by Venture Planning Associates. Used by permission.

Did you know, that there is more money looking for "a good deal" than there are "good deals" looking for money?

Venture Planning Associates, a business planning and venture capital consulting business in Honolulu, was founded in 1989.  VPA specializes in assisting entrepreneurs and start up companies with financing and assisting them in becoming profitable enterprises.  Many entrepreneurs would receive more serious consideration from investors and financial angels if they would realize that they are selling a financial package to the financial marketplace, rather than their product or service to a consumer.

The goal of every business plan should be to address upside potential, downside risk, management, potential dilution, and liquidity issues.  Investors are constantly comparing one investment against another and ranking them in numerous categories.

To properly evaluate your own project, VPA recommends that entrepreneurs put themselves in the place of investors, who want to know the answers to these six simple questions:

Six Investor Questions

• How Much Can I Make?  (40% ROI expected)

• How Much Can I Lose?  (All of it plus any loan guarantees, law suits and time)

• Who Says This Thing Will Work?  (Third party verification of all business plan items)

• Who Else Is In The Deal?  (What other investor groups, banks or players are in this deal?)

• Who's Running the Show?  (The management team and their qualifications in this field)

• How Do I Get My Money Out and When?  (Exit strategy for IPO, Acquisition or Merger)

Documentation

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

• 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)

Funding Basics

• Know what business you are in!  (Research and Development, Manufacturing, Distribution, Sales or Service)  Attempting to do all five areas is extremely expensive and risky.  Each area is a business of all its own and has its own financial dynamics.  Be focused on what you do best and out-source the rest.

• Have a well-rehearsed and polished presentation. Remember that you are a "Salesman" for your business first and a "Techie" last.  You are selling the investor on the wisdom of his investing with you and you must answer the six investor questions listed above. You should not spend the bulk of your time describing your product or service. Spend time on the market, management and financials.

• Develop a list of private investors, venture capital firms, or possible joint venture companies.   This is a research process whereby you invest appropriate targets for raising capital.  During this phase, you will receive lots of feedback about your business, its market and the possibilities for raising capital.  Incorporate the good ideas and modify you business plan, but remember that you cannot please everyone.  Stick to your guns.  Get more tightly focused and persist.

• Most Seed Capital will come from close friends and associates. Startup Capital comes from Private Investors or "Angels", and the big bucks will come from Venture Capital companies after you have survived the first two stages.

• Do not rush the investor!  Be patient and do not expect much positive response for as long as 3 - 6 months in some cases.  If possible, locate a minimum of three potential investment groups to work with simultaneously.  This will allow you options and leverage against "low ball" offers.  If you work only one at a time, and your best source turns you down, then you may have wasted 3 - 6 months and be back at the beginning again.  In fact you may have missed the window of opportunity altogether.

• Keep your eye on the goal of lowering perceived risks to the investors.  Most professional investors will accept Moderate Risks with commensurate High Reward Potential.  Private investors and venture capital companies are not gamblers.

•  Do not puff, exaggerate or over-sell.  Invest your time in perfecting and improving your sales prospects, decreasing future costs, and decreasing potential risks.  A project that has pre-sales is much easier to fund than one with no future income stream other than projections.

Our Best Advice to Entrepreneurs 

• Learn to sell, "Face-to-Face", "One-on-One".  Not just your product or service, but your entire business vision.

• Buy an HP 19B or equivalent financial calculator and become proficient in all aspects of finance for startup companies.  Weakness in the financial area will drastically reduce your chances of funding. 

• Surround yourself with a quality team.  Build your network in sales, finance, and management.

• Take a public speaking course and learn to give tight presentations to tough audiences.  Try Toastmasters, Rotary, or Junior Achievement, Sales and Marketing Executives, etc.

• Learn how to do the due diligence on those "too good to be true money sources".

• Attend investor oriented meetings such as the MIT Enterprise Forum, http://web.mit.edu/entforum/www/ a local Venture Capital Association meeting or the industry meetings for your business type.  Here are a few suggested websites: http://www.nvca.org/ , http://www.venturesource.com/active/vslogin , http://www.evca.com/, and http://www.vfinance.com/

• Angel investor groups are more difficult to find, however, here is a good place to start.  http://www.tcvn.org/

• Or find a local business incubator to assist you with your startup.  http://www.nbia.org/, http://www.iincubator.org/, http://strategis.ic.gc.ca/SSG/tf00118e.html, http://strategis.ic.gc.ca/SSG/tf00118e.html, and  http://www.pacificincubation.org.

Basic Elements of a Good Deal

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?

Critical Deal Criteria

• 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?

Investor Returns, Timing & Cost Of Capital

Rates of Return and Investment Periods

Each stage has its own set of funding criteria and its own group of individuals who work in that field. The earlier the financing stage, the greater the risk, the greater expected return, and the greater percentage private investors and venture capitalists will request. Sometimes the investor will require control of up to 80% of the company.

Entrepreneurs, however, are usually given the opportunity to earn back controlling interest if certain milestones and performance standards are met. Also, the earlier the stage, the more difficulty will be encountered in raising the initial capital. It may take six months to a year to locate the proper partner for your business.

General guidelines for venture capital investment returns are:

• Start ups, 10-12 times return in 5-7 years.

• Existing early stage companies, 5-7 times investment in 4-5 years.

Why are expected returns so high?

Quite simply because of all the non-performing investments, or losses and the lack of liquidity and the availability of other opportunities.  The compounded Venture Capital Return Rate over many years is approximately 17.8%.  In order for a Venture Fund to be profitable, it must assume at least 50% of its investments will at best make only a small profit.  Approximately 25% of the investments will be sold or liquidated.  Of the remaining 25%, about half will go public and generate compounded returns exceeding 60-120%.  For a portfolio of 20 companies, only one will be a "rocket" or "home run" and provide the 10 - 100 times Return on Investment that everyone is looking for.

Valuations and due diligence should be made by both parties in order to accurately determine the amount and type of debt and equity that will optimize the investment for both the entrepreneur and the investor. Follow-on stages of financing should also be considered. The importance of the cost of capital and the eventual amount of equity dilution to you and your initial shareholders cannot be overstated.

Besides Venture Capital, there are more than 30 methods of funding your business that do not require venture capital to finance your operations.

Venture Planning Associates will research both public and private sources of capital and debt financing in the U.S. and Asia for your venture. Depending on the size and type of project, a listing of at least 20 sources will be provided. Assistance from Venture Planning Associates is available for presentations and negotiations after you have received further information requests.