Venture Capital Blog http://blog.mycapital.com Guide to Raising Venture Capital | MyCapital.com Tue, 16 Aug 2011 06:37:31 +0000 http://wordpress.org/?v=2.8.2 en hourly 1 What Is Venture Capital http://blog.mycapital.com/what-is-venture-capital/ http://blog.mycapital.com/what-is-venture-capital/#comments Sun, 14 Aug 2011 10:20:29 +0000 MyCapital Team http://blog.mycapital.com/?p=364 vc_articleVenture capital is money provided by an outside investor to finance a new, growing, or troubled business. The venture capitalist provides the funding knowing that there’s a significant risk associated with the company’s future profits and cash flow. Capital is invested in exchange for an equity stake in the business rather than given as a loan, and the investor hopes the investment will yield a better-than-average return. Venture capital is an important source of funding for start-up and other companies that have a limited operating history and don’t have access to capital markets. A venture capital firm (VC) typically looks for new and small businesses with a perceived long-term growth potential that will result in a large payout for investors. ]]> vc_article1Venture capital is money provided by an outside investor to finance a new, growing, or troubled business.  The venture capitalist provides the funding knowing that there’s a significant risk associated with the company’s future profits and cash flow.  Capital is invested in exchange for an equity stake in the business rather than given as a loan, and the investor hopes the investment will yield a better-than-average return.

Venture capital is an important source of funding for start-up and other companies that have a limited operating history and don’t have access to capital markets.  A venture capital firm (VC) typically looks for new and small businesses with a perceived long-term growth potential that will result in a large payout for investors.

Who is a Venture Capitalist?

A venture capitalist is not necessarily just one wealthy financier.  Most VCs are limited partnerships that have a fund of pooled investment capital with which to invest in a number of companies.  They vary in size from firms that manage just a few million dollars worth of investments to much larger VCs that may have billions of dollars invested in companies all over the world.  VCs may be a small group of investors or an affiliate or subsidiary of a large commercial bank, investment bank, or insurance company that makes investments on behalf clients of the parent company or outside investors.  In any case, the VC aims to use its business knowledge, experience and expertise to fund and nurture companies that will yield a substantial return on the VC’s investment, generally within three to seven years.

Returns for Investors:

Not all VC investments pay off.  The failure rate can be quite high, and in fact, anywhere from 20 percent to 90 percent of portfolio companies may fail to return on the VC’s investment.  On the other hand, if a VC does well, a fund can offer returns of 300 to 1,000 percent.

Partnership:

In additional to a portion of the equity, a VC expects to have a say in how its portfolio company operates.  Ideally, the VC fosters growth at the company through its involvement in managerial, strategic, and planning decisions.  To do this, the VC relies on the expertise of its general partners who may be former CEOs, bankers, or experts in a particular industry.  In most cases, one or more general partners of the VC take Board of Director positions at a portfolio company.  They may also help recruit key executives to the portfolio company.

Size of Funding:

It’s important to do your homework before approaching a VC for funding, to make sure you’re targeting the right potential partner for your business needs.  Not all VCs invest in ‘start-ups.’  While some may invest small amounts of “seed” capital for very early ventures, many focus on early or expansion funding, while still others may invest at the end of the business cycle, specializing in buyouts, turnarounds, or recapitalizations.

Investment Preferences:

VCs may be generalists that invest in a variety of industries and locations.  More typically, they specialize in a particular industry.  Make sure your company falls within the VC’s target industry before you make your pitch – a VC that’s focused on biotechnology start-ups will not consider your request for later-stage funding for expansion of your semiconductor firm.  You can often gain insight into a VC’s investment preferences by reviewing its website.

In addition to industry preferences, VCs also typically have a geographic preference.  Being in the same general location as a portfolio company allows the VC to better assist with business operations such as marketing, personnel, and financing.

Keep in mind that venture capital is not an option for all new businesses.  In fact, VCs are very selective in choosing new companies to invest in, so your company may not qualify.  They’re most interested in businesses with high growth potential that will allow them to successfully exit with a higher than average return in a time frame of roughly three to 10 years, depending on the type of investment.  Given the rigorous expectations, most venture funding goes to companies in rapidly expanding industries such as technology, biotechnology, and life sciences.

