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David. A. Goldsmith


You want to buy a new company, expand operations, acquire a business, or raise capital. You’ve decided to go for venture capital funding versus a bank loan for a multitude of reasons from the risks involved to the amount you need to carry out your plan.

Do you know as much as you’d like about gaining capital? Most people don’t. Their expertise is in their business, not in capital funding. Here are ways to protect yourself from vultures, deals you can’t afford, and the nightmares of both.

Some quick explanations:

A venture capitalist (VC) is a person, group of people, company, or group of companies with money to invest in your business.

A VC broker represents you (or possibly a VC) and arranges the parties to create a deal. This article is about working with the broker.

Since many brokers are ethical, why such a negative slant? Over two months, two of our consulting clients nearly lost their shirts dealing with brokers. One broker tried to quadruple dip on a VC deal by taking a commission, bringing in another broker (who needed a commission), taking excessive points on growth targets, and adding interest fees into a contract making the deal impossible. Had our Boston-based client signed with his current and (estimated) future numbers, his decade-old business would have perished.

Another broker wanted a client in Connecticut to sign a broker-exclusivity contract, forcing our client to pay commissions on any type of financing, regardless of whether the deal originated through the broker or not. If an SBA loan or unrelated VC came through, our client would pay $400,000 in unearned commissions.

(With each client, the broker used four or more of the nine strategies below that would be harmful to your fulfilling your capital needs.)

Every deal has its own merits and challenges. Regardless, nine general tips to consider are:

1. Don’t sign exclusivity contracts barring you from finding your own funding. A) On one hand, a broker has every right to protect his intellectual property by preventing you from bypassing him and striking a deal with one of the contacts he’s introduced you to. B) On the other hand, beware of anything preventing you from gaining funding from any other source without going through the broker.

2. Avoid long-term cancellation clauses that hold you hostage for a year or more. Sixty to ninety days is reasonable. You’ve got to be able to move on. A broker’s objective in creating a long cancellation clause is to prevent you from securing funding with the VC they’ve introduced you to while at the same time making it difficult for you to find any funding. Keep your options open and agree to 90 days giving you time to find new opportunities.

3. Prevent double dipping. A savvy broker has multiple compensation channels: initial commission, commission on additional funding you get during a 1 or 2-year term, compensation if the business is sold during specified time frame, percentage of interest on monies lent, etc. Read fine print, several deals that have passed over our desks in the past 6 months have had hidden compensation clauses that would have made any deal difficult to swallow had they had signed with the broker. (Have legal representation from an expert in VC funding.)

4. Know the type of funding you want before you start searching, and bind your broker to the specifics with a contract. Looking for a VC with an equity position who wants shares and is interested in growing the firm, or do you just want financing? Initially, the two can appear similar. In one VC deal, the company looking for funding thought they were getting an equity partner, but the VC only wanted to achieve 3.5 times their ROI in 5 years in monthly fees and interest. The final terms of the agreement: the “receiver” would get $2.9 million, but would pay back $6 million in 5 years. It was not the deal he expected.

5. Remember that VC funding is all negotiation–between you, the VC, and the broker. First, never let the broker think that you don’t have other options. If they think you’re between a rock and a hard place, you’re in trouble. Second, VCs know the financing game in and out, and often they will tell you the deal is dead and not call back for weeks just to get you hungry. Sometimes the broker is in on this strategy. You must be patient. Third, even with contracts, the broker may only secure a few deals a year to make a great living. If they’ve invested four months on the project, they want the deal as badly a you do. Then ask for concessions. Realize they might jump up and down and scream as part of their negotiations. It’s a common strategy; look past it. In every deal, conditions change, and you must remember that commissions, fees, and terms can also change.

6. Know your broker’s loyalty, and make sure it’s to you, not to the VC, or solely to the broker’s own best interests. Think of real estate. The seller’s agent’s loyalty rests with the seller: the buyer’s agent’s with the buyer. Work only with people you trust.

7. Be careful of brokers in disguise. Some mask themselves as venture capitalists and yet have no money. What’s the problem? You think you’re working with an investor whose income is contingent upon the growth and success of the deal/business; in fact, you’re working with a commissioned salesperson who hasn’t invested a cent in the venture and only stands to gain as long as he links two parties. The only way you may ever know is when the deal is being written up and you catch the fine-print line for commission to XYZ firm.

