PBI-How to Raise Venture Capital

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From the Desk of Michael Kissinger

Getting Venture Capital in 90 Days or Less

You have everything you need to make your dream business a success except the funding. Isn't that what venture capitalists are for? This will help you how to get their money.

Venture Capital

Venture capital is a type of equity financing that addresses the funding needs of entrepreneurial companies that cannot seek capital from more traditional sources.

About Venture Capital

Venture capital is a type of equity financing that addresses the funding needs of entrepreneurial companies that for reasons of size, assets, and stage of development cannot seek capital from more traditional sources, such as public markets and banks. Venture capital investments are generally made as cash in exchange for shares and an active role in the invested company.

Venture capital differs from traditional financing sources in that venture capital typically:

Focuses on young, high-growth companies Invests equity capital, rather than debt Takes higher risks in exchange for potential higher returns Has a longer investment horizon than traditional financing Actively monitors portfolio companies via board participation, strategic marketing, governance, and

capital structure

Successful long-term growth for most businesses is dependent upon the availability of equity capital. Lenders generally require some equity cushion or security (collateral) before they will lend to a small business. A lack of equity limits the debt financing available to businesses.

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Additionally, debt financing requires the ability to service the debt through current interest payments. These funds are then not available to grow the business.

Venture capital provides businesses a financial cushion. However, equity providers have the last call against the company’s assets. In view of this lower priority and the usual lack of a current pay requirement, equity providers require a higher rate of return/return on investment (ROI) than lenders receive.

Understanding Venture Capital

Venture capital for new and emerging businesses typically comes from high net worth individuals (“angel investors”) and venture capital firms. These investors usually provide capital unsecured by assets to young, private companies with the potential for rapid growth. This type of investing inherently carries a high degree of risk. But venture capital is long-term or “patient capital” that allows companies the time to mature into profitable organizations.

Venture capital is also an active rather than passive form of financing. These investors seek to add value, in addition to capital, to the companies in which they invest in an effort to help them grow and achieve a greater return on the investment. This requires active involvement; almost all venture capitalists will, at a minimum, want a seat on the board of directors.

Although investors are committed to a company for the long haul, that does not mean indefinitely. The primary objective of equity investors is to achieve a superior rate of return through the eventual and timely disposal of investments. A good investor will be considering potential exit strategies from the time the investment is first presented and investigated.

Angel Investors

Business “angels” are high net worth individual investors who seek high returns through private investments in start-up companies. Private investors generally are a diverse and dispersed population who made their wealth through a variety of sources. But the typical business angels are often former entrepreneurs or executives who cashed out and retired early from ventures that they started and grew into successful businesses.

These self-made investors share many common characteristics:

They seek companies with high growth potentials, strong management teams, and solid business plans to aid the angels in assessing the company’s value. (Many seed or start ups may not have a fully developed management team, but have identified key positions.)

They typically invest in ventures involved in industries or technologies with which they are personally familiar.

They often co-invest with trusted friends and business associates. In these situations, there is usually one influential lead investor (“archangel”) those judgment is trusted by the rest of the group of angels.

Because of their business experience, many angels invest more than their money. They also seek active involvement in the business, such as consulting and mentoring the entrepreneur. They often take

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bigger risks or accept lower rewards when they are attracted to the non-financial characteristics of an entrepreneur’s proposal.

The Venture Capital Process

A startup or high growth technology companies looking for venture capital typically can expect the following process:

Submit Business Plan. The venture fund reviews an entrepreneur’s business plan, and talks to the business if it meets the fund’s investment criteria. Most funds concentrate on an industry, geographic area, and/or stage of development (e.g., Start-up/Seed, Early, Expansion, and Later).

Due Diligence. If the venture fund is interested in the prospective investment, it performs due diligence on the small business, including looking in great detail at the company’s management team, market, products and services, operating history, corporate governance documents, and financial statements. This step can include developing a term sheet describing the terms and conditions under which the fund would make an investment.

Investment. If at the completion of due diligence the venture fund remains interested, an investment is made in the company in exchange for some of its equity and/or debt. The terms of an investment are usually based on company performance, which help provide benefits to the small business while minimizing risks for the venture fund.

Execution with VC Support. Once a venture fund has invested, it becomes actively involved in the company. Venture funds normally do not make their entire investment in a company at once, but in “rounds.” As the company meets previously-agreed milestones, further rounds of financing are made available, with adjustments in price as the company executes its plan.

Exit. While venture funds have longer investment horizons than traditional financing sources, they clearly expect to “exit” the company (on average, four to six years after an initial investment), which is generally how they make money. Exits are normally performed via mergers, acquisitions, and IPOs (Initial Public Offerings). In many cases, venture funds will help the company exit through their business networks and experience.

How Long Will It Take My Company to Raise Venture Capital?The simple answer is that 6-9 months is a prudent amount of time to allow for raising money, although there is significant variation between companies (and over time). My advice would be to allow more time than you think you need and to be honest with yourself about the extent to which you can hope to be faster than average.