]]> http://blog.mycapital.com/what-is-venture-capital/feed/ 0 What Do Venture Capitalists Look For? http://blog.mycapital.com/what-do-venture-capitalists-look-for/ http://blog.mycapital.com/what-do-venture-capitalists-look-for/#comments Sat, 13 Aug 2011 08:21:49 +0000 MyCapital Team http://blog.mycapital.com/?p=356 Venture capitalists look for businesses that have the potential to grow quickly to a significant size, yielding a significant return on the VC’s investment in a relatively short period of time.  VCs are not just interested in start-ups.  Your company’s current size is less important than its future aspirations and growth potential.  A target company for a VC is one that may be capable of becoming a large market leader in its industry due to some new industry opportunity and competitive advantage.  There’s no single determinant for a successful portfolio company, but a VC tends to focus on the following factors:

Commercially viable. Does the company have a product or service that can be reproduced efficiently to generate revenue?

Identifiable market. Is there a clearly defined market for the company’s product or service?  Does the company’s product or service meet an identifiable need in that industry?  Does the company have a reasonable plan to meet the identified need in an efficient, revenue-generating manner?

Strong management. Does the company’s leadership inspire confidence?  Do they have the vision, expertise, and the ability to propel a business to a significant level of growth?  Does the team consider best practices of those that have gone before them?

Sustainable competitive advantage. Has the company hit upon an idea that’s truly unique to the industry, one that has significant barriers to entry that will inhibit others from encroaching upon its market?  Has the company considered economic and technological change that may affect the business model?  Who are the company’s potential competitors, and what are those companies’ strengths and weaknesses?

Like a banker, a VC will also consider factors such as results of past operations, amount of funds needed and their intended use, future earnings projections and conditions.  But unlike a banker, a VC is a part owner rather than a creditor, so it’s looking for potential long-term capital, rather than interest income.  A common rule of thumb is that a VC looks for a return of three to five times its investment in a five- to seven-year time period.

A lot may also depend on the relationship between you and the VC.  Often, the firm will have you meet with every one of its individual partners to determine whether there’s a consensus on how the company will be co-managed.  Don’t underestimate the value of mutual respect, teamwork, and understanding.

]]> http://blog.mycapital.com/what-do-venture-capitalists-look-for/feed/ 0 Types of Venture Capital Funding http://blog.mycapital.com/types-of-venture-capital-funding/ http://blog.mycapital.com/types-of-venture-capital-funding/#comments Thu, 11 Aug 2011 07:45:14 +0000 MyCapital Team http://blog.mycapital.com/?p=347 The first professional investor to a deal at the start-up stage is referred to as the Series A investor.  This investment is followed by middle and later stage funding – the Series B, C, and D rounds.  The final rounds include mezzanine, late stage and pre-IPO funding.  A VC may specialize in provide just one of these series of funding, or may offer funding for all stages of the business life cycle.  It’s important to know the preferences of the VC you’re approaching, and to clearly articulate what type of funding you’re seeking:

Seed Capital.  If you’re just starting out and have no product or organized company yet, you would be seeking seed capital.  Few VCs fund at this stage and the amount invested would probably be small.  Investment capital may be used to create a sample product, fund market research, or cover administrative set-up costs.

Startup Capital. At this stage, your company would have a sample product available with at least one principal working full-time.  Funding at this stage is also rare.  It tends to cover recruitment of other key management, additional market research, and finalizing of the product or service for introduction to the marketplace. 

Early Stage Capital.  Two to three years into your venture, you’ve gotten your company off the ground, a management team is in place, and sales are increasing.   At this stage, VC funding could help you increase sales to the break-even point, improve your productivity, or increase your company’s efficiency.

Expansion Capital.  Your company is well established, and now you are looking to a VC to help take your business to the next level of growth.  Funding at this stage may help you enter new markets or increase your marketing efforts.  You should seek out VCs that specialize in later stage investing.

Late Stage Capital.  At this stage, your company has achieved impressive sales and revenue and you have a second level of management in place.  You may be looking for funds to increase capacity, ramp up marketing, or increase working capital.

