Venture Capital Firms

As an entrepreneur seeking investment capital, it is crucial that investors see you as intelligent, credible and competent. Your business plan can support or deny that you possess the above attributes, depending on several important details within the text. Most entrepreneurs have heard what NOT to write (i.e., “Our competitors do not exist, and our management team is unbeatable”), but the following five tips are excellent examples of what you SHOULD do to gain credibility and be taken seriously by a venture capitalist.

1. Keep it real. When it comes to your financial projections, make sure they are realistic. Do a “sanity check” by looking at your income statement, particularly your year-to-year growth and your profit margins. If something seems “too good to be true,” it probably is. Dig through your assumptions and temper them to make sure they’re all realistic. Also, keep in mind that not everything will go as planned.

On the other hand, if you can realistically support that your business will double in size every year, by all means do so. But be prepared for healthy skepticism from investors, and be ready to answer all of their questions in detail. Another common assertion is that a business will have unrealistically strong operating margins. If you can show data from comparable companies that are actually making those margins, then your projections are believable.

2. Examine the barriers to entry. This is an overlooked part of many business plans. You will win credibility and favor in the eyes of investors if you can articulate something real other than a “first mover advantage.” It’s been said that the first-mover advantage only lasts until there’s a second mover.

3. Define, analyze, and explain your customers’ needs. Show the investor that you’ve done your homework. Use as many reliable third party resources (reports, studies, etc.) to show how your business provides exactly what the market is demanding.

4. Talk about the relevant market, not the total market. This is a common mistake in healthcare business plans; the healthcare market, broadly defined, is worth $1 trillion, but that includes everything from knuckle bandages to titanium hips and open-heart surgery. When writing the plan, include the eye-popping market size figure, but be certain to condense that figure down to your relevant market. For example, caffeinated citrus-flavored sodas are a fraction of the global beverage market, but the market size for this specialized product is much more meaningful to an investor.

5. Draw attention to tangible milestones and achievements. Have you been successful in the past? Investors will think you’re more likely to succeed in the future.

Want to finish your business plan quickly & easily? Click here for a proven business plan template.

Raising venture capital? Click here.

All the best,

Amir

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There are two types of valuations used for startups when they receive injections of outside equity capital from a venture firm: pre-money and post-money valuation. As their names imply, pre-money valuation is the value of a firm before it receives money, and post-money is the value of the firm afterward. Intuitively, the post-money value is equal to the pre-money value plus the investment. (If Matt has $100, and Pete gives him $50, Matt now has $150.)

It is extremely important to move slowly through the valuation and negotiation process, defining your terms at all times. Failing to do this can yield unfavorable results for the entrepreneur. For example, if a company is valued at $10 million, $4 million would buy either 40% of the company or 28.6% of the company, depending on whether that $10 million valuation was pre-money or post-money. Here’s how.

If the $10 million valuation was pre-money, that means the investor will add $4 million in cash to the company, raising the value to $14 million. The investor then owns $4/$14 or 28.6% of the company.

If the $10 million valuation was post-money, that means the investor’s addition of $4 million cash BRINGS the total valuation to $10 million. The investor now owns $4/$10 or 40% of the company.

The second situation implies that the value of the company on a pre-money basis was actually $6 million. The entrepreneur in this case had to give away a much higher portion of his company (40% compared to 28.6%).

Clearly, it is very important for entrepreneurs to define their terms at all stages of valuation negotiations, including pre/post money valuation, and percentage ownership stages. It is advisable to seek the aid of a qualified attorney or investment banker to aid you in this process.

Valuation is a critical part of the process, whether you’re looking to attract angel funding or raise venture capital.

Are you looking to attract angel investors? Click here.

Raising venture capital? Click here.

All the best,

Amir

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A very common mistake that entrepreneurs make, that often causes their businesses to fail, is to underestimate the time it takes to raise capital. By some calculations, the time investment required to get funding for a small business can run up to 1000 hours and 9 months of time. Be careful to avoid this pitfall; here are several facts to support your efforts.

Capital raising can be broken down into four phases:
1. Drafting the business plan and related investor materials (the private placement memorandum, due diligence documents, etc).
2. Building a list of investors to contact.
3. Actually contacting the investors and responding to their various requests.
4. Negotiating and closing the funding event.

