Raising Venture Capital

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What is Venture Capital?

Venture Capital provides long-term, committed share

capital, to help generally unquoted companies grow

and succeed. If you are looking to start up or expanding a business, venture capital could help you to do this. Venture Capital is invested in exchange for a stake in your company and, as shareholders, the investors returns are dependent on the growth and profitability of your business.

The Venture Viability Metrics

Rate

Return exceeds cost Cost of capital Cost exceeds return Funding not available
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Fund these ventures

Venture Financing
Nature of Risk
Market demand Operating costs Unexpected capital costs Customer/industry changes

Financial Risks
Well developed risk management practices and supporting industry Risk financing through derivatives Well-developed risk management practices and supporting industry Risk finance traditionally through insurance, but recently through captives and capital markets products as well
Credit default Financial market risks Interest rate changes Currency/foreign exchange fluctuations Liquidity, cash flow issues Property damage

Strategic Risks
Demand projections often have little credibility Operating costs often are underestimated Unforeseen capital costs can cause major problems No risk finance or other risk transfer methods

Integrated Risk Information systems

Accounting/ control systems Key managers Supply chain

General liability/ legal risks

Workers compensation Natural disasters

Developing risk management field Some risk financing in business interruption insurance; risk transfer through PEOs; business interruption services

Business interruption

Hazard Risks

Operational Risks
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Would your company be attractive for Venture Capital?

Many companies are life-style businesses whose main purpose is to provide a good standard of living and job satisfaction for their owners. These businesses are not generally suitable for venture capital investment, as they are unlikely to provide the potential financial returns to make them of interest to an external investor.

Would your company be attractive for Venture capital? Contd..

Venture Capital firms are interested in Entrepreneurial businesses which can be distinguished from others by their aspirations and potential for growth, rather than by their current size. Such businesses are aiming to

grow rapidly to a significant size. Venture capital

investors are only interested in companies with high growth prospects, which are managed by experienced and ambitious teams who are capable of turning their business plan into reality.

What venture capital investors look for?

The expertise and track record of the founders and management The features and growth potential of the market The synergy between the management, business opportunity and the investors skills and investment preferences The financial commitment of the entrepreneur The exit avenues

How do venture capital firms evaluate?

Is the product or service commercially viable? Does the company have potential for sustained growth? Does management have the ability to exploit this potential and control the company through the growth phases? Does the possible reward justify the risk?

Does the potential financial return on the investment

meet their investment criteria?
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Critical factors for venture capital?

Reliable Idea: What makes an idea compelling to an investor is that it reflects a deep understanding of a big problem and offers a viable solution.

Market Opportunity: You should be targeting a sector

that is not already crowded and there is a significant problem that needs to be solved, or an opportunity that has not been exploited

Critical factors for venture capital?

Contd..

Competitive Advantage: Competition is not just about

direct competitors; it includes alternatives and other better solutions. Team: The promoters must have the ability to launch the company and attract the good talent that is needed to execute the idea successfully.

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Critical factors for venture capital?

Contd..

Financial Projections: Your projections must tell your story in figureswhat drives your business growth, what drives your profit, and how your company will evolve over the next few years. Validation: Is there any evidence that your solution will be interesting for your target customers? Do you have an advisory board of reliable industry experts?

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How to fine tune business plan?

A business plan should show potential investors that if they invest in your business, you and your team will give them a unique opportunity to participate in making an excellent return. It should be considered an essential document for owners and management to formally assess market needs and the competition; review the business strengths and weaknesses; and to identify its critical success factors and what must be done to achieve profitable growth.

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Broad Contents of Business Plan

The market The product or service The management team Business operations

Financial projections
Amount and use of finance required Exit opportunities

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Selecting a Private Equity Partner

Stage/type of investment Industry sector Amount of investment Geographical location

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Keys to Success
Understand Process
Allot enough time to raise funds (6-8 mos) Timing and appropriateness of VC investment Stage investments to get maximum valuation Know limits of negotiation

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Useful tips
Be prepared that private equity investment is a highly selective process VC typically invest in only 2% to 5% of the opportunities they see, and they see a lot of proposals. The proposals selected should have potential for high growth in sales, profits and shareholder value and have the management team to achieve that growth. VC are usually investing other peoples money and that they are highly regulated to do their job properly. They will need to have a detailed understanding of you and your business before they invest this takes time, so you must need a lot of patience. The process of raising venture capital will typically take 3 to 6 months.

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Useful tips

contd..

Always keep in mind that VC back teams rather than individuals so make sure you cover the entire key management functions relevant to your business: e.g. general management, marketing, sales, finance, development, production, fulfillment etc. PE will be looking for both breadth and depth of experience. Dont assume that VC know your products, sector or industry, so keep it simple and avoid - or at least be prepared to explain any jargon. Dont be afraid to go right back to first principles if necessary.

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Useful tips

contd..

Remember that you are selling a stake in your company, so treat VC the same way youd treat any potential customer or commercial partner. Be prepared to answer very detailed questions about projected sales and their related direct costs, market drivers, products, actual and potential customers, pricing, volumes, sales and marketing strategy, competition etc. this is the heart of your proposal.

Get advice from a firm that understands venture capital in the long run it could save you time, money and heartache.
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