8. Use a VC’s leverage if the broker is unreasonable. One of our clients worked with a broker whose stubbornness kept on getting in the way of the deal. Everyone was giving in a little to make the package work. Our client told the VC he couldn’t afford the deal, because the broker was not participating in the concessions. The VC (with greater financial leverage) wanted the deal enough that he negotiated a compromise with the broker, and everyone was happy.

9. Lastly, brokers, like you, are looking out for their own pockets. To combat this, try to put more emphasis on bonuses based on the long-term viability of the funding and the growth of the business rather than solely on the introduction. Incentives encourage brokers to build the most potentially successful deals.

Most brokers are ethical. They don’t want to take you to the cleaners. Their future successes rest on their reputations for making good deals. But just in case you get a vulture, you now have ways to find out early and prevent yourself from getting in a jam. And as you probably know, always consult with your attorney when entering into a relationship with a broker or investor.

Acquiring capital to fund future projects is exciting and daunting. Although common sense will guide you to avoid pitfalls and seize opportunities, you won’t know everything about this area. Therefore, gaining outside help from experts in this area is wise no matter how many times you’ve done it. After all, you’re strongest doing what you do best: leading and managing your organization.

© David and Lorrie Goldsmith

Danil Ava


Venture capital consultants are companies or individuals that make it their goal to help a business find venture capital investors for its start up and raising venture capital needs. These companies have the contacts in the venture capital industry that the business owner needs in order to successfully land the investment deal. They charge a fee for their service, and if successful, can save a business a lot of time that would have been wasted searching the wrong way for the money needed for the business. There core job is to provide http://www.launchfn.com/>venture capital consulting and http://www.launchfn.com/id187.html

>raising venture capital in quick time.

An experienced and good VC consultant can help your business obtain Venture Capital funding in many ways. Here are the main areas that could help you:

- Contacts VC consultants usually have many contacts in the industry. They can recommend the right list of venture capital firms for your industry, or find the right ones if not known right offhand.

- Business Plan Review: The business plan is the main document that gets you in the door of a VC firm. A VC consultant will work with you to revise and re-write your plan so that it will be most attractive to a VC firm.

-Market Research, if your business is a start up and you need market research to firm up statistics and market potential, a VC consultant will help you down that road.

A right venture capital consultant is a person or company who will work at knowing your business and the industry it is involved in.

Before contacting a venture capital consultant, make sure that you have a firm business plan. Business plan gives the consultant a place to start when researching the opportunity you are presenting. Before you pay the consultant any fee, talk to him or her, and find out what plan is in place to develop your plan and present it to potential investors. If you like their advice, and the consultant seems to have answers to your questions about the industry and the financial market, then you have found the right consultant.

Finding one venture capital consultant can save you much wasted time while shopping around for someone to invest in your business. Take the time to interview potential consultants until you find someone you are comfortable and who sees the potential in your business plan. The two of you will work as a team, seeking the successful financing of your new business!

Joel Weaver


The downward trend of the economy continues. An old axiom in business says that the best time to start a business is during an economic downturn, but all indications point to the same downward trend in available venture capital.

It seems that most venture capital groups are sitting on cash, riding out the uncertainty that dominates the economy.  It’s not that the money isn’t there; the groups are just unwilling to take a chance right now. Why is that?

The goal of most start-ups is to make it to initial public offering (IPO) or to be acquired by another company.  The rate of failure in business start-ups is alarming.  With the rise in fuel costs comes a rise in the cost of everything else, including capital equipment, labor and supplies, as well as construction and real estate.  Companies that will not invest in their own business are very likely not going to acquire another company.  With the high costs associated with starting a business, people are relying on initial profits fund their new business.

Unfortunately, these businesses that open on a shoestring are not surviving. Consumers simply will not spend money these days, the competition is high, and it costs too much to promote and advertise a new business.

How Venture Capital Helps Small Business Become Big Business

The influx of money in the initial phases of a start-up helps the business to acquire equipment, real estate, and anything else not associated with the day-to-day operation of the business. This type of investment helps the business to grow very quickly.  Usually.

In this economy, consumer confidence is low.  People are sitting on cash reserves and not buying new products… from small appliances to automobiles, they are either fixing what they have or doing without.  Service industries have also taken a hit.  More consumers are choosing to do it themselves rather than hiring a company.

