Need help: Questions about Venture Capital firms

[alvaranz]

Hello,

It might be possible that in the following months I could meet a Venture capital Firm to show them an interesting project.

We are developing a technology star-up, and we are in the seed stage.

I would like to be given a some advices about the following questions:

1. Which is tha main manner in which VC firm works... is that correct that you ask them for money and they normally ask you for a participation/company shares %?

2. Are they always interested in managing some processes in the company ther are investing in or they give you the money and let you do it by your own?

3. Which is the best way of building a company society in case you are gonna ask for VC capital to a VC firm, PLC public company or LTD limited company?

4. Which are the main keypoints to be sucessful for a VC firm to invest in your project?

Any other advise would be really helpfull as this is the first time that im gonna meet a VC firm... I think there is always a first time...


Regards


Julio

[jasaunders]

See below responses.

Hello,

It might be possible that in the following months I could meet a Venture capital Firm to show them an interesting project.

We are developing a technology star-up, and we are in the seed stage.

I would like to be given a some advices about the following questions:

1. Which is tha main manner in which VC firm works... is that correct that you ask them for money and they normally ask you for a participation/company shares %?

No, that's not the way it works. Very few entrepreneurs ever get funded by simply approaching a VC firm and saying "hi Mr. VC, I have a good idea/business, will you fund me?" You need to have connections, either internally on your team, or externally through people you know.

The second part of the question, yes, VC's are a subset of private equity and thus ultimately make equity investments. However, very few VC deals are structured as I give you X millions and you give me Y% of the company. Various types of convertible securities are used to protect the firm and give them preferential treatment in many situations, be it vesting options or future dilution.

2. Are they always interested in managing some processes in the company ther are investing in or they give you the money and let you do it by your own?

They don't just hand you money and let you roam free. At a minimum you will give up control through board seats. In the optimal situation, you will leverage the VC's experience and connections in the industry to help your business.

3. Which is the best way of building a company society in case you are gonna ask for VC capital to a VC firm, PLC public company or LTD limited company?

In the U.S., VC firms will almost always prefer to invest in a Delaware Corporation. Thus it is advisable to to create one from the beginning or a Delaware LLC which can be somewhat easily converted to a Delaware Corp. In the UK I am not sure.

4. Which are the main keypoints to be sucessful for a VC firm to invest in your project?

I'm not sure I fully understand the question, but here's a shot:
1) For non-revenue generating companies they will use the VC valuation method, whereby the terminal value of the firm should produce the required IRR desired. This relates back to the post-money valuation and investment made. I am trying to say, if your return doesn't have enough potential (min. 10x, but more likely much more) than they won't even consider the deal.
2) The people matter more than the business or idea.
3) The idea is worthless, you need to be as far along in the business and as close to revenue generation or profitability as possible and have a tangible product or service in most cases. Don't go trying to sell an idea.

Any other advise would be really helpfull as this is the first time that im gonna meet a VC firm... I think there is always a first time...

How do you know you are going to meet a VC firm? Judging by your questions, I'm not sure you understand what makes an investment preferable to even approach a VC firm.

Regards


Julio

[alvaranz]

Hi jasaunders, thank you for your reply.

Im gonna develope an idea with an IT guy and co-founder and prehaps make it come true into the internet.

This company basically is networking and community based as lot of 2.0 internet companies are. At the beggining we won´t need that much money as we are gonna develope the IT infraestructure which is basically the whole company itself, but in the future ( 6 months after we run the web) I think we will need some funds to invest in business development, marketing and IT imporovement.

As i never did any deal with a Seed capital firms I would like to know how can i sucess
when facing them.

Thanks a lot for your advices, were really helpful, any other advices of course would be more that welcome.

Regards.

Julio

[akula]

josh is pretty much spot on in his feedback
i'd add that venture capital is a highly strange, specialised and dangerous form of finance, that accounts for financing a very very very tiny percentage of all uk businesses. the percentage is so small that it's totally negligible. in uk, there's about 1.2 million startups seeded every year. about 100 of them raise seed stage vc (0.008&#37, and out of those 100 startups, 80 can be expected to go under. in other words, there are much more common, cheaper and effective methods for financing startups, which are used by 99.99% of all new ventures

[alvaranz]

Hi Akula,

Thank you very much for the antiventurecapital link, I think it has been one of the most important things related with start ups ive read in the last years... really amazing.

The message is clear, " If you can choose, don ask for money to VC firms" , In case you do "make all the cashflow possible before you ask"

I understood that the 3 key points of that are:

1. Is not about business plans but about business models
2. You have to use the tools you have at hand
3. With cashflow you are someone; without you are noone

thanks too much for the link, opened my eyes so much


Julio

[akula]

sure julio, no problem. vc is definitely not one of my recommended financing alternatives for nascent entrepreneurs, and i share my conviction in this respect with the vast majority of the business community. the fact of the matter is that venture capital does not make wealthy entrepreneurs. if you look at a list of young, wealthy, self made entrepreneurs, out of a list of 100 names, you'll find that less than 5 were at any stage seeded by institutional vc, with 95% of the remaining entrepreneurs making their millions using things like customer finance, debt, franchisees, trade credit and so on.

if vc was a realistic and effective option for making young people millionaires, if it correlated positively to wealth creation, i'd recommend it wholeheartedly - unfortunately, this is not the case. the fact is, wealth creation is a lot more boring and mundane than the thrill of running around town with nothing more than a powerpoint presentation, high hopes, some generic technology and a tall story.

to that end, i think all up and coming entrepreneurs will benefit from getting in touch with peter ireland and expanding their level of skill in being able to finance projects.

[alvaranz]

Hi Akula, thank you very much for the info.

Its being difficult for me to start running the first company because i don´t come from a rich family or a family with business tradition, the main problem is to find capital and find the right partner, but i have a burning desire and enjoy thinking about how some industries might be revolutionized with new and innovative business models on the internet based.

I really think that "entrepreneur" is not a person but a feeling, even i would say a way of thinking and behaving.... I think you will understand the "artistic feeling" that I always say when refering what means for me to be an entrepreneur... "Is not the same being a VIP director of a company that trades with paintings than be the person who painted them" For me entrepreneurs are like painters.

I have got a few ideas about how to change some industries implanting new business models internet based for these industries. I found a businesspartner , he is a web developer and we are thinking of start running one of the new business models..

Regarding with the outside capital we have a little advantage on this point beacuse since he is IT developer and I know how make good and cheap marketing on the internet thru networks and so... we won´t need that much money at the beginning to launch the company and try to do something meaningfull, diferent and profitable and that clients and the market will get advantage of that

You know, I think that nowadays, people with innovative ideas, revolutionarie business models and It developers we need each other as fish and sea need each other, beacuse is in that way of partnership in which every one can make what they know to launch the company with the less outside capital possible... you see, just another idea came to my mind... "creating a community based website only for connecting IT developers and people with new and innovative business models and make it profitable in someway" what do you think??... hehe

Anyway thank you very much for the info you gave me, was really usefull, perhaps i will contact in the future with the guy that you told me.

Enjoy the week.

byee

Julio