Tag Archives: business funding

Four Important Points About Targeting Your Approach to a Venture Capitalist Who Could Fund Your Business

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Once you have narrowed down your choice of a Venture Capitalist or Venture Capitalist Fund and found the right one to “court” as a means of funding your business, the next step in this process is to plan a Targeted Approach.

You need to do your research on your Venture Capitalist options and plan your pitches.  Keep in mind that there are approximately 934 VC firms.  These firms, at any given time, may consider 10 deals a day, knowing very well that they can only fund four a year.  With this in mind, your motivation should be high for doing your due diligence beforehand.

Your due diligence should include consideration of the following:

  • Industry Focus – who has invested in your industry before
  • In Network – who are investors/funds that may be in your network
  • Fit Their Portfolio – does your business fit their portfolio or is it totally outside their realm of expertise, to the point where they may not feel they can bring managerial experience to the table
  • $$ to Invest – you definitely don’t want to spend time courting a funder whose monies have been depleted for the year
  • Match of Size and Stage – is it the right size fund or investor that you need and is it geographically located to be of benefit
  • Track Record – be sure to talk to other people who may have been funded by this person or group before

It’s also very important to keep these four points in mind:

  1. Venture Capitalist Firms like to invest in their area, industry of expertise or in a mission- related project
  2. Find connections anyway you can and make contact with them (who works for them; who is on the board, etc.)  This is so important.
  3. Remember the Magic of 3 and Make it Personal – Before making your pitch, there should be three points of contact…all personal to the person with whom you want to work. This does not mean just email, a text or letters.  Think out of the box on how to make a great first impression (i.e. a gift basket of product samples sent to the executive team).  After you do your pitch, remember to do the same…another three touches or contacts to follow up.  This is very much like grant funding; you need to do the work to earn attention.
  4. A Venture Capitalist website drop box or out-of-the-blue emails DO NOT WORK!! – You need to try and make contact before going through their portal; if they are asking for a full business plan, I would want to know more about them first.

You need to make sure the Venture Capitalist you’ve chosen knows you are out there and what you are about.  This can include:

  • Networking like crazy
  • Using social media and blogs – create a buzz around who you are; let them know where they can find information on you; if you have a media or marketing plan, make sure the VC and your pitch to them is a part of it.
  • Attending industry-related events and conferences
  • Again…Create a Buzz!!

Now that you have taken time to Prepare, you’ve determined the Right VC or VC Fund for funding your business, and you have the steps for creating a Targeted Approach, it is time to begin working on The Perfect Pitch!

In the meantime, I’d like to hear about what you may have done as one of your “Magic 3” contacts or “touches” when approaching the Venture Capitalist you chose.

 

8 Vital Steps to Prepare You for Going After Venture Capitalist Funding

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Now that you know the five steps involved in the Venture Capitalist “process”, we can look more closely at each.

So let’s start at the beginning of the process…Prepare…and the steps involved:

  1. Must establish a C-Corp entity structure
  2. Must create a GREAT Executive Summary
  3. Must write a detailed Business Plan
  4. Must prepare a Venture Capital Term Sheet
  5. Must have an attorney prepare a Stock Purchase Agreement
  6. Must amend your Bylaws (or a “Certificate of Designation”)
  7. Right of First Refusal/Voting Agreement for VC
  8. VC Consulting Agreement (if Applicable)

Let me address each of these steps briefly.

First, to obtain VC funding, you can’t be operating as an LLC or sole proprietor; you must be a C-Corp and deal with compliance for that designation.

The Executive Summary is what will open doors to Venture Capitalist companies; and for that reason alone, it must be GREAT!

The Business Plan you will need to prepare at this stage is not your one- to three-page document, but a very well researched, detailed document that you should consider getting proper help to prepare.

The VC Term Sheet is typically a non-binding document that outlines the terms of the deal.  It’s an important investor packet item that says, “Here is what we’re all about and what we’re going to give back in return.”

Obviously, the Stock Purchase Agreement is the document that sets the terms for the VC investment, inclusive of the purchase price, closing date, and conditions regarding the issuance of the stock.  Needless to say, this is a very important document that an attorney should handle and/or review to be sure you dot your “i’s” and cross your “t’s”.

Your Bylaws will need an Amendment (or create a Certificate of Designation) that creates the new preferred stock class and addresses anti-dilution provisions, as well as dividend, liquidation, and conversion rights.  This is an item that you can find great templates for online.

The Right of First Refusal document is important if you will be offering more stock later.  Your Venture Capitalist will want the right to fund it first.  As for the Voting Agreement, Venture Capitalists want board positions and, with that, voting rights.  My position is that the borrower should try and limit this as much as possible. In fact, try to leave it out if they don’t bring it up.

Finally, the VC Consulting Agreement will address any resources and/or management teams that will be brought to the table, the fees involved, how long they will be involved with the company and when they will step aside.