Bridge Financing: You may also be looking for a partner to help you find a merger or acquisition opportunity, or attract public financing through a stock offering.  There are VCs that focus on this end of the business spectrum, specializing in initial public offerings (IPOs), buyouts, or recapitalizations.  If you are planning an IPO, a VC may also assist with mezzanine or bridge financing – short-term financing that allows you to pay for the costs associated with going public.

A key factor for the VC will be risk versus return.  The earlier a VC invests, the greater are the inherent risks and the longer is the time period until the VC’s exit.  It follows that the VC will expect a higher return for investing at this early stage, typically a 10 times multiple return in four to seven years.  A later stage VC may be seeking a two to four times multiple return within two years.

]]> http://blog.mycapital.com/types-of-venture-capital-funding/feed/ 0 VC Exit Strategy http://blog.mycapital.com/vc-exit-strategy/ http://blog.mycapital.com/vc-exit-strategy/#comments Fri, 05 Aug 2011 08:25:42 +0000 MyCapital Team http://blog.mycapital.com/?p=359 The exit strategy is the VC’s way of cashing out on its investment in a portfolio company.  A VC often hopes to sell its equity (stock, warrants, options, convertibles, etc.) in a portfolio company in three to seven years, ideally through an initial public offering (IPO) of the company.  The company becomes liquid through the sale of its stock to the public and the VC sells its stock to reap its return.

While an IPO may be the most visible and glamorous form of exit, it’s not the most common.  Most companies are sold through a merger or acquisition event before an IPO can occur.  If the portfolio company is bought out or merges with another company, the VC receives stock or cash from the event.

Another alternative may be the reorganization of a portfolio company’s debt and equity mixture, called a recapitalization.  The VC exchanges its equity for cash, the management team gains equity incentives, and the company is positioned for future growth.

]]> http://blog.mycapital.com/vc-exit-strategy/feed/ 0 Alternatives to Venture Capital Funding http://blog.mycapital.com/alternatives-to-venture-capital-funding/ http://blog.mycapital.com/alternatives-to-venture-capital-funding/#comments Tue, 26 Jul 2011 07:07:49 +0000 MyCapital Team http://blog.mycapital.com/alternatives-to-venture-capital-funding/ There are some excellent alternatives to venture capital that you should also explore in your search for funding sources.  One such alternative is an angel investor – a term for an investor that takes you under its wing and lifts you up to the next level of growth.  Angel investors typically do not have deep pockets so the average investment tends to be smaller than that of a VC, typically hundreds of thousands of dollars rather than millions.  For that amount of capital, proceed with caution if you’re considering giving up some control over your company.  For instance, it may not be wise to give a Board position to an angel investor who does not necessarily have the time, experience or expertise to make a significant contribution to your company.

You might also consider a strategic investor partner in place of a VC investment.  This could be a vendor, customer, or other business partner with whom you’re currently working, who might be interested in investing in your company.  A strategic investor often has deeper pockets than an angel investor, but typically has a specific reason for investing in your company – make sure you know the reason behind the investment.  The investor may only want to leverage your technology for its own purposes, which could have a negative impact on your business.  Or, the investor may want a licensing distribution agreement if your company succeeds, which could benefit you.  Make sure your interests are aligned.

Before you approach a VC for funding, examine your goals.  How much capital do you need?  Do you want passive or active investors?  Are you looking to ramp up your marketing efforts?  Grow your management team?  Does your Board of Directors need more seasoned expertise?  Answering these questions for yourself will help you decide whom to approach for investment capital, whether that be a VC, angel investor, strategic investor, or other.

If you choose the VC path, make your best effort to get an entrée into your target VCs through a trusted referral.  And always do your homework, both on the VCs you’re targeting and on your own business needs.  ‘Do the math,’ come to the table prepared, and keep your presentation brief and to the point.  Know your ultimate business objectives, and be honest about those goals with your prospective investors.

