MBS e-Course:

Venture Financing

Step-by-Step Guide To Obtaining Venture Capital

Raising Funds for Your Start-up Venture – a Road Map To Venture Financing

Decide When To Seek Outside Funds

Bootstrapping

Try to finance personally 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. In fact, 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 

• their experience in similar projects and presence of competing projects in their current investment portfolio, 

• the management role they take in investment projects,

• their links with other potential investors and critical service providers that will be useful for future company growth stages and rounds of financing,

• personal chemistry.

Introduce Your Project  to Venture Capital Investor

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

Do your home work and be ready to make an impressive introduction of your venture within a minute. Investors are usually short on time. Take it as a challenge and try to impress your future financial partners with your professional approach. The introduction will either make or break your opportunity with them. Don't try to explain them your technology idea during this minute. 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? Your first task is to compel your potential investors to find out more and fix the meeting for your venture presentation. To achieve this, you need two documents:

• Milestone chart

• Cash flow forecast

Prepare Your Venture Presentation

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:

• The company's business

• The company's success ingredient

• The company's growth prospects

• The way in which you plan to achieve the company's objectives

• Your key managers and their backgrounds

• The amount of financing you require, and the way in which you will use it. 

If the venture capital investor is interested as a result of your approach to him, he will probably ask to see a business plan.

Prepare Your Project for Evaluation by VC Investors

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:

• Key personnel

• The market and your marketing strategy

• Product or service uniqueness and your ability to protect the technology

• The financial statements (balance sheet, income statement, cash flow statement).

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.

Negotiate, Valuate, and Close the Deal

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. The value of your company is the future cash that can be taken out of the business, discounted back to the present.

Get ready to share your project management, if required. Your company should now concentrate on business rather that technology development. Many venture capital firms have pool of trusted professional business managers.

 

Discover much more! Equity Investor's Compensation Ways of Realization of Financial Returns for Investors Business Negotiation Tips Venture Valuation and Keeping Your Share Valuation of a Start-up Company Small Business Valuation Valuation Quantification Techniques How To Structure Your Deal Structuring the Deal (slide show) Structuring the Deal: The Key Terms for Most Seed Investments Typical Terms of Preferred Stock Issued to Venture Capitalists Making the Best of the Venture Capital Obtained

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