Favorable valuation/terms to “known & friendly” people.
Delay dilution until, a later & higher valuation reached.
Owners Investment demonstrates founder’s commitment to business (critical to a VC who wants owner to have skin in the game).
Possibly creating personal conflict or “taking advantage” of persons who may lack investment sophistication & experience and may have unrealistic expectations of returns.
Investors usually not helpful to business or future fundraising efforts.
Usually wealthy and experienced business individuals who desire and are willing to invest time and money. (Will expand later)
Studies show more money invested by angels than VC’s in the seed and early stage of a business, many VC’s have minimum first round, thus angels fill void.
Less due diligence and documentation than a VC, can close financing quickly.
Usually, invest close to home.
May or may not bring added value to business i.e. strategic relationships.
Usually lack significant capital for follow-on investment.
VC’s typically bring extraordinary value to it’s portfolio companies.
Very difficult to obtain.
Extensive due diligence and documentation, so house must be in order.
Substantial equity dilution.
Loss of control, especially if milestones not met.
Not as patient as angel investor, need exit from investment in 3 to 5 years.
Very time consuming, is not the best path for many businesses.
Can be cost-effective means of raising capital.
Be wary of field of placement agents/investment bankers, must be a broker/dealer under Florida and Federal law.
Company must comply with exemptions under Federal and State blue sky laws, these laws regulate offering process, publicity and communications, disclosure and information requirements and the offer and sale of the securities in question, so experienced counsel needed.
Be wary of significant “upfront fees”.
Requires preparation and significant documentation (subscription documents and private placement memorandum).
If not conducted by experienced placement agent or investment banker, high risk of not being consummated after significant time and expense.
“ Strategic alliance” or partnership with an established operating company may serve as means to raise capital.
Marketing or distribution arrangement.
Capital can also be provided through strategic arrangements and relationships with customers, vendors and suppliers.
Tread carefully: Strategic partners often have far greater resources than you. i.e. resources used against you if dispute or conflict arises.
Can limit your flexibility to engage in other alliances, acquisitions and transactions; you may find yourself controlled, or your future substantially affected or limited, by a much larger company with its’ own agenda and priorities (which may not include the successful development of your business).
Be careful regarding protection of confidential and proprietary info.
Probably should not enter into relationship if doing it to primarily raise capital.
Factors to Help Determine Which Type of Investor is Most Appropriate:
Amount of money you need.
Proposed use for money.
Size and profitability of company.
Anticipated rate of company growth.
Projected future value of company.
Factors within Management’s Control that Influence Fund Raising Success:
Timing and planning of fund raising campaign.
Quality and completeness of management team.
Quality of company’s plan for expansion.
Company’s historical results of operations.
Strength or weakness of company’s internal systems.
How well company uses outside advisors.
How well management understands the fund raising process, as evidenced by the quality of it’s fund raising plan.
Outside Factors that Influence Fund Raising Success:
Volume of money available for investment.
Popularity of company’s business sector to investors.
Activity level of public markets.
Investor familiarity with your industry.
Intensity of competition in your market.
Stage of your company’s development.
How does Venture Capital Work?
A Venture Capital firm invests time, energy, advice, and money in private companies in the early stages of growth.
These investments are made in exchange for a percentage of the ownership in the company.
Money is a commodity.
The real value in a gaining support from a VC lies in their ability to to provide support with the growth, management, and competitive position of the business.
More than just money...
How does Venture Capital Work?
To understand how VC’s make decisions, it is important to understand their operations and motivations.
VC’s create unique investment vehicles called “funds”.
VC’s solicit investment from a variety of sources including wealthy individuals, pension funds and university endowment funds. This money is “committed” but not immediately sent to the VC.
Over time these funds are paid in the form of installments called “draw downs” or “capital calls.”
Operations Fund “n” Cash Investors University Endowments Pension Funds Wealthy Individuals
How does Venture Capital Work?
Capital calls are requested as the VC identifies targets in which to invest.
Money is invested in a company in exchange for a portion of the equity (ownership) in that company.
When all of the money is invested, a VC firm will seek investment to create a new fund.
Typically, a fund may have a limited period of time to invest (2 to 3 years).
A typical VC firm will undergo fundraising every other year - or more frequently if needed.
