VC Process

Venture Capital is the process by which investors fund early stage businesses. A venture capital funding arrangement will typically entail relinquishing some level of ownership and control of the business. The promise of a high return on investment offsets the high risk the investor takes.

The investment is usually in the form of stock or an instrument which can be converted into stock at some future date. As the business matures, an initial public offering may take place, or the business may be merged or sold. Venture capitalists typically expect a minimum of 30-35% annual return on their investment at the time they are bought out with an overall target of 10 to 30 times their total investment. Venture capitalists typically invest in high growth companies within specific industries of interest. Typical investments range from $1m - $20m. Management experience is a major consideration in evaluating financing prospects.

Seed Funding
A relatively small amount of capital provided to an investor or entrepreneur, usually to prove a concept. It may involve product development, but rarely involves initial marketing.

Early Stage Funding
Financing provided to companies that have expended their initial capital and require funds, often to initiate commercial manufacturing and sales.

Later Stage Funding
A subsequent investment made by an investor who has made a previous investment in the company -- generally a later stage investment in comparison to the initial investment.

Bridge Loan
Short-term financing which is expected to be paid back relatively quickly, such as by a subsequent longer-term loan or IPO. Also called swing loan or bridge financing.

Mezzanine Financing
Late-stage venture capital, usually the final round of financing prior to an Initial Public Offering (IPO). 

Debt Offering
A debt instrument offered for purchase by private investors. Normally with warrants for future stock purchases at fixed prices.

Equity Participation
Offer of an equity ownership position or a note which has an option to convert from debt to equity.

Initial Public Offering (IPO)
A company's first offering of stock to the public.

Joint Venture Partner
An agreement between firms to work together on a project for mutual benefit.

Two or more companies combined to achieve greater efficiencies of scale and productivity. This is accomplished through the elimination of duplicated plant, equipment, and staff, and the reallocation of capital assets to increase sales and profits in the enlarged company.

The act of one corporation acquiring a controlling interest in another corporation. In an "unfriendly" takeover", the buying corporation may offer incentives to stockholders such as offering a price well above the current market value.

Mezzanine Funding
A company's progress makes positioning for an Initial Public Offering viable. Venture funds are used to support the IPO.

Preferred Stock (preferred stock offering)
A preferred stock is a type of capital stock that pays dividends at a set rate (at the time of issuance). Dividend payments to preferred holders must be made before common stock dividends can be paid. Preferred stocks usually do not have voting rights.

Private Placement
The sale of securities to a small group of investors (generally 35 or fewer), which is exempt from SEC registration requirements. The investors execute an investment letter stating that the securities are being purchased for investment without a view towards distribution.

An investment banking firm sells securities from the issuing corporation to the public. A group of firms may from a syndicate to pool the risk and assure successful distribution of the issue. There are two types of underwriting arrangements: best efforts and firm commitment. With best efforts, the underwriters have the option to buy and authority to sell securities, or if unsuccessful, may cancel the issue and forgo any fees. This arrangement is more common with speculative securities and with new companies. With a firm commitment, the underwriters purchase outright the securities being offered by the issuer.

Determine Whether Venture Capital Is Appropriate
Consider Alternative Sources Of Capital:

    Bootstrapping By Providing Services For Hire
    Angel Investors (Former Successful Entrepreneurs In The Industry)
    Corporate Partners
    Equipment Leasing Firms

Find The Right Firm - Ask the right questions

    Stage Focus - e.g. Does the firm invest in companies that have no revenue?
    Geographic Focus - e.g. Does the firm invest in companies in the Southeast?
    Industry Focus - e.g. Does the firm invest in Internet companies?
    Size Of Investment Criteria - e.g. Does the firm invest as little as $500,000?
    Return On Investment Criteria - e.g. Is the market large enough to create a 30% annual
       rate of return for investors?
    Investment Style - e.g. Does the firm like to take a roll-up-the-sleeves, "hands-on"
       approach or a passive advisory approach?

 Prepare A Business Plan

    Hook them or lose them in the first 2 pages - lead with a tight executive summary
    Explain your company's "unfair" advantage - show why you will succeed in a sea of
    Outline a well-defined product or service and target market
    Provide good market data and analysis and a cogent plan of attack
    Demonstrate that management has the necessary skills to execute its plan
    Show uses of funds and concrete financial goals and milestones

Secure An Introduction

    Get professionals who provide services to venture capital firms and portfolio companies
        excited to work with you
    Network your way to your target venture capital firms - elicit professionals' support and
        have them provide an introduction as a trusted intermediary
    Target lawyers and accountants who provide services to the venture community

Grab Firms' Attention

    Focus, Focus, Focus - play to venture capitalists' short attention spans
    Find strong, seasoned managers willing to work on the team
    Demonstrate a very large future market opportunity
    Prove the management team's ability to adapt rapidly and successfully to a changing
    Show escalating barriers to entry in your market

Make A Powerful Presentation

    Get to the point - Brevity is the soul of wit
    Focus on the market opportunity - Technology is a necessary but not a sufficient condition
    Guide the presentation toward the management, the market and the money

Follow Up With Additional Information

    Bring up any adverse news or information first and control its dissemination
    Avoid negative surprises
    Provide complete information when requested
    Make it as easy as possible to get to "yes"

Understand The Valuation Process

    Identify the major risks in your business
    Reduce the perceived risks to increase the value of your company
    Understand investors' return on investment criteria - e.g. discount rates for earlier stage
        companies are significantly higher than for later stage ones
    Identify a clearly definable exit strategy

Years/X 2X 4X 6X 8X 10X
2 41% 100% 145% 183% 216%
3 26% 59% 82% 100% 115%
4 19% 41% 57% 68% 78%
5 15% 32% 43% 52% 58%
6 12% 26% 35% 41% 47%

Internal Rate of Return (IRR) on a multiple of original capital investment (Horizontal Scale) realized over an assumed period of years (Vertical Scale).

Survive Due Diligence

    Back up sales, revenue and expense claims with documentation
    Provide solid references
    Organize records of all contracts
    Secure all intellectual property rights
    Audit historical financials
    Examine legal documents with attorneys

Close The Deal

    Remember that the deal is not done until the money is in the bank
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