Venture capital allows the start-up to buy the equipment and inventories necessary to grow quickly and begin making money faster than it otherwise would.  It allows the new company to promote and reinvest, attract new customers and expand without spinning its wheels by making money only to immediately buy something it needs.

Helping the Economy

The importance of venture capital now is that many companies that have been successful in year past are no longer making money.  They are stuck in neutral and not making any significant gains.  Equipment wears out.  Needed improvements to business infrastructure are constant. They need to compete in order to survive and to do that, they must improve their situation.

It’s not a trickle down or a trickle up theory; it’s a trickle out theory.  The business buys equipment to make money by attracting more customers and keep people employed who build the stuff another company needs to supply the company… you get the picture.

It’s a web of economy. It’s one that needs to succeed in order for our economic system to succeed.  Even the United State Government is getting involved by offering money to certain industries.  Say what you will, no matter your politics, but the Federal government just became the biggest provider of venture capital in the country.  Usually, venture capital groups do get some say in the decisions made by the start-ups they help finance.  They get a seat on the board, they get stock in the company which gives them a say in how its run.  Unfortunately, many companies in these key industries are not using this money to invest; rather, they’re using it to pay down debt.

Finding Venture Capital

Many venture capital groups exist, and are looking for ways to invest.  An Internet search can provide small business owners with venture capital possibilities. Most groups will express interest in the start-up, rather than waiting, but usually, the business seeks out the capital. Most will require a presentation, including a detailed business plan.  It is better in this instance to offer too much information about the business, the industry, the key players, the product, and most importantly, the pay-off to those who are investing.

Martin L


Please read the article before answering:

http://online.wsj.com/article/SB12392364…

Exerpt from the article quoting Tim Geithner, speaking on behalf of the administration, trying to justify the new draconian regulations:

“In justifying new SEC registration requirements, Mr. Geithner said that Bernie Madoff’s Ponzi scheme demonstrated that investors need more protection. He didn’t mention that Madoff’s firm was registered with the SEC as an investment adviser and had also been regulated by the SEC for decades as a broker-dealer. Also, Madoff was not running a venture firm.”

Does Geithner know what he’s doing?

If not, we should all be afraid that he (and Obama) is in over his head.

If so, we should all be afraid that they are not interested in a thriving private sector.

Another excerpt:

Says Cypress Semiconductor CEO T.J. Rodgers, “First, Sarbanes-Oxley mandated byzantine corporate bureaucracy to ‘protect’ investors. Then, the SEC damaged the Silicon Valley economy by forcing companies to count stock options twice, both as dilution and as expense. As a result, Silicon Valley, for decades the bright spot of the American economy, produced only one [initial public offering] in all of 2008. Now, Geithner wants to regulate venture capital firms to protect us some more. It’s like watching children deface an economic work of art.”

Reuben Buchanan


Anyone who has raised or tried to raise venture capital for their business will tell you it is no easy road. There are lots of obstacles and reasons why investors won’t invest. It’s hard to pinpoint just one obstacle but if I had to narrow it down, I’d have to say that risk is the biggest one.

Investors just have a hard time believing that the entrepreneur is going to make anything of their idea. A lot of investors are tending to lean towards established companies or listed companies because the returns are great (at the moment) and risk is much lower.

So the key is to lower the risk for the investor. This will greatly increase the chance of getting funding.

How to lower the risk factor for the Investor…

In a typical situation, the entrepreneur or promoter has had little prior experience building a successful company. If they had, they probably would not need an outside investor. It’s sort of a catch 22 situation, therefore the most successful approach for start-ups is to:-

1. Take their idea/concept as far as they can with their own funds (if possible get some sales or at least pre-commitments of sales from worthy buyers)

2. Raise small amounts of money from people who are close to them at a reasonable valuation (most promoters value their idea too high which is a turn off to investors). Say $10k or $20k each from a number of friends/family who are close to them and believe in the promoters vision.

3. Use those funds to get the product into the market and get one years trading/sales behind them.

A year’s trading gives them a couple of things. Firstly it proves up the business idea and demonstrates that there is a ready market for it. Secondly it proves that the promoter can start/run a business to some degree, and thirdly it gives some figures by which a basic valuation can be done from (for the next capital raising).