Perhaps the single most time consuming aspect of capital-raising is developing a business plan. It can take up to 200 hours or longer to develop a high-quality business plan. A business plan involves more than simply writing; it requires a great deal of research and to understand the industry and evaluate the market. A good business plan is rich with data and facts from credible sources. It uses these facts to spell out a specific strategy. Additionally, every business plan should be accompanied by a financial model in the form of a detailed spreadsheet file, a product that takes a great deal of finance, accounting, and software expertise to create. Writing and proofreading these documents takes enormous effort; they must be flawless when presented to a venture capitalist or other investor.

After creating all the necessary documents, an entrepreneur seeking capital must create a list of potential investors. A good list is targeted and specific; every investor is different and seeks different industries, stages, and locations of companies. For example, don’t contact a bio-pharma venture capitalist to fund your software startup. The right fit between firms is essential; it is even necessary to find the right fit with individual partners within a firm. Trying to contact these investors specifically and individually is also a time consuming process.

Another factor speaking to the difficulty of raising capital are the percentages of companies that proceed through each phase of the equity funding process. Given that an investor is interested, only 25% proceed to the due diligence phase, and 10% of that actually offer funding. From that percent (2.5% of interested investors), only one-fourth actually complete the transaction (.625% of interested investors!). It can take literally hundreds of investor contacts to achieve funding.

Keep in mind how time consuming each stage of that process is. Due diligence often involves the transfer and review of a great deal of data between investor and startup, some of which the startup may not have readily available. Lastly, negotiations vary greatly in length depending on the individuals and variables involved, and the type of transaction being conducted. All things considered, raising capital is an enormous but essential undertaking to grow a small business. Do not underestimate the depth of commitment that must be made to the process. The effort is worth it, because the alternative is no capital at all.

Want to finish your business plan quickly & easily? Click here for a proven business plan template.

Need to raise venture capital? Click here to learn how to raise venture capital.

Need to attract angel investors? Click here to learn how to attract angel investors.

All the best,

Amir

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It may seem cliché, but there’s a reason you often hear successful entrepreneurs and investors speaking about “elevator pitches” and their importance. You, as a business owner, ought to be able to quickly and concisely communicate what your business is and why it will be successful. Learn it, know it, practice it, and keep it under two minutes. You never know when you’ll have an opportunity to deliver it. Many successful business deals happen outside the office. Here’s what you need to do to be ready:

1. Quickly, clearly, and concisely communicate exactly what your company sells. Is it a product? A service? Why is it valuable, and who is willing to pay? Don’t worry about the technical details of how your product works—in fact, talking about this may even detract from your elevator pitch. Focus on results and the value it adds to customers/clients.

2. Don’t be afraid to acknowledge other companies that are competitors or comparables. It’s okay to have competitors; in fact, if you claim that you don’t, you will instantly lose credibility. Remember that your company isn’t EXACTLY the same as the others (and if it is, something must be very wrong!). Competition can even be a sign that other companies and investors thought this industry was worth participating in.

However, after you mention the “other” company, you must be able to make a compelling case that you can out-compete and win against them. Know your competitive advantages and be able to list them off. It is often these advantages that win the attention of venture capitalists.

3. Lastly, you need to explain the unmet need in the market. This should come at the very end of the elevator pitch, so it will “stick” in the mind of the investor. Use facts—large, shocking pieces of numerical data can go a long way. And end the pitch with a confident statement that YOUR business, and no other, is uniquely qualified to succeed by meeting this specific market need. You have competitors, but they don’t and can’t do what you do.

As with any presentation, there’s an art to it. Practice it. Be able to deliver it without any hesitation or uncertainty. And remember, you never know when you’ll get a chance to deliver it.

Click here to learn about a proven, step-by-step method for raising venture capital.

All the best,

Amir

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If you have the chance to present to a venture capitalist, you need to come prepared to speak to three specific issues that every venture capitalist cares about. At some point, these pieces of information must come out in every presentation or negotiation with venture capitalists, without fail.

