Seven Secrets to Raising Venture Capital

08/10/2010 03:39 pm ET | Updated May 25, 2011

Venture Capital firms screen through hundreds--if not thousands--of investment "opportunities" each month. To differentiate yourself from your competitors, it's important to avoid the classic mistakes companies make while trying to sell themselves to VC firms and to learn what steps you can take to have VCs wanting to invest in your idea. As both an entrepreneur and venture capitalist, I've sat on both sides of the table. Here are the seven secrets to what VCs are looking for as they consider who to invest in:

1. Track Record

Which team would you bet on if the LA Lakers played a Division III team? The same holds true for venture capital firms; VCs prefer to bet on experienced winners. This means that if you're a kid right out of college, even if you have a great idea you'll most likely be written off as "likely to fail." This is because already established winners tend to win, while unknowns are far more likely to lose.

But even if you are an unknown just starting out, there's still a chance that you could score VC money -- but the hurdles are going to be higher.

2. Market Size Matters

Most VCs want to see a $1 billion dollar market opportunity where a $100 million dollar company can be developed. VCs have finite time and resources so they prefer to focus on big home run opportunities. If you find yourself in a smaller market, focus on getting money from angel investors who will be quite happy building a $10 million dollar company.

3. Ideas are Cheap

Entrepreneurs believe the value is in their idea, but every VC knows that ideas are cheap. To really sell your idea to a VC, have at least a tangible prototype that the VC can touch and feel before asking for funding. And if you can reference 10 happy--and paying--customers, VCs will be much more inclined to want to fund you.

4. Rule of 10s

VCs want to know that your product is going to solve the market's problems in the best or most efficient manner. Are you 10 times better or 1/10th the cost of your competitor's product? Being 20% better then a Microsoft product isn't going to convince a Fortune 500 company to bet their future on an unknown startup that probably won't be around next year. A "little better" won't cut it.

5. Go Local

VCs have finite time so they don't want to spend all their time traveling to see the companies in which they have invested, and they're even less interested in traveling to see a company in which they probably won't even invest. Look for VC firms in your region that actually care about your market space. In the same way that VCs on Sand Hill Road -- notable for the concentration of venture capital firms in California's Menlo Park -- have tended to invest close to home, there are a lot of regional VC firms sprouting up to take advantage of entrepreneurial ideas in their area.

6. Beware of Brokers

Most entrepreneurs hate the thought of having to go out and raise money, so they can't believe their seemingly good fortune when a broker offers to raise the money on their behalf. But beware -- I guarantee there will be an upfront fee, a monthly retainer fee, success fee and stock warrants. As a venture capitalist myself, I have never seen a VC conduct a deal through a broker. VCs want a direct line to the principals, and that's you.

7. Do Your Homework

VC funds are often very focused on certain industries and company stages. Don't waste your time -- or the VC's -- by pitching your hot Internet company to a VC firm that only invests in biotechnology. Similarly, if you have an early-stage company, don't pitch to a VC firm whose stated purpose is expansion finance. Look for VC firms who care about your industry and company size.

Kevin O'Connor, a graduate of the University of Michigan, has been on both sides of the VC table. As an entrepreneur, he was founder and CEO of DoubleClick, founder and vice president of research at the Intercomputer Communications Corporation and was the initial investor for Internet Security Systems. O'Connor previously headed his own VC firm, O'Connor Ventures, where he has reviewed hundreds of opportunities but has only invested in a few companies. O'Connor, who is an avid skier, is currently the founder and CEO of a new startup called, which is an objective comparison engine.

Over the past ten years, he's balanced his time between family and venture investing in next wave technology companies like Meet-Up, 9Star and Travidia. He also completed "The Map of Innovation, Creating Something Out of Nothing," a book that outlines his process to find the next big idea.