idea to a venture capitalist who is interested in something else.

That done, plan your approach--and be careful here, too. Every venture capital firm in the country gets business plans over the transom, and most give them to a junior staffer whose job it is to find reasons to toss them into the trash.

You want to get your idea in front of somebody higher up, and the key is to network. Show your lawyer, your accountant, your banker your plan. Show it to your peers in the business community, to your suppliers and to your customers. Show it to everyone whom you respect, and ask for a referral to someone who might know someone at one of your target venture capital firms.

Sooner or later you will find yourself in front of an individual who buys your idea and believes in your capacity to make it real, and who can "vet" your deal--that is, get you in front of a venture capitalist with a personal introduction.

In the end, this is the only way, and there are no shortcuts. If you have a good idea and you work hard to write your business plan and get it in front of the right people, you show yourself to be a serious player--that is, one who's ready to tap into the flow of venture capital transforming the economy of Southern California.


Next Week: How one entrepreneur did just that.

Juan Hovey can be reached at (805) 492-7909 or at

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