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Experienced Innovator Guide |
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Venture |
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In this Section Venture capital is probably one of the least understood areas of financing. Many entrepreneurs think that these investors do the early-stage financing of relatively small, rapidly growing enterprises. Venture capital is better defined as a professionally managed pool of participation through stocks, warrants or convertible securities. If you think you have a venture that might qualify for venture capital financing, here is how you go about locating and contacting venture capital firms. The first step is identifying venture capital firms that might be interested in your company. You can use our Venture Funds List Builder or contact the National Venture Capital Association, 1655 N. Fort Meyer Drive, Suite 850, Arlington, VA 22209, (703) 524-2549, which publishes an up-to-date list of its members. The more you can network with the infrastructure and other entrepreneurs to obtain referrals to venture capitalists, the better chance you have of securing financing from these investors. The referral may involve only a telephone call alerting the venture capitalists that your business is deserving of their consideration. Be sure to expose your deal to more than one potential venture capitalist. Avoid mailing your business plan arbitrarily to many different venture capitalists. Safety in numbers is not the case when obtaining venture capital financing. The best way to proceed is to contact five to 10 venture capital firms that, according to your referrals, have a reasonable probability of being interested in your company. During the first contact, describe the venture, its products, the experience of your management team, the amount of capital sought, and the expected performance of the venture two to three years down the road. At this point, you must persuade the investor to find out more about your venture. After this initial call, the venture capitalist will quickly evaluate whether the venture is worth having you submit a business plan or perhaps make a presentation. Experts estimate that 60-80 percent of all ventures presented to venture capitalists are rejected during the first contact. Venture capitalists will agree to review your business plan only if they believe that your idea has significant growth potential in an expanding market, that your management team is well qualified to operate the venture, and that their investment will earn an appropriate return in terms of capital appreciation. Studies suggest that venture capitalists focus on five areas in their investment screening:
The management team is of key importance. Most venture capitalists would rather invest in a first-rate management team and a second-rate product than the reverse. If the venture capitalist discovers no major flaws in the preceding areas, you will be asked to make an oral presentation to the investment group. At this stage, only 10-20 percent of all entrepreneurs who originally contacted the venture capitalist are still being considered. Don't be discouraged about being turned down at this point. Your venture must fit the investment objectives and philosophy of the firm. The firm must decide on the number and portfolio mix of businesses, buy-out opportunities, types of industries and geographic regions. The intuition or gut feeling of the venture capitalist toward your deal also plays a significant role. Return to Table of Contents for this guide | Return to index of all guides | Return to the top of this page So you've got this great idea for a new business or you have just heard of a business for sale and it is exactly what you have been looking for. You've been dreaming of going into business for yourself for a long time and maybe this is the right time, but. . . . where are you going to get the money needed to start or purchase the business? Raising money for a business might not be as difficult as you think. Especially, if your idea is unique or you have the required knowledge or skills to make yourself (and perhaps your backers) a lot of money. It has been said that there is MORE venture money available than there are good business ideas. The first thing to do is to put together your business plan or prospectus for your new venture. Be sure to include all the personal information about you that might relate to the business. The Resume and Personal Financial Information Include a resume of your background, including education, job training, experience and anything else that might be considered as an asset to a business of the type you are considering. Include any personal loans you have had in the past, what they were for (car, house, etc.) and your history in paying the loans. Explain in detail exactly how much money you now need and what it will be used for. If it is for a new business, your business plan should include a projected profit and loss balance sheet for the first year of operation. This would include all salaries, utilities, office expenses and loan payments as well as projected income. Anyone loaning you money will want to see how you intend to pay it back. If you are contemplating purchasing an existing business, your business plan should include a profit-and-loss balance sheet for the past six months, as well as projected future plans showing how the new money will produce additional income. Anytime you are projecting expenses and incomes for a business plan, it will be advantageous if you base your expenses on the highest averages and the income projections on minimal figures. In this way, a slow period or unexpectedly high expenses will not surprise you. You will be better prepared to handle those extreme "ups" and "downs" inherent in any new business. Prospectus Versus Business Plan Now here's where the prospectus varies a little from a normal business plan. You will need to state exactly what you are offering a prospective investor in return for the use of his money? What is the going rate of interest for business loans at the time? What percentage of interest are you willing to pay -- perhaps a point (1%) or two above the going rate? Will you pay by monthly installments, quarterly or yearly? Are you offering a percentage of the gross or net profits? Are you offering a percentage of the business or perhaps a seat on the board of directors? Investors use their money to make more money. They know that there are risks involved with investing in new business ventures or with a person purchasing an existing business who may not have much experience at running a business. In order to attract such investors or convince them to put up the money you need, you will have to be very persuasive by perhaps offering him or her an opportunity for larger-than-normal profits on his or her money. You must also be able to back up your claims with marketing research and other means laid out in your business plan. Although venture investors are normally familiar with "high risk" business ventures, they didn't get their money by being foolish, and you will find that ALL investors will want to minimize any risk to their money. The investor should be able to read your prospectus and find a list of your personal as well as business assets. Include documents to substantiate your financial position, such as copies of your last three year's income tax returns. Be Honest and Up Front Just try to give the potential investor all the information