]]> http://blog.mycapital.com/alternatives-to-venture-capital-funding/feed/ 0 Understanding Venture Capital Term Sheets http://blog.mycapital.com/understanding-venture-capital-term-sheets/ http://blog.mycapital.com/understanding-venture-capital-term-sheets/#comments Sun, 24 Jul 2011 08:15:32 +0000 MyCapital Team http://blog.mycapital.com/?p=353 A term sheet is a document that sets out the basic terms and conditions under which the VC will invest in your company.  Work completed in the due diligence phase of the funding process is used to draft this document.  The term sheet is generally non-binding and is used as a template, along with further due diligence, to draw up more detailed legal documents.

You will, no doubt, be particularly concerned with the valuation of your company set forth in the term sheet.  To arrive at this figure, the VC takes into account your management team, your company’s market and competitive advantage in the marketplace, and your earning potential.  The various factors that go into a valuation are determined during the due diligence phase.  Note the difference between pre-money valuation – the valuation of your company before a VC invests in it, and post-money valuation – the pre-money valuation plus the contemplated investment amount.

A good tip for negotiating the best valuation is to have multiple VCs interested in investing in your company.

In negotiating your term sheet, keep in mind that there are two central issues for the VC.   The first is the economics of the deal, i.e. the return on investment and the terms that dictate that return.  The second is control, meaning how the VC will be able to exercise control over your company’s decisions.  The pertinent negotiations will revolve around these two issues.

]]> http://blog.mycapital.com/understanding-venture-capital-term-sheets/feed/ 0 Venture Capital Funding Process http://blog.mycapital.com/venture-capital-funding-process/ http://blog.mycapital.com/venture-capital-funding-process/#comments Wed, 20 Jul 2011 07:16:59 +0000 MyCapital Team http://blog.mycapital.com/?p=339 Step 1: Business Plan Submission

The first step in approaching a VC is to submit a business plan.  At minimum, your plan should include:

  • a description of the opportunity and market size;
  • resumes of your management team;
  • a review of the competitive landscape and solutions;
  • detailed financial projections; and
  • a capitalization table.

You should also include an executive summary of your business proposal along with the business plan.

Once the VC has received your plan, it will discuss your opportunity internally and decide whether or not to proceed.  This part of the process can take up to three weeks, depending on the number of business plans under review at any given time.

Don’t be passive about your submission.  Follow up with the VC to check the status of your proposal and to find out if there’s additional information you could be providing that might help the VC with its decision.  If you are asked for further information, respond quickly and effectively. If possible, always try to get a face-to-face meeting with the VC.

Keep in mind that most VCs receive an average of 200 business plans each month.  Of those, less than five percent will be invited to meet with the VC’s partners.  Just two percent will reach the due diligence phase, and less than one percent will be offered a term sheet.  Some 0.3 percent of those submitting a business plan will ultimately obtain VC funding.

**The overwhelming majority of successful proposals come from a trusted referral of the VC, such as a limited partner, another VC, a known attorney or accountant, or other professional.  If you can get your business plan referred by such a contact, you dramatically increase your odds of succeeding in getting VC funding.

Step 2: Introductory Conversation/Meeting

If your firm has the potential to fit with the VC’s investment preferences, you will be contacted in order to discuss your business in more depth.  If, after this phone conversation, a mutual fit is still seen, you’ll be asked to visit with the VC for a one- to-two hour meeting to discuss the opportunity in more detail.  After this meeting, the VC will determine whether or not to move forward to the due diligence stage of the process.

Step 3: Due Diligence

The due diligence phase will vary depending upon the nature of your business proposal.  The process may last from three weeks to three months, and you should expect multiple phone calls, emails, management interviews, customer references, product and business strategy evaluations and other such exchanges of information during this time period.

Step 4: Term Sheets and Funding

If the due diligence phase is satisfactory, the VC will offer you a term sheet.  This is a non-binding document that spells out the basic terms and conditions of the investment agreement.  The term sheet is generally negotiable and must be agreed upon by all parties, after which you should expect a wait of roughly three to four weeks for completion of legal documents and legal due diligence before funds are made available.