1. How your investment will make money (the “liquidity event” or “exit strategy”)

The exit strategy is the single most important thing a venture capitalist needs to know. Will the company eventually deliver a return on investment? If not, there will be no investment.

The most common types of liquidity events are acquisitions by larger companies, and (less commonly) initial public offerings (IPOs). Note that these are not the only types of exit strategies. However, these are the preferred types of exit strategies by venture capitalists, because they tend to offer the highest returns on investment.

For this reason, VCs will look for CEOs/entrepreneurs who are focused on building the company for the long term, who will work hard to grow the company to its maximum potential. As Dick Costolo said, “Make a map of how you want to grow the business, not what you want to happen to the company.” Dick Costolo is a successful entrepreneur who founded a business that was acquired by Google.

Exit strategies are critically important; however, as the CEO of a business, you ought to be focused primarily on operating the firm. Exit opportunities will develop as the business becomes successful. Focus on the here-and-now, rather than speculating on the distant future, and you will be rewarded.

2. How much your business is worth (“valuation”)

This issue is often a sticking point between entrepreneurs and investors. When you’re asked about this, it’s important to have a realistic expectation of your valuation. An idea-stage startup will not be worth $50 million dollars. On the other hand, if you give a completely “fair” projection of your business’s current and future value, the venture capitalist may use that number against you as they negotiate it downward. And if you understate the value, you either won’t get enough capital, or you won’t get any at all (who would invest in a worthless business?).

The RIGHT answer to the question is this: the market will decide. If you have the investors convinced that your success is assured, multiple venture capitalists will likely enter into a bidding market, increasing your valuation and winning you more capital as they bid higher and higher.

3. How much capital you need, and what you’re using it for

This issue comes down to being knowledgeable about all aspects of your business. You need to know everything—from the cost of your equipment to the fees you expect to pay your attorney or accountant. The venture capitalist wants to know that their money is being used and not wasted unnecessarily. Know all the details of your financial model and be prepared to speak about it confidently.

You should be able to present line items for the entirety of the funding that you are seeking. It isn’t unheard of for a venture capitalist to ask, “What will you do if we don’t give you all the funding you’re seeking? What if we give you 75%?” In this case, it’s important to have a series of milestones set up, and to understand the timing of investment and the growth of your business.

Click here to learn about a proven, step-by-step method for raising venture capital.

All the best,

Amir

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Ultimately, any presentation to a venture capitalist serves one purpose: to get the investor excited about your company. Such presentations are comparable to presentations in a corporate setting, but they should focus on the critical facts about your business. Be prepared to answer any question about your business, with facts and numbers to support your conclusions.

Venture capitalists, like everyone else, are faced with time constraints. It is best to keep your presentation succinct and focused. Consider the investor’s perspective: if you listened to fifteen presentations every week, what would make one stand out over another? You should explicitly include the following facts, to grab attention and aid memory.

1. What is your business model? What do you do?
2. How do you generate revenues? What are your costs?
3. Why is your company uniquely qualified to succeed?
4. What stage are you in? How far along is the plan?
5. What is your target market like? (Think size, growth, demographics, change over time)
6. What unmet need do your products and services satisfy?
7. Who do you compete with? (Perhaps the most overlooked portion of a presentation!)
8. How much investment do you need to succeed?
9. How long will your plan take?
10. Does your management have a track record of success?

Remember the ultimate purpose of the presentation: to generate excitement in the investor. At this stage of the process, it’s too early to expect to talk about terms and details. The venture capitalist will contact you if he is interested. Don’t try to “oversell” or push your company too hard; be enthusiastic and optimistic, but temper your presentation with some realism. Every VC hears things like “strong management team” or “successful business model” or “first-mover advantage.” As famous venture capitalist Guy Kawasaki said, “Oh God, it gives me a migraine just thinking about those things.”

Again, try to think from the venture capitalist’s perspective. What is their goal? Make money. You need to make the case that your business will grow, increase significantly in value, and reach a liquidity event for a significant return on investment.