Many companies that set out to raise venture capital fail in their endeavors, but usually only after trying for a year or more.

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The average company is prudent to allow nine months from deciding to formally start raising money to the point when the cash is needed.

Nine months probably sounds like an awfully long time, certainly that is the feedback we get when we pass this message onto the CEOs in our portfolio, but it pays to be prudent.

Raising money in a hurry against a hard deadline (e.g. cash runs out) is a demoralizing process that is unlikely to end with a happy result. Investors can sense desperation, and it is not attractive.

You will have heard stories about companies raising money much faster than nine months, but that is very much the exception rather than the rule. The prudent course of action is to allow nine months, however, if your business/fundraising process has any of the following characteristics you might be able to get away with less (which will allow you more time to build value and get a higher valuation):

Company and founders already well known to VCs – this is the biggest lever available to management Company performance is stellar on key metrics (typically either revenue or traffic growth) Market and/or sector is hot

A realistic assessment of these factors is critical and the vast majority of mistakes I’ve seen have been to err on the side of optimism rather than pessimism. Most VCs have closed deals far quicker than 6-9 months and in early discussions will quote their fastest times to you, on the assumption that the company and market will be hot and they will have to move as quickly as they can – be aware that they are talking the fastest likely time rather than the average (note there is no dishonesty here – in the early stages of discussions excitement is typically high on both sides and everyone is operating on the assumption that the deal is hot).

Remember that for VCs a quick decision is almost always a less thorough one. If you are lucky enough to have a super-hot company then you might manage to raise money in 2-3 months. See: Venture Capital Survey

The deal process has two parts, pre-term sheet and post-term sheet.

The post term sheet part should largely be for legals and confirmatory due diligence which shouldn’t take more than 1-2 months. The process of getting to term sheet can be much longer, as it involves writing an investor presentation, contacting VCs, getting them interested in a meeting, scheduling the meeting, and then scheduling follow ups, and building excitement and momentum within the VC fund. Each of these stages can take weeks.

Raising Venture Capital With a 30-60-90 Day Plan

Overview of Venture Capital Considerations

The six sets of things venture capital investors look for, in order of importance, are:

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2. A large, rapidly expanding market3. A brilliant idea or technology that can be commercialized4. A well-prepared and focused business plan that provides clear direction 5. A strategy that has a strong sustainable competitive advantage 6. A reasonable price per share

There are 3 Phases for Venture Capital Funding1. Preparing2. Closing3. Funding

Stage 1-The Learning & Preparing Stage Prepare Extensively Before Approaching Investors

Once you have raised your seed round of funding and perhaps gotten to the point where you have your product and have users or even have customers, and you’re ready to raise half a million dollars or more, that’s when you can start going to early stage venture capital funds. This is what is known as your Series A round of funding.

As you go into your second round or third round of funding, your Series B, and you need between $5 and $25 million (known as growth stage venture capital), then mezzanine debt opens up to you.

Once are five or six years in to your growth, you have built out your product and generated more than $20 or $30 million in revenue, and you’re looking for more than $25 million, going to late stage venture capital funds and private equity shops is often possible.

If you ever end up needing more than $50 million, which will only happen if you’re trying to do something very technologically complex or if you’re a large publicly traded company, then you can go to large private equity funds or public markets like NASDAQ and the New York Stock Exchange and sell shares to the public in exchange for investment in your company. You can do a private investment in a public entity or a pipe through an investment bank or you can issue corporate bonds, which are interest-bearing notes from large companies, through an investment bank.

Regardless of where you seek capital, a rule of thumb for most companies to follow is: do your best to avoid raising too much money. Don’t raise more than your current annualized revenue.

Your Negotiating Power Considerations

Your negotiating power is based on a number of factors, such as your level of need for the money; your previous business experience and success; the people around you and their experience; the quality of your advisors; the product and technology; the market; the competition; and particularly the competition for your funding (if you are considering multiple term sheets, oftentimes you can greatly increase the valuation and greatly improve the quality of those terms).

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Term Sheets Considerations

When you receive an investment proposal from a venture capital fund, you get what’s called a term sheet. A term sheet is a summary of their desire to invest in your company and the terms at which they want to invest.

The most important terms on the term sheet include: valuation, option pool size, liquidation preferences, founder revesting, veto rights, the type of preferred stock (whether it’s straight preferred or participating preferred), and the number of board seats. I’ll explain each of these terms below.

Many entrepreneurs think that valuation is the most important term and that the highest valuation is the best valuation. While valuation is an important term, it is only one of many important terms. You shouldn’t simply take the term sheet with the highest valuation on it. There are often other terms that end up affecting the true return of the investors and the true cost of capital for your firm. And you need to factor in things like firm reputation, firm access to IPO markets, and firm experience in addition to the terms in the term sheet.

