In theory, new businesses have a million and one ways of raising capital. The practice however is that many possible financiers will reject your request without even a second glance.

Business funding is only viable after the business concept has been tested and achieved a level of success in the market. Untested ideas can only be funded by people who earn your trust based on your record and a clearly identified market gap. The proposed product or service should convincingly meet identified need at sustainable cost.

So who is a venture capitalist?

This is a provider of risk capital in exchange for an equity stake in your business. It is risk capital in the sense that if the business fails, he loses. Unlike banks who will call up the collateral given, this guy takes risk knowing there is a fifty-fifty chance of success or failure.

What considerations do venture capitalists use to evaluate funding applications?

Nature of product- If your product can’t sell, don’t expect anyone to fund you! The Venture capitalist needs to be convinced that the product will attract enough buyers in the market to provide the needed return.

Operational cash flows- It is hard to fund a start up business. It is even harder to fund a new concept based on paper projections and enthusiasm! Usually, you will be expected to try the concept in the market at a small scale, achieve proof of viability before financiers come on board to help you grow. You will therefore have to present some historical books of accounts to support your case.

Scope to improve efficiency- Paper projections hardly actualize in real life. Expenses will overshoot the budget, new costs will come up that must be met and some aspects of the business plan will fail after consuming resources. You should therefore have some room to cut other costs to accommodate emergent demands on resources without going back to your financiers for more money.

Expertise in production- Having a great product proposal is not enough. The idea has to be executed well in order to yield the product as per design and market expectations. The business should have the technical knowhow and capacity to produce at the minimum cost possible without sacrificing value.

Expertise in management- As an entrepreneur, you will need to manage business aspects like finances, people and marketing among others. In the absence of money to hire the professionals, it helps if you have ability to juggle all these roles. Depending on the amount of capital sought, you may be required to hire specialists or use consultants.

Board membership- To protect their investment, a venture capitalist will need to be represented on the board. This helps them monitor the business closely as well as influence decisions that may risk their capital.

Risk borne by existing owners- As a business founder, your input in the business helps others take you seriously. Nobody will want to assume 100% risk just for the promise of future profits. You have to raise part of the capital and seek additional funding so as to share part of the risk!

All said and done, general experience shows that only about 3% of venture capital applicants are successful! Don’t give up after rejection, you try and try again until you get the money!