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Raising Funds for Your Start-up Venture The Step-by-Step Guide |
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by Vadim Kotelnikov, Founder, Ten3 Business e-Coach for High-Growth Firms, 1000ventures.com
"Most venture capitalists believe that ideas are a dime a dozen: only execution skills count" - William A. Sahlman
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Prepare Extensively Before Approaching Investors Finding suitable investors is one of the biggest challenges for the entrepreneur in a company's early stage. The major hurdles are:
To target and pursue suitable investors, it is a must for the venture capital seeker to understand their investment strategy and preferences. However optimistic you feel about business prospects your technology, you are probably the only person who is feeling that way at the moment. 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. Our step-by-step guide will help you achieve this goal. |
Selecting Investor Introducing Your Venture to Investors Venture Presentation Venture Evaluation Negotiating and Closing the Deal
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Decide When To Seek Outside Funds |
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Bootstrapping Try to personally finance and bootstrap your firm as long as possible, until the need for external growth finance becomes evident and unavoidable. Select carefully your initial investor Not every money is the same. 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
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Introduction to venture capitalists through referral sources Introduction to venture capitalists through referral sources they respect improve the odds of securing financing. As venture capitalists themselves say: "You need to have trusted referral or otherwise you just waste your time". Though services of reputed consultancy companies may be too expensive for first-time entrepreneurs at the early stage, some special mutually beneficial arrangements with could be explored. For instance some business incubators and entrepreneurship development institutions have an arrangement with business consultancies according to which the latter charges the start-up entrepreneur only a fraction of their fee at the initial stage provided the enterprise ties up with them for its all future consultancy needs up to a certain milestone, e.g. initial public offering. Another option would be exchanging consultancy service fees for an equity stake in the company. This option would also be beneficial for the company management, as in order to maximize their profits the consultancy would provide continuous business coaching service to the company they are invested in. Cold calling on venture capitalists "In a highly competitive field with many players, you need to be able to articulate your competitive advantage in a matter of minutes, if not seconds. If you cannot, you will lose your prospective customer's attention, and the business" - MoneyHunt, Spenser & Ennico Get prepared - you may have less than one minute for introduction of your project to the prospective investors at the very first meeting. The investors are very busy people who are usually short on time. Take it as a challenge and impress your future financial partners by your professional approach. The introduction will either make or break your opportunity with them. Don't try to explain your technology idea during this minute or ask them to read your 300-page feasibility report (even if you do have it). Your business plan and executive summary are often not of the first importance at this very first stage either. Why would they spontaneously get interested in your stuff? To raise their interest, at this stage you need: |
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Before you speak to a venture capital investor you should prepare a brief, well-thought-out, oral presentation. You should include the relevant information on:
If the venture capital investor is interested as a result of your approach to him, he will probably ask to see a business plan. |
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You need to prepare a private placement memorandum and a high-quality business plan for potential investors. Business plans are an important test of clarity of thinking and clarity of the the business. The order of importance that an investor usually places on your business plan components is:
Explain also clearly how you expect to provide investors with a return on their investment and how they could realize their financial returns. Remember, that VCs don't invest based on financial projections, but is they don't pass the reasonability test, you won't get funded. Financials are a sanity check. To be on the same length with your prospective venture capital investors, have you business plan reviewed and tuned up by a venture capitalist.
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Be prepared to be flexible in your approach because many venture capital firms prefer to structure deals themselves. The venture capital firm may propose a funding package that contains various forms of finance. Because the question of the funding package is not only complex but also very important to you, consult your attorney beforehand. The venture capital firm will value your proposed business and combine this with the required rate of return to decide on the type and level of investment that it is prepared to make in exchange for a percentage of equity proportional to the risk it will incur. Get ready to share your project management, if required. Many venture capital firms have pool of trusted professional business managers as the company should now concentrate on business rather that technology development.
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