Terms in a Typical Term Sheet

Let’s briefly go through each of the key terms you’ll find in a typical term sheet.

Valuation is simply the price at which a firm is going to invest in your company. If they’re investing $5 million at a $10 million valuation, they’ll end up owning approximately one-third of the stock because they invested $5 million in a company that’s now worth $15 million.

Option pool size is the amount of additional stock that the venture fund requires you to create in order to provide incentive structures for future employees that come into the company. For an early stage company in their early stage investment, a venture fund might require an option pool as high as 15 or 25%. In later stage investments, particularly once you have revenue and you’re going after your Series B or Series C, the option pool requirements are more typically in the 1-5% range.

Liquidation preferences simply means that in the case of company liquidity (in other words, if the company goes bankrupt and the remaining assets are turned into cash), who gets those assets first? Often, liquidation preferences are for dealing with the downside scenario. In a capitalization table (or capitalization chart), which is simply a chart of accounts for who has put money, in the form of equity and debt, into a company and who owns shares in that company, often the debt providers are senior to the equity providers.

What that means is that in the case of bankruptcy, the people who provided debt (the creditors) get their money out before the people that provided equity. For most investors, it’s important to be as high in the cap chart as possible. So they may want to make their investments “preferred investments,” which are senior in the cap table to common investors who have have common stock, typically the employees of the company. It’s important to pay attention to this question of who gets their money out first as you negotiate your term sheet.

Founder revesting of shares is also an important term. When you, as a founder, work at a firm for a number of years, you often earn your equity over time. When you provide options and stock to employees and to founders, often you’ll provide it over the course of four years.

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For example, if you were to be earning 40% of a company’s stock over four years, you’d probably get 10% every year, on a monthly or quarterly basis. But sometimes, investors will restart the clock on your vesting of shares and force you to revest. In many cases, I find that to be unfair to the founders who have already earned part of their shares.

Veto rights are another important topic to look at and negotiate carefully. Veto rights are simply what an investor can say no to and what they can stop you from doing. It’s common for investors to have a veto right on something like the sale of the company or the issuance of a lot of new debt. But you pay careful attention to what they can block, particularly if there is a block on a merger or acquisition. You don’t want a minority investor or shareholder to be able to block a deal that’s beneficial to the large majority of your shareholders.

Type of preferred stock is another term you should pay attention to. There is “straight preferred” and there’s something called “participating preferred.” There’s a world of difference between these two in terms of how much return your investors get and how much your capital costs. Make sure you read up on what “participating preferred” means and try to avoid it. Stick with “straight preferred” as much as possible.

Number of board seats is the final term you need to be aware of. Board seats are critical in terms of control of the company. If you have a five-person board of directors and you, your co-founder, and someone you know and trust have three of those five seats, then effectively you control the company, particularly if you, as the majority owner of common stock, can appoint those seats.

When you start raising investment, however, investors may want one or more board seats depending on the amount of money they’re putting in. You need to be careful because if you give up the majority of the board seats or, more importantly, the majority of the rights to appoint the board seats, you will end up being at risk of other people besides yourself being able to make decisions in your company, and even let you go as CEO. Particularly if you’re a first-time CEO, be very careful about giving up board seats. The last thing you want to do is put years into building your baby and then allow some investors who don’t see eye to eye with you to let you go from your own company.

Factors Outside of the Term Sheet Considerations

There are some other factors, besides on what’s the term sheet, that you should consider when selecting investors.

Partner Chemistry. One of the most important factors to consider is simply your ability to get along with the venture partner—you chemistry, so to speak. The partner, in this case, is the person who’s going to be joining your board of directors, and who is going to serve as your chief mentor during this process. Raise money from smart people you really like because, ultimately, you’re going to be more or less married to them in a business sense for the next three to ten years, until they get their money back or you go bankrupt.

Partner’s Operational Experience. You also want to look at the partner’s operational experience. In most venture capital funds, the partners tend not to have operating experience. What that means is that they haven’t run a business or even been part of C-level team. They’ve simply been investors, financiers. And while investors do gain valuable experience through being on the boards of many different companies, if they

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haven’t run a company they can’t understand what it’s like to be an entrepreneur and therefore they won’t understand the nuance of the important components needed to mentor a new entrepreneur.

I’d encourage you to only take money from partners who have operational experience. Or, if you’re taking money from a fund that has some partners who have operational experience and others who don’t, make sure that the partner joining your board has operational experience, at least the one who’s going to be serving as your primary mentor.

Portfolio Alignment. You also need to consider your alignment with the fund’s other investments, known as their portfolio. Are there firms in their portfolio that you could partner with or potentially sell to someday?

Successful Exits. Pay attention to the history of successful exits from the firm and specifically from the partner that’s going to join your board of directors. How many exits north of $100 million has that partner personally been part of? How many exits north of $100 million has that firm been part of? If you’re looking at raising capital from a fund that’s had fewer than ten investments turn into exits north of $100 million, then that firm is either very new or they simply are not a good firm.