]]> http://blog.mycapital.com/venture-capital-funding-process/feed/ 0 How to Write an Executive Summary http://blog.mycapital.com/how-to-write-an-executive-summary-for-raising-venture-capital/ http://blog.mycapital.com/how-to-write-an-executive-summary-for-raising-venture-capital/#comments Sat, 16 Jul 2011 04:47:21 +0000 MyCapital Team http://blog.mycapital.com/?p=391 bizplan2The executive summary is by far the most important section of your business plan because it’s the first thing the busy VC or prospective investor will look for and read to get an idea of your investment opportunity. If your executive summary is compelling enough, the VC will read further, contact you for more information, and/or ask you to come in for a meeting to present your ideas. If your executive summary fails to strike a chord of interest, the reader will quickly move on to the next business plan in the stack. The executive summary – really just a compact version of your business plan – should concisely address the following:]]> bizplan2The executive summary is by far the most important section of your business plan because it’s the first thing the busy VC or prospective investor will look for and read to get an idea of your investment opportunity. If your executive summary is compelling enough, the VC will read further, contact you for more information, and/or ask you to come in for a meeting to present your ideas. If your executive summary fails to strike a chord of interest, the reader will quickly move on to the next business plan in the stack.

The executive summary – really just a compact version of your business plan – should concisely address the following:

  1. what your company does;
  2. why your product or service is unique and what opportunity you’re presenting;
  3. how your management team is well qualified to execute your business plan;
  4. how much capital you need and how it will be used.

Keep your summary brief – ideally, two pages or less. Think of it as everything you’d say to a prospective investor in a five-minute interview. There are some who advise that you write your executive summary last, to capture the crucial points you’ve written into your plan. Others advise that you write the executive summary first and use it as a road map to keep your business plan on track. Both approaches have merit. In either case, make sure your executive summary is professional, comprehensive, and concise.

Example:

iWidget, Inc. designs, manufactures and markets software solutions for the online gaming and desktop publishing industry. The company’s flagship product, iWidget Pro, is the leading software package for entrepreneurs seeking to start up a web business in the fast growing online gaming industry. iWidgetPro allows a user without any HTML skills to quickly set up an online gaming web site bundled with quick loading graphics and gaming technology. The company’s two accompanying software packages, iWidgetNext and iWidgetWorld, provide advanced design elements and technologies that allow users to customize their web sites. While the market is flooded with desktop publishing software, there is no other desktop publishing software company focused exclusively on the online gaming industry.

1. The Market

iWidget’s target market is the rapidly expanding online gaming industry and entrepreneurs seeking to set up gaming websites. Since its inception, the online gaming industry has experienced tremendous growth. Estimated at just over $1 billion in 2003, In-Stat/MDR expects the online gaming market to grow to nearly $4 billion by the end of 2008.

2. iWidget’s Competitive Advantage

As the only desktop publishing software maker focused exclusively on the online gaming industry with proprietary software that allows individuals to easily set up their own web businesses, iWidget is uniquely positioned to grow along with the industry and adapt to new industry developments quickly. Unlike other software makers’ products, iWidget’s products offer advanced and continuously updated technologies exclusive to online gaming. Software products offered by other software makers do not include these specialized technologies and do not offer the same ease of use or gaming graphics capabilities.

The expertise needed to design gaming industry-specific software is a significant barrier to market entry; iWidget’s management team includes desktop publishing industry pioneers with extensive knowledge and understanding of the online gaming industry and market.

3. Management Team

This is the second software venture for iWidget founders and co-owners J. Smith and R. Jones. Former classmates at M.I.T., the two teamed up to co-found iStudy, an online study system for college students that was acquired by BIG Textbooks Co. in 2002 for $8 million. Smith and Jones were among the pioneers of the desktop publishing software industry, and used their extensive knowledge and expertise to develop gaming-specific software that would allow individuals to set up lucrative online gaming web businesses. As the online gaming industry grows and develops, Smith and Jones are at the forefront of adaptive software that continues to evolve into a greater array of business options for online gaming industry entrepreneurs.

4. Investment

The capital sought in this proposal is iWidget’s third round of financing. Proceeds of the first round of $2.6 million in funding and second round of $3.5 million in funding have been used to expand the company’s highly knowledgeable team, develop new software products, and execute the company’s first software licensing agreement.

iWidget intends to raise an additional $3.5 million to develop additional software products, build out its marketing function, and successfully bring new products to the market.

