The 10 Commandments of Raising Venture Capital

Given the state of the financial markets, the world and the general gloom and doom in the
press today, raising venture capital in this market may seem like a kamikaze mission. But for
the fearless entrepreneur set on raising money, there are definitely some rules to help tilt the
odds of success in your court. I call them the Ten Commandments of Raising Venture Capital.

By David V. Alhadeff, Managing Partner of Velocity Capital LLC

Rule #:1 Know your VC

Not all VC’s are created equal. Each firm has its own set of investment guidelines that it
follows when making investments. Typical rules include geographic focus, investment stage
preference, lead/follow-on investor, minimum and maximum investment amount, industry focus
and board seat requirements. Make sure that the strategy of the firms you are targeting match
your funding needs.

Rule #2: Make a personal introduction

Cold calling does not work. Find a business or personal acquaintances that can make an
introduction such as lawyer, accountant, CEO of the VC’s portfolio company, or banker. VC’s
are looking for good investments and tend to prioritize personal introductions.

Rule #3: Get to the point

At your first meeting get directly to the point. Be crisp, concise and articulate about your
business. Be clear on what you do, who buys your products, how you make money, and how
you plan to grow. Keep powerpoints to under 12 pages and executive summaries under 2
pages.

Rule #4: Have the right team

Emphasize the quality, passion and experience of the founding team. You are not expected to
have a complete executive team, that is what the new money is for. You are expected to have
passion, industry expertise and proven start-up experience (making money for other investors).

Rule #5: Differentiate yourself

Everyone has competitors. Those that say they have no competitors are not believable.
Directly present yours and the measurable difference your product or service offers.

Rule #6: Show the ROI

What is your value proposition to the customer? How does your business save time or money
(or both). What is the cost to the customer of not using your product or service?

Rule #7:Address the real market size

Who exactly are your customers (i.e. what exact position in a Fortune 100 company?). What
is the real market you are serving? Everyone is entering a $50 Billion market in 2004 according
to Jupiter. What is the exact size of the addressable market of purchasers of your product or
service. Show a bottom-up analysis of how many customers you need to hit your numbers.

Rule #8: Know your numbers

What is the exact use of proceeds? What is the amount of money/time to break even? Explain
the key matrixes that drive your business such as number of customers, sales per customer,
cost per customer etc. Be prepared to discuss what you would do with more money…how you
could make it with less.

Rule #9: Honest Exits

Assume the IPO door is shut and that the only way for your investors to realize a return (what
it is all about) is an acquisition. Be prepared to provide tangible examples of recent and
related acquisitions. Also, provide examples of at least three different categories of potential
acquirers (suppliers, distributors, competitors) and five companies in each category to show
that there are plenty of viable of exit options.

Rule #10: Valuations come last

It is better to raise more money for growing the business at a lower valuation than not enough
(or no money) and go out of business. Early stage valuations are subjective, get over it. Your
first round of investors will probably own 30%-50% of the business.

David V. Alhadeff is Managing Partner of Velocity Capital LLC (www.velocitycap.com), a Seattle-based Venture Capital
Fund. Velocity focuses on investing in northwest-based growth companies in a range of technology and
non-technology industries.

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