Network. Look at the venture capital firm’s network. Building your team is the lifeblood of your likelihood of success. So it’s important to work with funds and firms that have a network of operational executives at the CFO level, the COO level, or even the CEO level who they can bring in to help your company grow.

Negotiating Your Valuation Considerations

Let’s talk about valuation guidelines for a pre-revenue company. A valuation can range all over the map, depending on many factors. At a tech company, a software company, or a life sciences company—the kind of company that has huge potential in the future—a pre-revenue (that is, before you get any users, customers, or revenue) valuation might be between $1 million at the low end and as much as $25 million at the high end, depending on factors like the CEO’s past exits and results, the team experience, the size of the current user base, the number of engineers in the company, and the location of the company.

When it comes to valuations, the old adage “location, location, location” is all too true. If you’re in Silicon Valley, between San Jose and San Francisco, valuations are often double what they are in other parts of the world. Location is not just a matter of what’s trendy. Being in the right location is critically important because it enables you to attract better employees and executives and offers you better access to IPO and M&A markets. In areas like Silicon Valley, firms densely congregate in a way that enables you to have a much greater chance of eventually exiting the company.

Post-revenue guidelines are, of course, different than pre-revenue. Oftentimes they’re based on revenue multiples. That revenue multiple might range from 1x at the low end to 12x at the high end, depending on factors like the amount of revenue; the revenue growth rate; the number of users and customers; whether the revenue is recurring revenue, services revenue, or product revenue; the experience of the team and CEO; the market you’re playing in; and the location of your company.

Building a Pipeline of Investors Considerations

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As you go about your fundraising, generally you want to create a competitive process. To do this, you need to build a pipeline of potential investors and have a number of meetings (as many as 20 or 30 meetings within a period of two to three weeks). You may need to have initial meetings six to nine months before you’re really ready to run your process and then have those meetings again when you’re ready. You want to build your funding process to ensure that within the period of a week, you will receive multiple term sheets.

Typically, when you get a term sheet, it will only be “enforceable” or valid for a few days, so you need to drive different firms toward the same timeline and create a competitive process so that you can increase your valuation and get better terms.

When you begin negotiating valuation, as you receive term sheets, you need to have comparables fresh in your head—valuations of firms that are similar to yours. Look for companies that have had similar venture capital deals, exits, and M&A deals, and that play in a similar space to yours. If you’re at the point where you have revenue, look for companies with similar revenue multiples and profit multiples. If you’re pre-revenue, look at similar venture deals that the particular fund or other funds have done in your area.

While you consider all these factors, remember that you don’t want to take a valuation that’s too high. That’s a mistake I’ve seen many entrepreneurs make. When they have a choice between raising capital on a $20 million valuation or a $40 million valuation, there’s obviously a huge temptation to raise money at the much higher valuation, because then you give up less ownership in your company and you’re diluted less.

However, when you raise money at a an overly inflated valuation, what can happen is that the pressure coming from your investors to produce a return for the limited partners and general partners in their fund ends up creating a stressful environment in which you can’t be productive. So while it is good to maximize your valuation and create a competitive process and get great terms, don’t push your investors too hard to increase their valuation. Otherwise, when they get to the other side of the table, you’re suddenly going to find investors who are under a lot of pressure, and that won’t make your life easy.

Know Your Customer Unit Economics before You Raise Institutional Money

It’s important to calculate your unit economics before you raise multiple millions of dollars of venture financing. You want to figure out how much it costs (in advertising, etc) to acquire an additional customer. If you take your total ad spend and divide that by your total number of new customers per month, that is your customer acquisition cost.

When you understand how much it costs to acquire an additional customer and how much it costs to produce an additional unit of whatever you’re selling and how much revenue you earn from that customer over that customer’s lifetime, you’ll be able to be ready to raise venture capital at Series A or Series B level because at that point you’ll to know that, for example, every $10 of investment will generate $50 in revenue and it will be worthwhile use of capital.

To summarize my key advice on raising capital: Wait to raise your Series A until you have revenue that is growing predictably each month. Raise just a small seed round until you have proven mathematically that a certain amount of investor dollars will amount to a multiple in dollars back. Don’t raise money until you know

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how you’re going to use it and you’ll end up controlling your destiny and controlling your company and being able to be much more creative with a lot less stress in your life.

At the end of the day, equity capital, or venture capital, is the most expensive type of capital you can raise. So only raise what you need and make sure you know what you’re going to use it for before you take it on.See: http://startupguide.com/entrepreneurship/raise-venture-capital/

Finding suitable investors Considerations:

Finding suitable investors is one of the biggest challenges for the entrepreneur. Thus is will require in your first 30 days to try to complete as many of the following considerations as possible before you move on to the second part of this plan (i.e. The 60 day section).

