Tag Archives: Funding a Business

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.

 

How to Know Which Venture Capitalist or VC Fund is the Right One for Your Business

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In the five-step process for going after Venture Capitalist funding, the logical first step is to Prepare, which I covered in my previous article.

Today’s blog post is going to cover step two of the five steps, and that is:  Find the Right VC.

 

FIND THE RIGHT VC –

As you’ve been thinking about pursuing Venture Capitalist funds, you may have been spending a lot of time ruminating on how to make sure you are attractive to them.  But you should also be looking at whether the VC or VC Fund is the right fit for you and your business.

You need to know that all Venture Capitalists are not created equal.  The quality Venture Capitalists should not only be ready to provide you monetary support, but also support of a “non-monetary” kind.  You want to find investors who are looking to collaborate with you and give you support on a whole new level.  Ideally, they will fill in the gaps in your foundation so that the potential that your company has is maximized, helping to lift your profitability levels to where they need to be.

This “non-monetary” support can come in the form of:

  • Operational Experience
  • Hiring Contacts
  • Service Provider Contracts (i.e. a team to help with your website)
  • Profiles and Public Relations
  • Exit Optimization – preparing for a buy-out situation right from the start; you should know your exit strategy (are you looking for an IPO, overall buy-out, to leave a legacy for your family?)
  • Experience Throughout the Process (as I’ve said…collaboration)

Once you feel as though you’ve homed in on the Venture Capitalist (Fund) that is the best fit for you and your company, it’s time to move on to Step 3 in the process, which is to create a Targeted Approach.  Funding your business can’t be left to chance at any point in the process, so my next blog post will address how to work through this next step.

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?

What Should You Consider if You Want to Fund a Business with the Seed Funding Option?

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As I discussed in my last blog post outlining the Three Key Types of Funding, funding a business on your own is very often the choice made by entrepreneurs, especially in the early, start-up phase of the business.  The option to self-finance in order to get things off the ground, as with other funding methods, has its upside and its downside.

The obvious first consideration is the significant amount of money that may be required to get things underway when pulling together inventory, employees, property leases, etc.  This can easily move into the range of $100-200K before your business starts to turn a profit.  The time frame that this might require can easily run into three years or more.

 

Seed Funding Key Consideration – 

If you have access to funds of this kind, it can be a great way to go.  One of the things that makes this such an attractive option is the pot at the end of the rainbow (also called “profit”). With seed funding, when your company becomes profitable, the profits come back to you.  However, what this also means is that if your business flounders, if it’s a failure…if the pot at the end of that rainbow is empty…you have a lot to lose.

 

Seed Funding Key Advantage – 

Another very attractive part of the seed funding piece for many is the fact that YOU are in control of your business and how it is run.  You and those you choose to help manage your business venture can run things as you see fit, whether it is day-to-day decisions or future deals, such as private equity sales.  There’s no waiting for anyone else’s stamp of approval!

 

The promise of profits and control are a huge motivation for choosing to seed fund a business for an enormous number of start-ups.  If you’ve had your own experience (whether good or bad) with seed funding your business, maybe you can share a little insight.  In my next blog post, I will talk about another type of funding for your business…Angel Funding.