Special Guide for Raising Money From Venture Capitalists and Angel Investors

Is your company “really” investor ready? Do you know how to market and sell to outside investors? Do you have a sound financing strategy? Here is what Anita Roddick, founder of The Body Shop, once said: “There are only two ways of raising money: the hard way and the very hard way.”

We advise many entrepreneurs and know what you are facing right now. Here’s some information we share with them:

The world of venture capitalism has its own language, its own process, and its own methods of communication between entrepreneurs and potential investors. All entrepreneurs must go through the formal venture process when raising money from outside investors. Just take your time to carefully research and understand how the private equity, risk capital, venture capital works.

What is a business plan?
Most people hear “business plan” and think only “start-ups.” Yet this is not always true because ongoing companies create business plans, project plans, new product plans, and plans for acquiring and integrating other ventures. General Dwight D. Eisenhower once said, “Plans are nothing. Planning is everything.”

Why do we need a business plan?
The business plan is perhaps the most important written document an entrepreneur can ever create. It describes all critical internal and external elements and strategies for guiding the direction of the venture’s first several years as well as giving potential investors an idea of the venture’s structure, objectives, and future plans. It communicates important entrepreneurial management practices, such as how the venture will mitigate risk, and how the venture will manage uncertainty.

What do we need in a business plan?
Business planning is the process of uncovering and identifying what creates and drives value in your business; the business plan is the document that communicates your Value Drivers.

Detailed Business Plan Outline
Our outline simply follows the content and approach of our online resources. We recommend that the total length of your business plan be no more than 15 to 20 pages. Each Value Driver should be one page (10 total pages) with 3 to 5 paragraphs for each page. Your financial section should be limited to 3 to 5 pages (the notes and assumptions can be embedded on the spreadsheets) and your Executive Summary should also be 3 to 5 pages.

How do I get started writing a business plan?
Your business plan acts as a reflection of you, showing that you have really thought things through. It requires advance preparation, delegation, refinement, and, most importantly, a disciplined approach. Eugene Kleiner shares sage advice, “Writing a business plan forces you into disciplined thinking if you do an intellectually honest job. An idea may sound great in your mind, but when you put down the details and numbers, it may fall apart.”

Why do some business plans fail?
The cold reality is that no one is going to read the plan with the intensity you had when you prepared it. So knowing this, most entrepreneurs focus on just getting the plan done rather than on getting the right plan done. But what is the perfect plan?

What is a cash budget table?
Every entrepreneur planning a new venture faces the same dilemma. What are the critical capital resources? How much cash is needed? When is it needed? How will the funds be used? How soon will the venture reach profitability? To answer these questions, it is important to first gather all the pieces of the puzzle that are known.

What is your financing strategy?
Funding is the oxygen that fuels a fast-growing business, but understanding the capital sources, potential capital structures, and creating a financing strategy can be confusing and overwhelming. The key is to understand your financing options, understand your alternatives, and create a financing strategy that best matches your situation.

What are the stages of a company in the food chain?
According to Dan Bassett, a partner at InnoCal Partners based in Costa Mesa, California, “The number one piece of advice for entrepreneurs is to know where you are on the food chain. If you don’t know, seek advice and make use of the very high quality people in your environment.”

Why do we need a financing strategy?
You need to have a financing strategy before you do the business plan, but you don’t actually start to seek financing until you have your business plan complete. In fact, your business plan communicates not only your vision and business strategy but should also complete and support your financing strategy.

How can we bootstrap (self-financing) the launch our new business?
Tom Siebel founded Siebel Systems in 1993 with $50,000 in East Palo Alto, California. Ten years later his company had nearly $2 billion in revenues, with 8,000 employees working out of some 136 offices in twenty-four countries. Said Siebel, “We didn’t spend much money. We had the crummiest space in Silicon Valley. All of our furniture was the crummiest furniture that we could buy at auction.”

What is an accredited investor?
Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the registration requirements.

What are angel investors?
Venture capitalists invest in more established ventures, but informal angel investors are the primary source of early stage risk capital for entrepreneurial ventures in the United States. Angels are private individuals that invest their own wealth in entrepreneurs who are not directly related to them through family or prior friendship, with the mindset that they will get higher returns as the ventures get “discovered” down the road by an attractive buyer.

What are venture capitalists?
The NVCA defines venture capital as money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors.

How does the venture capital industry work?
Marc Andreessen, co-founder of Netscape, vividly describes an insider’s view to the venture capital industry’s food chain: The best venture capitalists (VCs) can see ahead and are willing to think they can fix things, put the management team together, do all this stuff. Any huge success story like Netscape or Apple is like a sausage factory. Everybody likes to eat sausage; no one likes to see how it gets made. These things are all sausage factories inside.

How do we find investors?
First-time entrepreneurs out raising money normally make one of two mistakes in approaching venture capitalists. They contact either too few, or too many. According to Tom Clancy, a partner at Enterprise Capital, raising money for start-ups is probably more dependent on personal relationships than it is on the underlying potential and economics of the deal.