The major hurdles are:

Finding the right investors Convincing them to invest, and Achieving this before the market opportunity is lost.

To target and pursue suitable investors, it is a must for a venture capital seeker to understand their investment strategy and preferences.

To communicate successfully with venture capital investors, you need to adapt to their map of reality. Venture capitalists are financing professionals; they are not experts in your technology area.

They think in terms of business and finance and evaluate you and your venture based on these merits. You need to learn their language and demonstrate sound venture planning and business skills if you wish to succeed in implementing your idea and develop it into a profitable business.

This plan should help you achieve your venture capital funding goal.

[1]: Key Documentation to be Prepared

To attract and hold investor interest, the business must provide top quality documentation:

1. Executive Summary-3-5 pages2. Business Plan- 20-50 pages3. Venture Presentation- All key issues are to be presented within 10 minutes4. Due Diligence Materials-Market Studies Research Papers, Patents, etc.5. Business Valuations-Company and investor pre and post investment values6. Deal Structure-Share distribution and terms

[2]: Understanding the Process and Selection Parameters

Selection Parameters

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Only 6 in 1,000 business plans get funded on average Only 5% of business plans are read beyond the executive summary Only 10% of proposals pass initial screening Only 10% of pre-screened proposals pass due diligence and receive funding

[3]: The Funding Process:

1. Opportunity Introduction-Presentation, executive summary milestone charts, cash flow forecast2. Initial Screening – management team, business plan3. Due Diligence- Management, personnel, marketing, production, financial, references4. Negotiating-Valuation, ownership control, management, legal contract.5. Funding

[4]: Venture Flow Chart to Financing Considerations

This flow chart type process is to assist you in this arduous task.

1. Venture Planning2. Business Planning3. The Funding Round4. Long Term Capitalization Planning5. Business Finance, Administration, Marketing and Sales6. Business Operations7. Mergers, Acquisitions and IPO's

[5]: Finding & Selecting the Initial Investor Considerations

Not all money is the same. In fact, from whom you raise capital is often more important than the terms. Benefits and advantages vary with the type of investor. When selecting your investor, you select not just a money source, but a strategic partner. As venture capitalists advise: "Pick your investor carefully, you can divorce your partner but not your investor."

To select the best value-added money source, evaluate the potential investors by

Their experience in similar projects and presence of competing projects in their current investment portfolio,

The management role they take in investment projects, Their links with other potential investors and critical service providers that will be useful for future

company growth stages and rounds of financing, Personal chemistry.

[6]: Venture Proposal Considerations You Must Know and Present to the Investor

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Purpose and Objectives

Proposed Financing: You must state the amount of money you will need from the beginning to the maturity of the project proposed, how the proceeds will be used, how you plan to structure the financing, and why the amount designated is required.

Marketing: Describe the market segment you've got or plan to get, the competition, the characteristics of the market, and your plans (with costs) for getting or holding the market segment you're aiming at.

History of the Firm: Summarize the significant financial and organizational milestones

Description of employees and employee relations, explanations of banking relationships, recounting of major services or products your firm has offered during its existence, and the like.

Description of the Product or Service: Include a full description of the product (process) or service offered by the firm and the costs associated with it in detail.

Financial Statements: Include statements for both the past few years and pro forma projections (balance sheets, income statements, and cash flows) for the next three to five years, showing the effect anticipated if the project is undertaken and if the financing is secured. (This should include an analysis of key variables affecting financial performance, showing what could happen if the projected level of revenue is not attained.)

Capitalization: Provide a list of shareholders, how much is invested to date, and in what form (equity/debt).

Biographical Sketches: Describe the work histories and qualifications of key owners and employees.

Principal Suppliers and Customers, Problems Anticipated and Other Pertinent Information.

Provide a candid discussion of any contingent liabilities, pending litigation, tax or patent difficulties, and any other contingencies that might affect the project you're proposing.

List the names, addresses and the telephone numbers of suppliers and customers; they will be contacted to verify your statement about payments (suppliers) and products (customers).

Provisions of the Investment Proposal

[7]: Venture Planning Checklist to Assure the Return of the Investors Money

a. Customer Opportunities Considerations

What do you really know about the marketplace? (Not just opinions, but real facts.) What is happening in the marketplace to fill this need? What is in the pipeline of development?

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What specific evidence do you have that the need really exists? How long will the 'window of opportunity' be open? Based on what information? Are there follow-on opportunities to allow a growing business and multiple products? List all other customer needs and related backup data for your venture.

b. Customers

Who specifically are your customers and how many of them currently exist? Missionary marketing is not recommended. Creating a solution where no problem exists is a formula

for failure!

c. Selling Is Problem Solving

How will you get information to those customers?

d. Differentiation Strategies

1. Buzz Marketing

Will you sell directly or indirectly to your customers? Will you be selling to businesses, end users or resellers? Have you talked to potential customers about their needs and how to best satisfy them?