As you can see, just this first step in the Venture Capitalist Funding Process is involved.  You need to be prepared to dig in and focus.  In upcoming blog posts, I’ll address subsequent steps in the process.  In the meantime, if you are now going through it or have been through this preparation process, I’d love to get your insights from the experience.

 

5 Questions to Ask Yourself If You Want to Pursue Venture Capitalist Funding

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In my blog post last week, which outlined the features of Venture Capitalists and VC Funds, I wrote about how they work with businesses to fund them through their growth phases.  Today I want to help shed some light on the actual process of gaining Venture Capitalist funds and determining whether your business is a viable candidate for them.

Let’s consider first whether your business is one that will deliver the kind of returns enticing enough for Venture Capitalists.  As the business owner, you need to contemplate:

  • Are you going to have the profit margin necessary to be giving someone else 28-35% of it?
  • Once your business starts to grow, is it scalable; in other words, will your increasing revenues cost less to deliver?
  • Is your industry one where it is common for buyouts to occur?
  • Are you growing fast enough?

Last, but not least, are your business and its future growth defensible?  If you can’t explain it and what you have, how is a Venture Capitalist or VC Fund going to believe it.

Whether you’re going to pursue a Series A or Series B level of funding is determined by where your company is in its growth and this whole journey.  Series A is for those seeking their first round of funding; you’re ready to go and make your mark.  It is a milestone-based investment.  Whereas, Series B investing occurs after you’ve had your initial round of monies and the business is prime for moving to another level of expansion.  At this point, the risk has perhaps diminished some.

Now that we’ve given you food for thought in regards to having what it takes to attract Venture Capitalists, let’s review what comes next…the Funding Process.  The process is a long, resource-intensive one that is not for the faint of heart.  I’m going to break it down for you into five stages:

  1. Prepare
  2. Find the right VC
  3. Targeted Approach
  4. The Perfect Pitch
  5. Due Diligence

In my upcoming articles, I will dissect these stages into bite-size pieces so you can more appreciate what I mean when I tell you that the process is not an easy one, albeit in the end it can be an extremely beneficial one.  In the meantime, take some time to ask yourself the questions at the beginning of this post, and try to determine if your company is poised for the kind of growth that could warrant Venture Capitalist funding.

 

5 Common Features of Venture Capitalist Funds Who Can Help Fund Your Business Growth

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EARLY GROWTH FUNDING – VC FUNDING

Seed funding for your business and start-up costs are, obviously, vital for getting your dream off the ground.  Getting these foundational expenses covered by family and friends, crowd funding and/or angel funding is a great way to go.  Once you have gotten established, however, and need more substantial dollar amounts to support your business’s early growth, it’s now time to consider VC (Venture Capitalist) funding.

Now that you have a bit of a track record with your business and the risk for investors starts to diminish, your investor options begin to increase even more.

I touched on Venture Capitalists in an earlier blog post.  Venture Capitalists and VC Funds are individuals or investment companies that use their money (capital), expertise (managerial and technical), and other resources in an effort to continue growing your new business endeavor.  Venture Capitalists are generally compensated via:

  • 2% management fee, plus…
  • Up to 20% interest carried on profits or…
  • Interest on their investment of 25-30%

When referring to a VC FUND, I’m talking about third-party investors who pool their monies (frequently in an LLC or LP) and manage them for the purpose of investing in businesses that may be high risk for normal bank loans.  In general, these funds have a “fixed life” of about 10 years, which includes 3-5 years of an investment cycle, followed by more focus on management and perhaps making follow-up investments in the existing portfolio.

 

VENTURE CAPITALIST FIRMS –

In the early growth phase, VC funds can typically maintain $20-50 million per fund (Series A) compared to VC funds used for mid- to late-growth investments (Series B and C), which can hold $2-14 billion.

Common features of Venture Capitalist Funds include the following:

  • Investors have a legal right to receive interest and repayment of their capital whether the business succeeds or fails.
  • Venture Capitalists invest in exchange for equity stakes in the businesses they help.
  •  ROI depends on the profitability of the venture and its growth.
  •  In general, a Venture Capitalist/Fund will receive its return on investment by selling its shares in the business when it is eventually sold to a new owner after several years.
  •  Due to the fact that their investment is not liquid, VC/Funds will do their due diligence before investing and will want to take part in the growth plan of the business.

A few more points of interest in regard to Venture Capitalist Funds:

  • In 2011 there were approximately 934 active VC firms
  • Through the 4th quarter of 2011, VC funds invested $29.1 billion in 3,752 deals in the U.S.
  • Two-thirds of the 934 invested in three deals or less; 41% did only one deal
  • 250 (27%) of the 934 firms did no new deals, which may indicate they are running short of capital.

In my upcoming articles, I will begin to address the actual process of going after Venture Capitalist funds for your business.  Have you considered whether or not your business would warrant or be of interest to a VC Fund?