5. Conclusion

First mover advantages have allowed iWidget to gain a dominant position in development and delivery of online gaming software. This early mover status, coupled with several years of desktop publishing management experience and technological expertise, will allow iWidget to continue to lead the field with cutting edge products in the fast growing online gaming industry.

]]> http://blog.mycapital.com/how-to-write-an-executive-summary-for-raising-venture-capital/feed/ 0 Business Plan Sample – Part 8: Appendix and Refine The Plan http://blog.mycapital.com/business-plan-sample-part8-appendix-and-refine-the-plan/ http://blog.mycapital.com/business-plan-sample-part8-appendix-and-refine-the-plan/#comments Tue, 12 Jul 2011 10:03:15 +0000 MyCapital Team http://blog.mycapital.com/?p=418 At the end of your business plan, you may want to consider including an appendix.  The appendix contains any additional information you think would be helpful to share with potential investors.  This may include resumes of your management team, additional charts, graphs, and/or financial information, any articles or other press coverage of your company, and a glossary of company- or industry-specific terms that may be helpful to define.

Example:

i.        IWidget Management Resumes

ii.       Additional financial information

iii.     Press coverage

iv.     Glossary of Terms

You should consider your business plan to be a work in progress; the work does not end with the first draft.  Show your completed draft to experts in various fields such as marketing, accounting, and finance, and use your readers’ feedback to revise and polish your plan.

You should also be reviewing your plan and, in particular, your data periodically.  Update your plan as the industry competitive landscape changes.  Additionally, if you’re finding that your actual results don’t match up with your projections, you will have the opportunity to correct discrepancies and adjust business strategies.  A business plan should be a blueprint for your company.  Over time, continuous revisions to your business plan will make it a valuable tool to help you guide your business venture.

]]> http://blog.mycapital.com/business-plan-sample-part8-appendix-and-refine-the-plan/feed/ 0 How to Write a Winning Business Plan-Introduction http://blog.mycapital.com/how-to-write-a-winning-business-plan-for-raising-venture-capital-introduction/ http://blog.mycapital.com/how-to-write-a-winning-business-plan-for-raising-venture-capital-introduction/#comments Fri, 08 Jul 2011 04:12:21 +0000 MyCapital Team http://blog.mycapital.com/?p=379 bizplanThe business plan is a detailed road map to your venture and how you plan to grow it into a successful business. It’s a crucial document for anyone seeking capital, and is typically developed with two audiences in mind: 1) angel investors – wealthy individuals who personally invest their money, expertise and experience in your venture; or 2) venture capitalists (VCs) – partnerships with funds of pooled investment capital with which to invest in a number of companies.]]> bizplanThe business plan is a detailed road map to your venture and how you plan to grow it into a successful business.  It’s a crucial document for anyone seeking capital, and is typically developed with two audiences in mind: 1) angel investors – wealthy individuals who personally invest their money, expertise and experience in your venture; or 2) venture capitalists (VCs) – partnerships with funds of pooled investment capital with which to invest in a number of companies.

The importance of a well-thought out, comprehensive business plan can’t be overstated.  VCs, in particular, review an average of 200 business plans each month.  Of the total number of plans submitted, just 0.3 percent ultimately receive VC funding.  So to even be considered, your plan needs to be thorough and engaging.

The main elements you should have in your business plan include:

  • Executive Summary
  • Company Description
  • Product or Service
  • Market Analysis and Competition
  • Marketing Plan
  • Management and Organization
  • Financial Projections
  • Fundraising and Use of Funds

Keep in mind that potential investors will judge you not just on your ideas, but also on the way they’re presented.  The more time you spend researching your ideas and mapping out your operations, the better off you’ll be.  It typically takes several weeks to complete a good, solid plan.  You won’t regret the effort because it will also help you to determine how to allocate your resources properly, address problems, and make informed business decisions as you move forward.  So take your time and write a thoughtful, comprehensive business plan that will serve you and your investors well as your business progresses.

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