2. Empathetic Marketing

3. Sell Benefits

4. Focus on Emotional Drivers

What are your observations and is there a universal theme or solution? Identify each major customer group and identify four key traits. Describe the market distribution channels you will use and how you can best reach them. Will you have direct contact with your customers? What is your best estimate of total market size versus the number of customers you can reach? How many can you get in the first year? Based on what assumptions?

[8]: Venture Models Considerations: Turning the idea into a viable business?

Business Model: Key Element Considerations

List all the possible customer/product concepts to meet the needs

Can you do this best by R&D with licensing, distribution, retail, or service company models?

Brainstorm and list all concepts. The last 20% will be the strongest ideas.

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After listing and outlining all concepts, choose the best three that will serve your customers.

Next, ask yourself is it unique, can it be copied, and how can I make it competition proof?

Is there current competition and how will I gain a competitive edge over them?

How much time is needed for the growth phase and how does it affect the window of opportunity?

How can you shorten the time frame or extend the market window? What factors control the time

frame and how can it be impacted by others or outside events?

How can you control risk? Can you pre-sell or pre-qualify likely sales?

What are the major risks associated with the model and how can you reduce the risk?

Has anyone else started a similar venture? Do you know what their mission, experience and results

were? How long did it take them to get started? What resources were required and what are the

lessons learned from the venture?

What type of venture is this? Lifestyle, High Profit, or High Growth?

Compare the answers to all three of these models and evaluate the results.

[9]: Financial Assessment Considerations

Making a cash flow analysis is very important. Use a computer model (mail to: [email protected] to request a customized model for your business) in one of these areas: Research and Development, Manufacturing, Wholesale, Distribution, Retail, Services, Software, Real Estate, Consulting. Each area is an entirely different model. Note: Trying to go from R&D to Retail with one business is another formula for disaster.

Make three models of assumptions for Good, Likely, and Worst Case Scenarios and solve for financial requirements.

Develop a decision matrix that compares profit, cash requirements, financial ratios, and break-even calculations to find the highest ROI with lowest capitalization.

How much money is needed and when do you need it?

Do you have it? Where will it come from?

Will it be Debt or Equity? And, how much equity is required to obtain the financing?

Compare the answers to all three of these models and evaluate the results.

[10]: Venture Capital Basic Considerations

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To properly evaluate your own project, it is recommended you put themselves in the place of investors, who want to know the answers to these six simple questions:

a. Documentation

To attract and hold investor interest, the business must provide top quality documentation that meets the concerns and needs of the investor:

Executive Summary (3 - 5 pages) Business Plan (50 pages maximum and focused on the above questions) Due Diligence Material (Market Studies, Research Papers, Patents, etc.) Business Valuations (Company and investor pre and post investment values) Deal Structures (To sell minimum shares for maximum dollar investment)

b. Basic Elements of a Good Deal the Investor Will Look For

There are six basic elements that will entice an investor to take a serious look at your project. They are:

Do I like the feel of this project, its market area, and its management team? Will I get my capital back off the top? (hopefully not off the bottom) Is there a big upside potential? Stock conversions, possible IPO, early payouts, etc.? What assurances will I have that the business plan will be followed and can be executed? How will I be involved? Director, consultant, officer, employee? What other opportunities are there available that is better than this one?

c. Critical Deal Criteria Considerations

Early investor return of capital. Premium paid for the risks involved. Kickers or other incentives not necessarily monetary in nature. Options to increase equity share or liquidate early. Tax and legal considerations including state securities laws. Is the entrepreneur being adequately compensated so that he remains focused on the business and

can afford to live during the startup stage?

What Do Venture Capital Firms Want From You?

Venture capital wants all the qualities angel investors want, but bigger and better. The venture capitalists (also called VCs) focus on high returns for high risk. Just like most angel investors, they’re not looking just for a healthy company, or just dividends; they are buying percentages of ownership of companies with the intention of selling those percentages for 10, 20, 50 or more times what they originally invested.

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They make the money when they exit, which is what happens when they sell their share of ownership for real money. The collection of investments a VC makes is called a portfolio. The companies they’ve invested in are in their portfolio. A successful portfolio grows at least 10x every two or three years, and that’s growth in real money, after exits.

And it’s a hit business, so they can’t expect returns over the whole collection of companies. The winners have to pay for the losers. The National Venture Capital Association says about 40 percent of VC-backed companies fail, another 40 percent have moderate returns, and only about 20 percent are really successful.

VCs invest in companies that have real possibilities for huge growth. They have to have very strong management teams. They have to be able to scale up—meaning get to high volume of sales—rapidly. They have to have something different, like a “secret sauce” or technology that will defend them against getting eaten up by strong competition.

The venture capitalists (also called VCs) raise funds of hundreds of millions and even billions of dollars about every three years. It comes from larger organizations like insurance companies and university endowment funds, sometimes enterprises, and even some very wealthy individuals. Taking that money carries with it an obligation to invest that money in promising startups and emerging businesses.