6 Tips on Angel/Crowd Funding and 10 Ways to Unearth Funders

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For a few weeks I’ve discussed numerous methods for funding your start-up business.  The most recent articles have included information on angel and crowd funding.  In today’s blog post, I’m passing along several tips in regard to the abovementioned types of funding and also methods you can use to find funders.

 

Tips for Crowd and Angel Funding –

  • Resist your desire to raise $1 from a million people.  Think about the maximum number of people you can manage while still protecting your vision?
  • Don’t take money from just anybody.  The funding you accept must be legal and should support your vision.
  • Stay in control of your company for as long as possible; be sure to only share that control with those funders who share your same vision.
  • Determine, in advance, how many shares you want to maintain control of before offering any equity to funders.
  • Map out an investor relations plan for term, communication and exits.
  • Investment terms should be communicated early on and in clearly outlined.  These terms should spell out what the investor is getting right now, how you reached this price, how it may change in the future, and your rights are in the event that there are further rounds of financing.  In particular, crowd investors must understand that an investment of $1,000 that represents 10 percent of the company at the time of investment,  will no longer represent 10 percent of the company if the company grows and gets new rounds of investments.

 

With these tips in mind, here are ten ways you can locate the funders that you need:

  1. Call your chamber of commerce
  2. Call a Small Business Development Center
  3. Ask your accountant or call a Big Four accounting firm.
  4. Ask your attorney.
  5. Call a professional venture capitalist and ask if he/she is aware of an angel investor group.
  6. Contact a regional or state economic development agency.
  7. Call the editor of a local business publication.
  8. Look at the “Principle Shareholders” section of initial public offerings’ (IPO) prospectuses for companies in your area.  This will tell you who cashed out big.
  9. Call the executive director of a trade association you belong to.  Ask if there are any investors who specialize in your industry.
  10. If you use a large commercial bank, ask your lender.

 

Now that we’ve spent time delving into angel and crowd funding, in my upcoming blog posts, I’m going to help you do some do diligence regarding Venture Capitalists funding your business.

Three Key Types of Funding and Criteria You Need to Know to Finance a Business

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If you have come to the conclusion that financing your business is the most beneficial and…in the end…most lucrative option for starting or growing your company, you should familiarize yourself with the overall “funding landscape”.

Before I say more about the general landscape, I do want to address a few facts of which you should be aware if you are a female business owner. Albeit the rate of women starting businesses these days is twice that of men (women own 30% of privately owned businesses), statistics also show that:

  • Most female-owned businesses earn less than six figures
  • 30% of the businesses owned by women generate only 11% of business sales
  • If you’re a self-employed woman, you make 55% less than a self-employed man
  • Women seek less financial help for their businesses
  • Women historically have had less access to funding, but that is changing

Different kinds of funding sources often focus on financing businesses based on different criteria, such as:

  • The stage of the business cycle you are in
  • How much risk you’re willing to take (if you’re willing to take more risk, you have more opportunities)
  • What you already have in the way of financial resources
  • How much you want to control your company

As a rule, the more financing you need, the longer the funding process will take.  It’s important you’re clear on where your business is in the funding landscape:

  1. Seed Funding – getting things off the ground; often done by owner, family and friends
  2. Bridge/Angel Funding  – your business is showing signs of growth, revenue, and merit
  3. Venture Capitalist – when your business has signs of quick growth, as well as the potential for a quick return on investment

Keep in mind that there is no “right” or singular way to finance your business venture.  Although the pursuit of funding has been described by some as a “shark tank”, it should be comforting to know that there are definitely people out there wanting to invest in businesses for the right reasons (i.e. Crowd Funding).  Make yourself aware of the basic processes and do your due diligence.

Our future blog posts will expand on each of the three funding types, and explain the advantages and disadvantages for each one. Be sure to start thinking about the stage of business you are in and your risk level as you finance a business.

Why Get Help to Finance Your Business

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So…you want to start your own business.  You have a passion and a vision that you’re sure will translate into a successful venture and now is your time!  Or perhaps you already have a business that is up and running, but you want to take it to the next level.  Though you may have some personal resources for infusing your business with cash, maybe you should consider the reasons why financing your business is an excellent alternative.

Considering the idea of seeking funding for your business may seem like a daunting task, especially if you are a start-up operation.  But it may surprise you to know that there are more and more opportunities these days for unearthing much-needed financial support.

Still the question on the table is “why” go searching for ways of financing your business.  Statistics are showing us these days that those businesses that do take advantage of outside funding benefit by:

  • More rapid growth than those who try to fund themselves (the lone wolf often ends up lonely and struggling)
  • Total sales that average five times more after ten years than those of companies that aren’t funded
  • Receiving access to resources that may not fall into their area of expertise

These additional resources can include, yet may not be limited to, strategic and collaborative partnerships, new and unique talent pools, and much-needed management skills.

If any of these “whys” sound appealing (and why wouldn’t they), pursuing a means for financing your business should be at the top of your list of ways for infusing your company with not only monetary help, but also other extremely valuable resources.