Here’s something interesting for entrepreneurs to consider: if only you knew in advance how a prospective funding source thinks about candidate ventures that are presented for consideration, wouldn’t that influence the way you think about your venture? Moreover, wouldn’t such knowledge also influence the way you would present your venture funding opportunity to such potential backers?

It turns out that bankers, venture capitalists, and private investors do have certain basic issues that they bring to every potential funding situation. And it’s not the issues that entrepreneurs usually come up with if asked to do so on their own. Typically, entrepreneurs make the mistake of assuming that the issues have something to do with the forecast financial performance, risk-reward calculations, balance sheet ratios, and the like. While important, it is usually not these issues that are the first determinant of whether or not a potential funding source may be interested in any given venture. Therefore, it is usually not advisable for the entrepreneur to make a presentation that emphasizes such calculations (or, worse, for a business plan to be focused around lots of financial analysis rather than on the commercialization strategy and the operations required to implement that strategy).

The first question that a potential backer must answer is not whether to invest dollars. The first question is whether to invest the time required to understand a venture well enough to consider investing dollars. The decision to invest dollars may, in fact, turn on detailed financial calculations. But deciding to invest time turns on other factors. These factors are equally important and virtually all of them are qualitative rather than quantitative.

These are called "sniff-test" issues. They try to answer the basic question "Does this venture appear to make sense?" The answer "Yes" is equivalent to the funding source saying to herself or himself "I think it is likely not to be a waste of my time to dig into this situation more deeply." It’s hardly a ringing endorsement of your venture, but at least it gets you into consideration.

Now if you knew and appreciated these "sniff-test" questions, wouldn’t you try to marshal information in such a way that your potential funding source could reach an initial decision to look at your venture in detail?

Based on experience with lots of different ventures (technology, service companies, consumer products, software, medical devices, etc.) and with lots of different funding sources (private investors, institutional venture capital, the Ben Franklin Partnership, etc.), I continue to see six key questions at the "sniff-test" stage. Though phrased in various ways, they are basically:

If these initial conclusions are basically positive, then the funding source is prepared to dig deeper and to analyze the situation based on much more detailed information. But until these initial "sniff-test" issues can be addressed, there will be no detailed analysis. For this reason, entrepreneurs should realize that presenting detailed information as part of their first contact with a potential funding source may actually be counterproductive. In short, the level of information and the form of that information should be matched to the type of evaluation that is to be done at each stage.

At the "sniff-test" stage, companies are often better off if they present "sniff-test" type information rather than a full-blown business plan. For this reason, many companies initially prepare what is called a "Venture Profile" — a two to four-page document which addresses the "sniff-test" issues and which specifically does not represent itself to be the company's ultimate business plan. With a Venture Profile, ideas get put on paper sooner than can ordinarily happen with a formal business plan process. This experience often proves to be very helpful to the company. And it certainly facilitates the "sniff-test" evaluation that outsiders need to do even if a full-blown business plan has been developed and is ready to be shared with funding sources that have satisfied themselves on the "sniff-test" issues. In short, dealing with the "sniff-test" issues seems like a "can’t lose" proposition for entrepreneurial companies.

The basic "sniff-test" issues can be been put into a simple evaluative check-list that entrepreneurs can use themselves. As noted, it may be particularly helpful (A) before you actually commit to undertaking a new venture (it can "flag" the issues that will need the most work and attention); (B) before you start preparing a detailed business plan (it can help you decide on the right type of plan to write and the relative emphasis to give the various parts of the discussion); and (C) prior to meeting with potential funding sources (it can help you design a more effective presentation because it helps you "see" the venture through their eyes). At no cost, a copy of this evaluation form will be provided on request.

In the Mid-Atlantic region from New England to the Carolinas, BLUE ROCK CAPITAL is developing a balanced portfolio focused on early-stage companies as well as appropriate seed-stage and mid-stage companies. Regardless of stage, all of BLUE ROCK CAPITAL’s investments will be selected for their ability to deliver strong appreciation in value through definable exit strategies that are achievable within a period of 3—6 years. BLUE ROCK CAPITAL expects companies in its portfolio to reflect the region’s technologies and its Managers’ combined experience of working with and investing in companies involved in information technology, service businesses, software, and various specialized technologies.

BLUE ROCK CAPITAL looks for companies with (1) a strong management team (or a strategy for putting one in place), (2) a compelling business model based on proprietary technology, products, or services and clear customer values that serve (3) growing U.S. and/or international market segments of significant size, and (4) an ability to create value through appropriate milestone-based entrepreneurial strategies and alliances.