The goal of a VC is to grow the value of the companies in their respective portfolio and exit their investment either in a sale or IPO.
Portfolio companies might be purchased in exchange for cash or securities.
In either case the resulting cash and securities is distributed back to the Partnership.
Operations Fund Investors Cash and/or securities Venture Partners Limited Partners
Although the ROI is significant, the percentage invested is not consistent with the percentage of the fund returned:
For their expertise the Venture Partners are handsomely rewarded with a disproportionately large share of the results, referred to as a “carried interest” usually around 20%.
2-3% of the value of the fund is paid annually to the management company to cover operations and employee salaries.
How does Venture Capital Work? Operations Amount Invested 10% Limited Partners Fund 90% Amount Returned Venture Partners 29% Limited Partners 69% 2% VC Management Company Venture Partners
How does Venture Capital Work?
What does all of this mean?
Like mutual fund managers, Venture Partners are investing other peoples money and are rewarded based on their ability to identify the potentially brilliant ideas and help make them successful.
Also like Mutual fund managers, future success is based on the ability to draw investors and create a larger fund next year.
The impression of investors is based not only on the ROI of the fund, but on the visibility of “home run” wins within the fund portfolio.
Think of it like a wacky mutual fund for the rich and powerful...
In search of Funding
A Venture Partner will use a variety of criteria to assess and analyze both the entrepreneur and the idea. What many look for is a combination of:
A High Quality Entrepreneur.
HOME RUN potential.
A compelling Model.
An Experienced Team.
A Company that has been DERISKED.
Personality & Fit.
What are VC’s looking for ?
The Funding Process
What should a company be looking for in a VC partner?
An investor with the right connections.
National and or Global Reach.
The Investment Process Time Line
Initial Contact : After entrepreneur's homework, investigation and assessment of appropriate VC, executive summary sent via “trusted source”.
Screening : Most opportunities submitted (75-80%) screened out and eliminated, after brief review (don’t fit VC objectives, criteria and preferences, most because of stage of development, location, man. depth or track record, market or industry focus, competitive dynamics, amount required to invest).
Closer Look : (20-25%) Some level of further review i.e. full read of business plan, financial information and projections; inquiries and background checks with local contacts and others, telephone calls to respond to specific questions, less than half will get opportunity to meet with lead VC.
The Investment Process (continued)
Due Diligence; Valuation : (4%) subjected to some greater level of “due diligence”, meetings with key management, perhaps customers, office/facility tours, competitive and market analyses, more intensive business, financial and technical inquiry and review, typically a discussion regarding Valuation .
Term Sheet : (less than 2%) presented with term sheet or “letter of intent”, ensures parties are on the same page regarding key terms
Definitive Agreements & Funding : (1%) result in signed definitive agreements and funding. Timing will depend upon level of detail in term sheet, business owner and it’s counsel prior preparation, sophistication and experience, the VC’s approval process and schedule and absence of surprises.
“10 Commandments” for Companies Seeking Financing
“ Thou shalt focus, focus, focus thy plan”
make sure strategy is a rifle shot, not a shotgun blast.
carve up target markets finely and restrict yourself to two or three well defined segments.
“ Thou shalt weave a story”
create excitement around plan.
show energy, enthusiasm and excitement when you present.
cover long term vision, then spell out short term practicalities of its implementation.
“ Thou shalt understand thy audience”
research and understand target audience – both for plan and pitch.
understand prospective investors job, history, area of expertise, prior areas of investment, etc.
“ Thou shalt arrive via referral”
reference will instantly give you credibility, visibility and the investors attention.
“ Thou shalt be crisp in thy plan”
keep business plan succinct.
typically 25 pages, executive summary no more than 2 pages.
6. “Thou shalt fine-tune thy presentation”
plan your pitch and pitch your plan (one bite at apple!).
no more than an hour.
have back-up slides for common questions.
prepare in advance reference list .
7. “Thou shalt thoroughly research and evaluate current and prospective competition”
all start-ups have competition of one sort or another.
honestly assess relative status.
openly discuss management team’s background strengths and weaknesses .
8. “Thou shalt get real about financial projections”
they may come back during the structuring of deal.
9. “Thou shalt not obsess on valuation”
it is important, but don’t be penny-wise and pound-foolish. By understanding this hopefully everyone gets a piece of a much larger pie.