After every presentation is a question-and-answer session. This is your last opportunity to show the investors not only that your business is an ideal candidate for equity funding, but that you are a credible manager. Know every aspect of your finances and projections, inside and out. Know exactly where your business is going and when it will be profitable. Include detailed plans for your capital expenditures and uses-of-funds. Remember, this is your chance! Put your business on display and demonstrate how capable and enthusiastic you are about building it.

Click here to learn about a proven, step-by-step method for raising venture capital.

All the best,

Amir

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Not all venture capital firms are created equal. They differ widely in a number of different variables. When seeking venture capital investment, you should narrow your search to firms that would be most interested in you.

Fund Size. More likely than not, your company will require additional equity capital in the future. If a venture capitalist has a large fund available, they are very likely to be interested in making further investments in the future. Follow-on rounds can be much easier if you simply use the same investors.

Location. Like angel investors, venture capitalists prefer to invest close to their physical location. This allows for more interaction between the investor and the investee. Managing such a relationship is easier if you don’t have to deal with time zones and geographic barriers. VC’s try to stay within 100 miles of their office.

Other Investments. What other companies has the venture firm invested in? It works in your favor if their portfolio includes other companies who work in related fields. Often, they form a network that can be mutually beneficial for all parties. You may have synergies with these companies. This makes your firm much more attractive to venture investors.

VC Firm Leadership. Remember, venture capital firms are made of people. These people all have specific expertise in slightly different areas, and they seek investments in industries with which they are familiar. If you choose the right firm with the right partners in leadership, they will support the growth and development of your startup with knowledge and expertise.

Early, Mid, or Late Stage? Venture capitalist firms are often selective about investing in certain “phases” of a company’s development. Some prefer to offer seed capital, others prefer companies that already have significant operations in place. Find a firm that invests in companies at your stage.

Industry. This is among the most important factors in choosing investors. It probably doesn’t make sense to reach out to medical device investors to fund an enterprise software company. Even if your company is sure to be a star performer, venture capitalists probably won’t invest in you.

If you spend a little bit of time screening venture capitalists before contacting them, you’ll save yourself some time and effort, and increase your chances of successful funding.

Click here to learn about a proven, step-by-step method for raising venture capital.

All the best,

Amir

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After a venture capital firm makes an investment decision, there are a number of critical issues that must be worked out contractually to ensure a good relationship between investor and investee.

Valuation. This is the most important issue to negotiate with venture capitalists. The outcome of this decision determines the valuation of your company—how much the investor pays for what percent of your startup. It works in your favor to give away a lower percentage for a higher dollar amount.

Timing. In order to minimize the risk of their investment, many venture capitalists provide their funding in stages. Installments of capital might come after specific time stages or operating landmarks.

Stock Issuance Timing. In some cases, it is preferable for investors to see that ownership stock comes in waves (“vesting”).

Company Management. Venture capitalists invest in people as much as they do in companies. In many cases, the investor will mandate that specific people be placed in key positions in the company, or that you hire certain individuals at certain stages. This is often a good thing, because venture capitalists and their networks tend to be very capable and knowledgeable. However, it affects compensation and stock options, and may dilute the holdings of the founders.

Employment Limitations. Generally, venture capitalists dislike contract clauses that prevent the firing of employees, or set compensation levels too high. These types of investors also may require non-compete agreements that limit what types of work you can do after your time of employment at this particular startup.

Proprietary Rights. Venture capitalists invest in technologies. They want to ensure that these technologies are bound, by law, to the company they fund, and not to any individual. Individuals move around and therefore represent a risk to the investment. Furthermore, investors usually want to see that any new innovation remain with the funded company as well. Confidentiality agreements are not uncommon.

Lock-up period. A common issue in negotiations is the lock-up period, a specified time period where this specific investor is the sole entity allowed to make the investment. This time period, often 30-60 days, is used to conduct due diligence on the company to be invested in.

Liquidity Events. The single most important part of an investment is the investor’s exit strategy; how are they going to get their money back, plus a return, at some point in the future? It generally occurs in a “liquidity event,” an acquisition or public stock offering. This issue will deal with registration rights, rights to sell stock, and forced redemption of stock. It is essential to seek the counsel of a qualified third-party professional to ensure that these terms are fair.