he or she might need in order to be able to make a decision on whether to invest in your business venture or not. Don't ever try to "con" a prospective investor. Most of them are smart enough to pick up a phone and find out anything they want to know about you or your business and you never want to be caught in a lie or a half-truth. Be honest at all times. Simply lay out all the information in an honest, orderly manner so that the investor can make his decision based on the honest facts. If you have a truly good idea and you've done your homework, it is likely to interest a prospective investor. In fact, an interested investor may end up offering more help than you dared to hope for. Where do you look for prospective investors? Well, once you have the prospectus written and know exactly how much money you want and have explained, in your prospectus, how it will be spent and how it will be repaid; it is time to start looking for the right investors. As simple as it may seem, many investors have been found by simply advertising for them in a local or national newspaper. If you are in a larger metropolitan area, perhaps the local paper has a classified section for INVESTORS WANTED or VENTURE CAPITAL AVAILABLE ads. When you place your ad, be sure to state the amount of money you are looking to borrow (ask for a little more than needed so you have room to negotiate). Include the type of business venture you are contemplating and the kind of return on the investor's money you are proposing. With this information right in the ad, you will eliminate calls from the curious and narrow the responses to really interested investors. Another source of investment capital might be your circle of friends and acquaintances. Take a lesson from party plan merchandisers and set up a party and invite everyone you know who might have money to invest in your business. Explain your business plan, the profit potentials for any investor and how much money you need. Give each person in attendance a copy of your prospectus. Ask each to pledge a certain amount to become non-participating, silent, partners in your business. Current tax regulations allow up to 25 partners in Sub Chapter S Corporations. This could open the door to you gathering a group of friends to help capitalize your new business venture; especially if you have something to offer the potential investor. Another source for capital is the sale of stock in your corporation. You are allowed to sell up to $300,000 worth of stock without having to go through the Federal Trade Commission. Discuss this possibility with your attorney and tax accountant. In fact, your attorney and tax accountant (you know, the ones you consulted with as you wrote your prospectus) may be another source of investment capital. Perhaps they already know of possible investors that may be interested in a business venture of the type you propose. Ask them to steer any possible investors your way. Perhaps you could even offer a "finder's fee" if you are directed to the right investor. Be sure to give a copy of your prospectus to your banker, also. Ask or her for advice on improving it and to possibly steer any potential investors to you. Many bankers are aware of investors looking for investments that will make them more on their money than the bank can offer. Don't overlook your bank as a source for a loan. Even though their requirements are far more stringent than other sources of loans, you might still qualify. It won't hurt to make an application. Industrial banks are usually more prone to lend money for business purposes than a regular bank, so investigate these institutions as well. Insurance companies sometimes make long-term loans for business purposes and should be investigated as a loan source. Ask your insurance agent if they know whom you should contact. Professional people such as doctors and dentists are constantly looking for places to invest their surplus money, many times joining investment groups to pool their resources. Give a copy of your prospectus and explain your ideas to your own doctor and dentist. Perhaps you can convince them to invest on their own or you could ask for an appointment for you to explain your plan to the entire investment group, if they belong to one. Another possible source of venture capitol may be a Small Business Investment Company. These type companies exist for the sole purpose of lending money to businesses. Many of these investment companies trade their investment help for a percentage of the company they are helping, in effect becoming your partner. Look in the telephone book under the heading, "Investment Services". They are always on the lookout for businesses that they feel have a strong chance of making money. Many states have organized Business Development Commissions to assist in the development and growth of new business ventures. They not only provide advice to the budding entrepreneur, but some even offer money and other facilities as well. Many such commissions have volunteers available from the business community that will take the new businessperson under their wing and act as their business mentor. Check with your local Chamber of Commerce to see if such a commission exists in your state. Some commissions can even steer you to sources of venture capital. Research your library to determine if there are any foundation grants available for a business of the type you are contemplating. If your business is considered to be related to the objectives of the foundation, it could be the answer to all your money needs. It may be possible to persuade the directors of another company to invest in your business. Look for a company that can, or will, directly benefit from your business. In other words, if your business makes money, the other company will also make money. Another possibility may be to merge with another company that is already established and that has facilities that are compatible or related to your business needs. Still another possibility, along this line, might be to get the people that will supply your production equipment to co-sign for a business start-up loan. Finally, there is the loan broker or money finder. For a fee (usually up-front) they will take your prospectus and circulate it among their known investors and lenders, talking up the benefits of investing in your particular business venture. Keep in mind that not all Money Brokers are successful and none will guarantee that you will get your loan. Just be sure to adequately investigate their success rate and talk to business people that have gotten loans through them before you put up any front money or retainer fees. In short, when looking for business start-up capital, don't overlook any possibility. There are literally hundreds of ideas for finding business venture capital. I have just scratched the surface with these few suggestions. This is the age of creative financing and if you truly have a good business idea, you should be able to find the money you need. Disregard the stories of "tight money," and just start contacting people that might have money to invest. It is said that there is more money available for new business ventures, now, than ever before. You just have to get to the right person. The problem seems to be that most beginning entrepreneurs don't know what to believe or who to contact for help. Don't believe the stories of "tight money." Set your goals and go out and start making contacts. Now is the time to act! |
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