Venture Capital – Stages Of Financing

The first stage of financing is to raise money from personal savings, credit cards, friends, and family. It is sometimes known as “golf-course preferred” when you ask people to invest in your company after meeting socially or playing a round of golf together.

You need to build significant critical mass before you can attract an outside angel or venture capital investor and eventually to secure an initial public offering (IPO). The developing of the necessary critical mass can take years of hard work.

There are some companies called incubators that will take an early stage business and guide them through the entire process of building an enterprise but will take a large percentage of your company in return.

Venture Capital – What To Consider Before Raising Venture Capital

Venture capitalists want to see more than an idea. They want to see that you have a client list, a finished product that is beyond the beta stage, a clearly defined need in the market place, and sales. They want to see that you have significant traction in place.

Although during some periods, venture capitalists were willing to take a long-term perspective; this is a very rare phenomenon. Most venture capitalists want to see a return in a very short period of time.

An essential characteristic of a successful entrepreneur is the ability to raise capital.

Develop a relationship with your banker before you need the money. The final decision of whether to give you a loan or not rests with the loan officer. If she knows you and understands your business, your chances of receiving the money increase dramatically.

Venture Capital – The Types Of Businesses Venture Capitalists Prefer

Venture capitalists will not invest in anything illegal or immoral. Anything that involves laundered, dirty, or offshore money will not attract venture capital investment.

Otherwise, a venture capitalist will look at any business providing that it meets their criteria of providing a return on investment, having good management, supplying a sound business plan, and demonstrating a developed product or service with revenues.

Some venture capitalists as a matter of policy will restrict themselves to investing in a specific industry. It is the role of the intermediary to know which firms would be willing to invest in your company.

Venture Capital – How Much Money To Ask For

There is no such thing as an overcapitalized small company.

Venture Capital – How To Select The Right Venture Capitalists For Your Firm

Some venture capitalists have highly targeted funds. These fund managers would have a full knowledge of your industry and be able to help spot the opportunity for your business.

Be comfortable with the venture capitalists. Seeking their money is only the beginning of a relationship with them. They will become board members and have a major say in the development of the company’s strategy and policies. It is important that you have good chemistry together, respect each other, and can get along.

Venture Capital – How To Valuate Your Business

The venture capitalists will usually look at your projected, or pro forma, earnings 3 to 5 years from the point of their investment. From there they will deduct a 30% annual return that they expect to receive and will subtract a further percentage for the fact that you are a private and therefore non liquid company. This is known as the pre-money valuation.

Venture Capital – Valuating A Business: Examples

Over the past 3 to 4 years, venture capitalists have been very conservative with their investments. This is because they have had so many problems within their current portfolios that they cannot afford to take the same risks on new companies.

The method of valuation will also depend on your industry. In a traditional, or smokestack, industry there are typically many comparative examples. Here you can work from the earnings before interest, tax and depreciation (EBITDA) of similar companies and apply a ratio to your own business.

New products and technologies pose a valuation problem due to the lack of comparative companies. It is much more difficult to valuate these businesses.

Venture Capital – How Long It Takes To Get The Money

It will usually take between 3 and 4 months. It is very rare to obtain the money in under this 3 to 4 month period.

Raising money is not like hiring people or purchasing new machinery. It is about building confidence between yourself, your company, and the investor. There is a certain of amount of due diligence that will be needed to build this confidence.

Your ability to project your company in both a strategic and factual way will be critical to your success.

The timing also depends on the sophistication of the entrepreneur. It the financing presentation is well laid it, it will make it much easier for the intermediary to get you in front of a venture capitalist.

Make contact with intermediaries and venture capitalists before you need the money. This way they can track your progress, they know you before you need it and it will make it easier for you to obtain the necessary capital. Nobody likes to be rushed, especially venture capitalists.

Evan Carmichael