Venture Capital Investing: Financing Questions That Make or Break Entrepreneurship

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Venture Capital InvestingOk, this is a throwback for me – I am writing on a book that I really adore and have kept in my library for ten years.  And if you have questions about operating a business for investment consideration, trust me it’s the right book to have no matter what year it is.

Venture Capital Investing; The Complete Handbook for Investing in Small Private Businesses for Outstanding Profits by David Gladstone lives up to its title. It covers the steps start ups should evaluate when creating a business plan, a marketing plan, or even asking for support from family and friends.  My review copy is my own, a first edition – there is a second edition with some updates – but either edition will certainly help you organize your business for profits, growth, and proper investment.

Thorough Questions For Important Capitalization And Investment

Gladstone’s book is thorough.  As in capital letters that are truly meant to scream THOROUGH.

Venture Capital Investing is structured as a small textbook, but in reality it’s a fit for most businesses that seek venture capital or at least are thinking of it.   Even in the preface Gladstone noted that after gaining  ten years experience in venture capital, he could not find a book that elaborated on investment in small private businesses.  It may be a bit much to say a book covers everything – Gladstone admits his book is not the definitive text – but this one certainly gets it right on the things that count.

The book’s value lies in asking the questions and explaining the investment process a venture capitalist would consider before investing.  A start up team can benefit by seeing how the tips fit for the business concept being developed.

There are some human psychology and behavioral basics that get covered thoughtfully, such as how to evaluate the entrepreneur in the investment.

“People normally speak at 125 words per minute, but we can think and comprehend conversation at 500-600 words per minute.  This means we have ample opportunity during interviews and discussions with the entrepreneurs to pick up many of the subtle clues and basic information that will lead us to a sound decision about the person.”

Tips on developing background information on the business cover the gamut. The professional references segment has a set of questions asking bankers, lawyers, even landlords specific questions on the start up’s background.  These sections are a few paragraphs, and truly worth the bookmark if you need to give or gain a complete picture of the team you are dealing with.  Appendix 1 sets the questions in a convenient numbered list.

Later segments explain the financial measures that should be in place, along with negotiating a deal and exit strategy. Unless you really are in IPO planning, you can skip the exit chapter; The negotiation chapter gives easy to read overviews of what legal concerns exits.  There’s no set ratio, but good explanation of what metrics are worthwhile and why.

Understand The Investment Behavior Of An Entrepreneur

“But what if I am crowdsourcing,” you ask. “What if I am not going to speak to a VC?”  The questions posed in Venture Capital Handbook do help in those instances, because you’ll gain some ideas as to how to answer investment concerns, which in reality are business concerns.  The segment called Warning Signals of Problems, particularly the personal early warning signals from Gladtsone’s experience, is good. For example, while many experts claim running multiple businesses is great, Gladstone explains when “hustle mode” is questionable for investment:

“Sometimes an entrepreneur will come in and tell you about an investment that he is going into personally. This is always a big red flag.  Whenever an entrepreneur puts his full time and attention into anything else, you can be sure that the business you invested in will suffer.”

The book was first published in 1988 – a bit ahead of the current crop of tech-based start ups and opportunities expressed in books like Rework, The Mesh, and High Tech, High Cloud Customer Service.  But the raised questions speak to the book’s value and longevity.  I have had my copy since 2001 and still peep the text on occasion.  You’ll gain a lot from this in terms of anticipating investor questions.  I am more than certain your business will operate profitably after working through Venture Capital Investing.

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Pierre DeBois Pierre Debois is Associate Book Editor for Small Business Trends. He is the Founder of Zimana, a consultancy providing strategic analysis to small and medium sized businesses that rely on web analytics data. A Gary, Indiana native, Pierre is currently based in Brooklyn. He blogs about marketing, finance, social media, and analytics at Zimana blog.

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