Venture capital is more likely looking at follow-up rounds, of more money, after the early money that invests in the beginning. Investors often talk about the “seed round” as the first few hundred thousand dollars, then “series A” comes for a few million after the seed funding has generated traction and credibility, followed by series B, and series C, each round getting bigger (meaning more money).

With investment amounts that high, the stakes are correspondingly high. So venture capital, these days, is usually involved in the later rounds, not in the seed rounds. You need to understand that your investor will require that your proposal meet each of these criteria. Failure to do will result in the denial of your funding.

Selected Investment Criteria Ranking byBusiness Angels

Ranking byVenture Capitalists

People or entrepreneur

Enthusiasm of the entrepreneur (s) 1 3

Trustworthiness of the entrepreneur(s) 2 1

Expertise of the entrepreneur(s) 4 2

Investor liked entrepreneur(s) upon meeting 5 9

Track record of the entrepreneur(s) 10 8

Market or product

Sales potential of the product/service 3 5

Growth potential of the market 6 6

→ Quality of the product/service 7 10

Niche market >>> 9 13

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Informal competitive protection of the product/service (know-how) 12 14

Nature of competition in the industry 17 16

Overall competitive protection of the product/service 21 11

Formal competitive protection of the product/service (patents) 27 20

Financials used to screen for potential gains

Perceived financial rewards 8 4

Expected → rate of return 11 7

High margins for business 15 15

Financials to monitor the operating firm

Low overheads 16 21

Ability to break even without further funding 18 19

Low initial capital expenditures needed (on assets) 19 24

Size of the investment 20 23

Low cost to test the market initially 22 22

Other business attributes (vital to hands-on role)

Possibility of investor's involvement in → business development 13 18

Investor's strengths in filling gaps in the business 14 26

Venture is local 23 27

Other business attributes (miscellaneous)

Potential exit routes (liquidity) 24 12

Investor's understanding of the business or industry 25 17

Presence of (potential) co-investors 26 25

30-60-90 Day Scheduling Plan for Obtaining Investor Capital

Stage [1]: The Learning & Preparing Stage

Week 1 Assessment: After one week on the project, your should begin to feel comfortable with your responsibilities with this funding, should have met at least one (ideally more) new business funding contacts each day, should be familiar with their team members (in your department and out) and should be able to walk into your office with any questions.

A good idea is to offer up an informal session of drinks, cake, or something similar with the other team members at the end of week one so that you can assess their understanding of your role, ask any questions to the group and hang out in a less formal setting.

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It might be a good idea to set up a questionnaire to complete after week one. Issues you want them to address (perhaps with a 1-5 point scale, 1 being a minimum explanation and 5 thorough) are their orientation, objectives set, motivation from the manager, assimilation, adaptation, mentor, organizational philosophy, feedback, facility tours and more. This is a very simple way to address your company policies throughout the process to see when and how progress is made.

15 Day Follow Up: "During the follow-up stage, you should check in on the progress toward the goals discussed in the venture capital acquisition orientation. At this time you can help identify and resolve any issues/challenges and therefore, increase the potential for good performance on venture capital acquisition.

30 Day Check In: The important thing to note in the first 30 days is to familiarize yourself with the company through document review, introductions and meeting with critical funding personnel. You shouldn't expect to make extreme strides from a business perspective during this time on creating the venture acquisition plan and required documentation. 

45 Day Benchmark: The important thing to note in the 45 Day Benchmark is to familiarize yourself more with the company funding requirements through document review, introductions and meetings. You should be working on the:

[A]: Key Documentation Preparation

To attract and hold investor interest, the business must provide top quality documentation:

Executive Summary-3-5 pages Business Plan- 20-50 pages Venture Presentation- All key issues are to be presented within 10 minutes Due Diligence Materials-Market Studies Research Papers, Patents, etc. Business Valuations-Company and investor pre and post investment values Deal Structure-Share distribution and terms

[B]: Overcoming the Process and Selection Parameters

Selection Parameters

Only 6 in 1,000 business plans get funded on average Only 5% of business plans are read beyond the executive summary Only 10% of proposals pass initial screening Only 10% of pre-screened proposals pass due diligence and receive funding

[3]: Meeting the Funding Process Requirements

Opportunity Introduction-Presentation, executive summary milestone charts, cash flow forecast Initial Screening – management team, business plan Due Diligence- Management, personnel, marketing, production, financial, references Negotiating-Valuation, ownership control, management, legal contract.

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Funding Considerations

[4]: Venture Flow Chart to Financing Venture Planning Business Planning The Funding Round Long Term Capitalization Planning Business Finance, Administration, Marketing and Sales Business Operations Mergers, Acquisitions and IPO's Considerations

Stage [2]: The Learning, Preparing, Closing and Funding Stage Considerations

60 Day Plan-Adding Your Services to Reach the Close and Funding Goals

Now that you have a general idea of most of the requirements for venture funding explain of adding your services can reach the venture capital funding goals. It may take you at least 60 days to gather all the information to get the capital funding requirements in place.

