With a few exceptions, many of the things bankers and venture capitalists look for in a company are very similar. When I stumbled upon Scott Maxwell’s article at Inc.com outlining the 6 Reasons a VC Will Turn You Down, it piqued my interest. I know Maxwell, founder and senior managing director of OpenView Venture Partners. I was working in one of their portfolio companies at the time I met him and found him to be a very smart and savvy guy.
If your not careful, it’s easy to lump business owners looking for a small business loan and their companies into a couple of really broad categories:
- Those that would be fund-able with venture capital or equity investment
- Those that might not be interesting to a VC or other equity investor, but are creditworthy
- Those a VC wouldn’t be interested in working with and don’t have many credit options
The fact of the matter is likely that there is some overlap as entrepreneurs who can work with equity investors and turn to debt financing for funding as well. Regardless of where you might fall or overlap in the above three categories, I think Maxwell’s list is a great representation of what a venture capitalist would be looking for and even relates to what a banker or other lender would be looking for too. Here’s his list along with my two cents:
- Market Size: “If the market is large enough to support rapid growth, I’ll take the next step,” says Maxwell. A VC is looking for companies that have the potential to scale growth rapidly with the infusion of cash. That’s not necessarily what a lender is looking for, but they do want to know that the money you’re trying to borrow will reap the rewards you hope it will. In other words, is the market big enough to support growth for your company?
- Competitive Advantage: According to Maxwell, “If an investor sees a small market with a bunch of similar companies fighting for those customers, he or she will likely tune you out.” Equity investors are very interested in the potential for your business to grow exponentially by capturing additional market share or create new markets. Although the loan officer might not be interested from the same perspective as an equity investor, any information you can give them that will minimize their risk in offering you a loan improves the odds for your business. There are lenders who will stick their neck out for a less-than-perfect borrower if they perceive that borrower has a product or service that has a pretty obvious competitive advantage.
- The Teams Ability to Execute: “Venture backers are looking for both experience and raw horsepower in different relative levels that depend on the age of the team members and the needs of the company,” says Maxwell. Lenders really are looking for the same thing. Depending on the loan, along with your business plan most lenders will want to see the resumes of the principles that will be financially responsible for the loan. They want to know that the “team” will be able to execute—even if that team is only you.
- Economic Model: For expansion-stage venture capitalists, no revenue is almost always an immediate deal breaker,” he says. This is particularly relevant when seeking financing to fund your small business. In most cases, no income = an inability to make the loan payment next month. Lenders might not ask about your economic model, but they do want to know that you have sufficient income to make your loan payment.
- Entrepreneurial Vision: Maxwell wants to know, “Does the long-term plan make sense for an investor?” Your banker or other lender will want to know your plan too. In fact the biggest complaint I hear from lenders when I speak to them is that potential borrowers come to them without a plan. Taking the time to develop a thoughtful plan will greatly improve your odds of success when approaching a lender.
- Exit Options: Although lenders are seldom interested in your exit strategy, VCs are. “If you can’t articulate your exit strategy or don’t have one, investors will be less interested in your business.”
Just like a lender, a VC is trying to balance risk and reward. Although the upside for a VC is likely far more than the interest earned by a lender writing a small business loan, if you’ve done your homework, have a healthy business, and reasonably good credit, you can present your desired small business loan as a relative low risk to your lender. Although Maxwell’s list is directed to entrepreneurs looking for equity financing, many of the deal-breakers he outlines will do the same at the bank. How do you and your small business stack up?