The results of negotiations on these issues will have tremendous impact on the future of any firm or entrepreneur who receives venture funding. It is critical that entrepreneurs seek the services of reliable, professional advisors to assist them through this process.

Click here to learn about a proven, step-by-step method for raising venture capital.

All the best,

Amir

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There are so many venture capital firms out there… Which one is right for you?

First of all, it is important to remember that venture capital firms are not monolithic, impersonal entities. They are partnerships consisting of individual partners. These partners generally take a Board of Directors seat in your firm when they invest. Each partner has unique, specific experience in the industries and businesses they have worked with. Therefore, when you select a venture capitalist, you’re also selecting a member of your Board of Directors. It is important to select the partner who has the most relevant expertise, who understands your business and value proposition the best, and who will fit with your company the best.

It is common practice for venture capital firms to make it plainly and publicly known who their partners are and what fields they are experts in. You can easily discover basic information about their background, industry and work history, education, and various other affiliations, depending on the depth of the biographies listed on the venture firm’s website. If you successfully identify the right venture capital firm partner, they can be a boon to your business in addition to providing capital.

After you’ve selected a specific partner whom you’d like to bring on-board with your startup, you need to contact them. Venture capital firms receive huge number of unsolicited business plans, and it can be difficult for them to screen all of them. For this reason, it is best to get a personal introduction or recommendation from another professional when seeking venture capital. Lawyers, accountants, previously funded entrepreneurs, company or university alumni, and any number of other connections can be useful in winning you credibility with venture capitalists. To get an introduction, oftentimes you must simply ask.

Identifying the right partner is the first step to raising venture capital; then, you must get their attention and convince them to believe in your opportunity, and finally, you must convince the remainder of the venture firm that your startup is worth their investment funding.

Click here to learn about a proven, step-by-step method for raising venture capital.

All the best,

Amir

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What are the differences between angel investors and venture capitalists?

Among the many differences, there are four that stand out as critical for entrepreneurs.

1) Management/Advisory Participation

Almost without exception, when a venture capitalist makes an investment in a startup, it comes with strings attached: they require at least one seat on the Board of Directors, a sub-organization within a company that ensures that investors’ money is managed well. They tend to be very involved in the operations of the business. Angel investors will occasionally desire this degree of participation, but not nearly to the same degree as venture capitalists. This type of participation is usually a good thing; investors fund companies in industries where they feel they have expertise, and they use this knowledge to provide advice and assistance in growing your business.

2) Whose Money They Invest

Angel investors are generally wealthy individuals (successful professionals or fellow entrepreneurs who have sold businesses) who are seeking alternative ways to grow their money. The funds that they provide come from their own personal pockets, or from their family’s accounts. For this reason, their money is less constrained and they are able to invest when and where they see fit. Venture capitalists, on the other hand, are generally investing other peoples’ money. A pension fund or network of wealthy families might entrust their money to a venture capitalist to invest in specific ways. For this reason, venture capitalists have restrictions and requirements that they must meet: for example, certain levels of return on investment, or certain industries. They also tend to have a great deal more money available to invest.

3) Professional vs Amateur

Another key difference in these two types of investors arises from their degree of professionalism. Without exception, venture capitalists are professional investors who invest money vocationally, as their job. The process of joining a venture capital firm is extremely selective and arduous. Angel investors vary a great deal in their degree of professionalism and experience. On one end of the spectrum, they can be equally professional and experienced as venture capitalists; on the other, they may be casual investors who fund startups as a hobby.

4) Size of Investment

This is perhaps the most striking difference between angel investment and venture capital investment. Venture capitalists tend to invest significantly larger amounts of money than do angel investors. For example, a typical investment by a venture capital firm ranges from $5 to $10 million, with $2 million as a bare minimum. The reasoning behind this is that they prefer a very strong return (40%, for example) on a large investment to an outstanding return (perhaps 100%) on a small, angel-sized investment. Angel investors can fund companies in any amount, but it typically ranges from $50,000 to $1 million.

Are you looking to raise capital? For many businesses, it makes sense to target BOTH angel investors and venture capitalists (first, a round of angel financing, and then venture capital).

Click here to learn how to attract angel investors.

Click here to learn how to raise venture capital.

All the best,

Amir

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