How To Raise Venture Capital

How to raise venture capital is only for the dozen companies that will ever be successful, right? If you spend enough time listening to venture capitalists and industry pundits talk about the next big opportunities in on-line commerce you may think so. Companies in huge markets like NetFlix, Google and MySpace have become bellwethers of the next generation of high growth e-commerce companies.

But what about everyone else?

While all of the attention goes to the big boys, the reality is that there’s big money in small markets that no one is paying attention to. In fact, these markets are often more profitable and less risky to enter than the highly visible markets everyone is talking about.

Entrepreneurs often get so misdirected by the hype of creating BIG companies (by reading books like mine) that they lose sight of tremendous opportunities in smaller markets.

How to Raise Venture Capital - The Internet is a Big Place

The demand-aggregating power of the Internet is providing many of these big opportunities in smaller markets. A small idea like selling spatulas online may have been ludicrous in 1996, but it seems increasingly reasonable in 2006. OK, maybe it’s not a great idea now either, but there’s likely a market there now that didn’t exist 10 years ago.

There are over a billion people connected to the Internet. While a billion people probably don’t need a spatula, it’s not unlikely that you can find 100,000 people that do.

100,000 customers is a lot of customers to a small, focused company. It may not move the meter for a big, established company, but it can provide a nice living for a startup company looking to get a piece of the market.

Smaller Market = Better Focus

While I’m a big fan of going after big markets, I have to admit – the smaller markets allow you to be far more focused. Smaller markets allow you to zoom in on a particular audience and concentrate all of your time and capital on their specific needs. The how to raise venture capital gets better…

For example, if we were really going to sell spatulas online, we wouldn’t be spending money on TV commercials and generic banner ads across the entire Internet. We’d focus very particular placements on cooking-related Web sites and online communities of chefs.

Since the Internet is so darn big, even those “tiny” placements could potentially attract hundreds of thousands of visitors to our websites. This traffic could easily turn into a few million dollars in sales which is meaningful to a small company.

The 1 Million on 3 Million Test

While your idea may not go on to become the next MySpace, you can still make a rock star living on a much smaller revenue number. Think about this – it’s very possible for an e-commerce company to grow to $3 million in revenues within about 5 years. That doesn’t exactly put you in the Fortune 500 but it’s attainable.

More importantly, on $3 million in revenues it’s very likely that an e-commerce business can generate $1 million in profit. That means you’re taking home a million bucks per year, which incidentally is what most Fortune 500 CEOs make in base pay (even if stock options tend to be better).

I often apply the “1 million on 3 million test” to an opportunity to see if there is enough of a market to throw off a million dollars in profit. If so, I’d say it’s a market opportunity worth pursuing. You could even take a smaller version of that test and use the $100,000 on $300,000 test. You get the idea.

How to Raise Venture Capital - Sometimes Small Ideas Go BIG

Sometimes your focus on a smaller opportunity can lead to a big opportunity. Yahoo! started out by creating a simple directory of links to help people find websites. Their focus on a small, specific need actually uncovered a much larger opportunity to create a massive Internet portal.

Our opportunity may seem small today, but we have to start somewhere. Perhaps we start selling spatulas today, but over the long-term we begin adding cutlery, cookware and aprons. What may have started out as a small, focused opportunity could turn into the Amazon of Cooking. Remember, every big opportunity starts with a small company.

How to Raise Venture Capital - Focus on Profits, Not Pundits

While the industry pundits may be all excited about the next “big thing”, you can stay nice and focused on the next “small thing” that will lead to big profits for you. In many cases the best markets to tackle can be those where there is little attention, and therefore the cost of servicing the opportunity goes down with less competition.

If you can take a moment to look past the industry hype (because that’s all it really is) you’ll find that business is booming, especially on-line, in industries that most people wouldn’t even think about. Let everyone else go after the one elusive “big fish” – you’ll eat just fine on bucket full of minnows.