Do we need a non-disclosure agreements? (NDA)
Do not get hung up on having every investor sign a nondisclosure agreement (NDA). Asking a formal private equity investor to sign an NDA is a sign of an amateur.

What’s the difference between equity and debt?
There are two types of financial offerings available to entrepreneurs, equity and debt. In exchange for private equity investments, the venture issues equity securities. There are three basic types of securities.

How do you know you have the right investor?
What makes a great venture capitalist? Now that you know and understand the specifics of your business—you know your numbers cold, you have the financials prepared, you understand how much you need, and grasp the fundamentals of valuation—it is about finding and evaluating the right investors for your specific deal. But navigating through the universe of investors can be confusing, even for the most experienced entrepreneurs.

What are some alternative sources of financing?
We realize that not all companies are venture-fundable. Venture capital is a unique form of financing and needs these three elements in a deal: It must have rapid growth, get really big sooner rather than later, and remain profitable for a long time. Our Web site is not intended to explore and discuss other sources in great detail. But we do intend to give a broad view of this topic and refer you to additional resources.

What are corporate venture investors?
Corporate venture capitalists will often co-invest along with traditional venture capitalists. They can add additional value by opening up access to corporate distribution channels, technology and know-how, and strategic partners.

What are angel investors?
Venture capitalists invest in more established ventures, but informal angel investors are the primary source of early stage risk capital for entrepreneurial ventures in the United States. Angels are private individuals that invest their own wealth in entrepreneurs who are not directly related to them through family or prior friendship, with the mindset that they will get higher returns as the ventures get “discovered” down the road by an attractive buyer.

Be Careful Using A “Matchmaker” to Help You Raise Money
As this report “The Search for Venture Capital: Beware of “Finders” Operating As Unregistered Broker-Dealers” prepared by the law firm DLA Piper points out, there is potential liability for Start-Ups. The potential problem with using a finder is that the finder may be operating as an “unregistered broker-dealer” of private securities.

What is the venture drill process for raising money?
All entrepreneurs must go through the formal venture drill when raising money from outside investors. The three steps to the drill are packaging, placing, and presenting. Packaging is researching and writing an effective business plan. Placing is skillfully introducing the opportunity before the best investors. Presenting is communicating and making the deal happen in a formal meeting at the investors’ closing table.

How does a venture capital firm screen deals?
Venture capitalists mitigate the risk of venture investing by developing a portfolio of companies in a single venture fund. They invest in a small percentage of the business plans that get placed and reviewed at their firms. When considering an investment, they carefully screen the technical and business merits of the deal before them.

How do we manage the venture drill process?
Sorry, just like in romance and dating, the answer is “No” until you hear a “Yes.” Don’t be shy, manage the relationship. Venture capitalists are very busy folks. They all have huge slush piles of unread business plans and unread e-mails, and lots of board meetings to attend. It takes at least six calls or e-mails before they return one.

How do we create a PowerPoint presentation?
Writing is tough for everybody, and making slides that represent what your deal is doubly tough. You want your listeners to be listening to your sales skills, not figuring out what you have on the slides, so keep it very simple. Here are some pointers that helped one of our entrepreneurs raise over $13.5 million.

What financials do we need for investors?
Professor William Sahlman writes, “Entrepreneurs are value creators, investing today in hopes of generating cash flows tomorrow.” So the main purpose of the financial section of a business plan is to formulate a credible, comprehensive set of projections reflecting a venture’s anticipated financial performance.

What are the supporting documents for investors?
Before any credible private equity investor will write a check to an entrepreneur they will conduct a complete background checks and detailed examination of the Company’s legal status and other important documents. We have provided discussions here for entrepreneurs to know about these supporting documents, and what entrepreneurs need to know before they talk to any potential investors. Our discussions here come from in-depth interviews and discussions with some of the world’s leading venture capitalists and professionals.

How to value your deal like an investor?
One of the entrepreneur’s most difficult challenges is assessing and determining a value for the emerging growth venture. Simply put, value is determined by the interaction of three major ingredients: cash, risk, and time. Valuation depends mainly on understanding the venture, its industry, and the general economic environment, combined with a very prudent job of forecasting. Investors know that careful thought and hard work leads to foresight.

How do we negotiate a deal with investors?
Congratulations! Out of a thousand plans, maybe 100 or so get considered and only about twenty get to meeting – so you are on your way! As you get into the talking points of a deal, know that there is much you can control when negotiating with venture capitalists. In fact, far more is negotiable than you may think, it only depends on your negotiation skills and tactics.

How do we present before investors?
The VC will also go over your basic deal points and test the chemistry and the fit of your personalities. If all signs lead to a “Go” then the VC will invite you for a formal meeting at the firm’s office before the partners. And congratulations—the odds are going in your favor, you made the first cut. Out of 1,000 business plans, maybe less than 100 are considered for a meeting, maybe less than twenty get to due diligence, and only about ten are actually funded.

What are deal killers with investors?
Just like it sounds, it is something that will kill the deal instantly for that particular investor. Triggering any one of the deal killers can be quite costly for you, especially when there is a limited number of venture firms you can approach.

SOURCE: Roadmap To Entrepreneurial Success