Stage [3]: The Closing and Funding Stage

90 Day Plan-Transformative Stage to Reach the Close and Funding Goals

Once you have established the criteria for venture capital funding and how you can provide services to your client you will be able to complete the transformative stage.

90 Day Review: Typically the amount of time it takes for getting venture capital funding varies. There is no exact time period. But at the end of 90 days you should have a clear understanding of the requirements you will need to satisfy. Anything faster can mean that you haven't been analytical enough in your assessment of the business, and by this time you should have a thorough understanding of what will need to be done.

Remember: The simple answer is that 6-9 months is a prudent amount of time to allow for raising money, although there is significant variation between companies (and over time). My advice would be to allow more time than you think you need and to be honest with yourself about the extent to which you can hope to be faster than average.

Venture Capital Survey How long it takes for Venture Capitalists to Close:

When asked how quickly their venture capital company had ever invested in a company, from the time they received the business plan until the deal closed, more than 4 out of 5 reported they were able to close a deal in less than 60 days, with 41% saying they had closed a deal in under 30 days. The average for all respondents was roughly 40 days.

Funding Stage: How Long Should An Entrepreneur Expect The Funding Process To Take?

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The more important factor however, is not how quickly has the venture capitalist ever closed but what is the average time it took to close a deal.

Under 30 days: 1% of respondents 30-60 days: 18%61-89 days: 45%

90-120 days: 26%More than 120 days: 10%

The average for all respondents was just over 80 days, double the quickest time period--or nearly three months. Another way of viewing this information is only 19% of venture capital companies can typically close a deal in less than two months. It is almost an axiom that entrepreneurs seeking capital do not allow enough time for the funding process in their planning.

Several VCs stated there was no difference between the quickest they had ever closed and their average length of time required for closing.

Because the volume of new companies contacting VCs has increased so much, it is reasonable this might affect how quickly deals are getting done. Among those that said the number of companies had "greatly increased" or a 5 on the scale, two-thirds said the average time to closing was under 90 days, not significantly different from the average for all those surveyed. Those who said the number of companies contacting them had stayed the same or declined, reported average times to closing almost identical to those who said the volume of plans had greatly increased.

So it doesn't look like the greater volume of companies to review has resulted in more time being required to close a given investment.

COACHING & FEES:

Coaching & Consultant fees can be as little as $250 for a five- to 10-page plans written by someone with minimal experience. Or they can be as much as $25,000 for a complicated business for which the entrepreneur is seeking several million dollars of venture capital funds and has little of the materials for the business plan available.

We provide reasonable fee for an uncomplicated venture where the entrepreneur provides assistance is between $3,000 to $8,000. We do not write the plan for a percentage of the funding raised or for an equity position in the company. Fees are generally negotiated based on the complexity of the assignment.

Factors in Pricing

Fees to write a business plan are based on the complexity of the plan, how much market research has been completed by the business owner, and how much research and assistance the owner will be able to provide during the creation of the plan.

The type of business is a factor as well. For example, a plan for a startup with one consumer product and an

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easily identifiable market niche, written to obtain a small bank loan, takes time to research and write than a plan for a business that has several complex technology products in emerging market niches, written to present to large venture capital firms.

Software typically runs from less than $50 to just under $500, although a few programs cost more than $1,000. A disadvantage of the software programs, in addition to their "one business plan fits all" approach, is that investors and lenders recognize the formatting of the canned business plans.

Business Plan Review Services

Technically, business plan review services don't write the business plan. They review what you've written to identify gaps or inconsistencies, and they help you improve the logic and clarity of the plan. What you receive might be as simple as a one-page analysis pointing out where improvement is needed.

Or it could be a several-page report and a copy of your business plan returned with extensive notes on specifics that require revision. The review service might include a second review of your revised business plan in the initial fee or charge a modified lower fee for the second review. Business plan review fees run from $49 to $1,500.

Conclusion:

1. Don't bother trying to get funding unless you already have something going, relevant experience and connections, and an edge that will make your business really grow and attract and retain customers.

2. Write a business plan and a formal pitch. If you don't know how, request our help.

3. Be clear about the deal. Why do you need money? How will you spend it? What's the deal for the investor?

4. Apply only to VC's who have shown a willingness to invest in ideas like yours.

5. Have a business that demonstrates the power of the idea in action. Good ideas are nice, but most VC's invest in an idea only when it's from a proven performer (think JK Rowling).

Michael Kissinger

Michael KissingerBusiness Development DirectorProfit Builders Inc.Phone 415-678-9965Email: [email protected]: www.prosperitybreakthroughs4u.com URL: http://www.linkedin.com/pub/michael-kissinger/4/b21/a66

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