Shopping . . .

refers to the practice of presenting a company’s business plan to several investors simultaneously (a.k.a. "shopping the deal"). Many people advise companies against presenting their business proposals to several potential investors at the same time. It is bad form, they say, and makes venture capitalists think the companies are not serious about working with them.

The fact is, however, that few entrepreneurs have the time to let only one venture capitalist look at their investment proposal. Most venture capitalists take six to eight weeks to conduct their investigations and make investment decisions. At that rate, one or two rejections can cripple a promising company if it pursues only one investor at a time.

The better practice is to present the company’s proposal to several carefully selected venture capitalists simultaneously, explaining to each that the company is doing this because it recognizes that venture capital firms often prefer to invest with other firms and that time pressures require the company to speak with a few select firms at the same time. Often, if an entrepreneur asks, investors will suggest other investors to whom the company can present its business plan.

Another good practice is to send an inquiry letter to a larger number of venture investors. This letter should identify the company, its business, the amount of money needed, and the way in which the money will be used. After providing this information, the letter can offer to send business plans to interested investors. Used in a mailing to venture firms that have invested in the company’s industry and stage of investment before, this process can help management identify those investors who are currently funding companies like theirs. This, in turn, allows management to concentrate its efforts on investors who are interested and more likely to fund.

The following is the body of an inquiry letter that was sent to a number of investors around the country. The investors were selected based on their histories of funding companies in the company’s industry. The letter generated significant interest and led to serious funding negotiations.

Dear Investor:

We are seeking first-stage investment capital for our business. Minimum investment requirements are $500,000 with a comprehensive package totaling $2.5 to 3 million. We have been in business for one year and can demonstrate rapid growth, achievement, and potential. All of our operating subsidiaries are involved with musical merchandise and high-tech electronic application to this field.

We are interested in taking our company public. Our management team is very experienced and already in place. I have enclosed an issue of Musical Merchandise Review (the trade publication) that features our company. This will provide you with some background information. We have made a significant impact on our industry with our merchandising ability as well as our rapid success.

Please contact me personally if you are interested in learning more about our firm.

Sincerely,

Entrepreneurs should be flexible in their search for funding and speak with lenders, individuals, family, friends, relatives, and other sources in addition to venture firms. A common mistake many entrepreneurs make when raising capital is limiting their searches to one type of investor. Many believe (mistakenly) that if they need capital, they must always get it from a venture capital fund.

Another common mistake is to assume that one investor will provide all of the debt and equity financing the company needs. In fact, many venture capital investments involve more than one investor. Many involve a separate lender who receives no equity for lending.

To improve the odds of being funded, management can separate its funding needs into debt and equity requirements and approach lenders and equity investors at the same time, asking each to commit to fund a portion of the company’s total financing needs. Getting a commitment for part of a funding is often easier than getting one for all of it. This is particularly true when each investor’s commitment is contingent upon the company securing the rest of the financing because each investor knows that his money will not be committed until another investors agrees enough with his positive assessment of the company to invest his money as well. Once a company gets its first commitment using this approach, other investors become easier to find and more inclined to join in. See: Networking, Syndication, Venture Books, Venture Capitalists.