All of this lowers the risk for the next investor, who may be asked to put up $250k or even $1m if the opportunity/technology is great.

The next round of funding may come from a wealthy individual, professional angel investor, or even an early stage VC fund (the latter is the hardest to get funds from). The next investor may also take out the first couple of investors giving the first group an exit.

There are many other factors which can affect the promoter’s ability to raise funds such as:-

• General capital market conditions (at the moment, they are pretty good – most investors have a bit of spare money to play with)

• Appetite for their particular idea (i.e. anything in the green or clean energy sector is pretty hot at the moment).

• The promoters ability to ‘sell’ their idea or concept

• The promoters track record

• The investors personal situation (they may like the idea but have funds committed elsewhere or may be about to go on holiday)

• Luck (promoter may by chance stumble across right investor at right time)

Typical criticisms of the Investor versus the Promoter/Entrepreneur…

Investor criticisms:-

• Poor investor presentation (sometimes no presentation at all)

• Too early stage – still an idea on a piece of paper

• Poor business planning or lack of

• Business model is wrong

• Promoter does not have the skills required to make it work

• Idea is not scalable – limited market opportunity

• The sector is not favorable

• Idea/technology is easily copied (no trade marks/patents in place)

• Projections are too high

• Value entry point is too high

Entrepreneur criticisms:-

• Investor does not understand their idea

• Investor does not get back to them with an answer

• Investor wants too much of the company for their investment

• Investor wants control of the company (more than 51%)

• Investor terms are too tough (i.e money comes with many stiff terms and conditions)

The best advice is for entrepreneurs to get as much knowledge on raising capital as possible. There are many books including many by Professor Tom McKaskill (www.tommckaskill.com).

Also, get a mentor involved in your business who has a track record of raising capital and building businesses. They may not invest into your business, but knowledge is far better than capital. This is because knowledge will attract capital.

© Reuben Buchanan, Integral Capital Group 14th August, 2007

www.integralcapital.com.au

summer s


hi,
i’m looking to find names of VENTURE CAPITAL and PRIVATE EQUITY firms (can be based anywhere) that invest in:
1.
HEALTH/WELLNESS/BEAUTY/COSMETIC industry
2.
WOMEN owned and operated businesses.
any leads would be SO APPRECIATED!!!!
thanks so much!!

THE CODER


I am a IT Engineer from INDIA.
I want to know each and every details about getting VENTURE CAPITAL to start my business over here in INDIA. I want to go for steel or cement or power or bio fuels or IT sector.
Should I have to become member of any association for that.
Should it be possible that I don’t need a single penny to start my business by using Venture Capital. If not then how much will be the minimum investment from my side?
Plese give detailed info about VC. If needed provide me the ways of contact to the respective authority.
Give me names of some countries where I can start and run my business more easily and with less or no investment.

Dave Kauppi


If you are an entrepreneur with a small technology based company looking to take it to the next level, this article should be of particular interest to you. Your natural inclination may be to seek venture capital or private equity to fund your growth. According to Jim Casparie, founder and CEO of the Venture Alliance, the odds of getting Venture funding remain below 3%. Given those odds, the six to nine month process, the heavy, often punishing valuations, the expense of the process, this might not be the best path for you to take. We have created a hybrid M&A model designed to bring the appropriate capital resources to you entrepreneurs. It allows the entrepreneur to bring in smart money and to maintain control. We have taken the experiences of several technology entrepreneurs and combined that with our traditional investment banker Merger and Acquisition approach and crafted a model that both large industry players and the high tech business owners are embracing.

Our experiences in the technology space led us to the conclusion that new product introductions were most efficiently and cost effectively the purview of the smaller, nimble, low overhead companies and not the technology giants. Most of the recent blockbuster products have been the result of an entrepreneurial effort from an early stage company bootstrapping its growth in a very cost conscious lean environment. The big companies, with all their seeming advantages experienced a high failure rate in new product introductions and the losses resulting from this art of capturing the next hot technology were substantial. Don’t get us wrong. There were hundreds of failures from the start-ups as well. However, the failure for the edgy little start-up resulted in losses in the $1 – $5 million range. The same result from an industry giant was often in the $100 million to $250 million range.

For every Google, Ebay, or Salesforce.com, there are literally hundreds of companies that either flame out or never reach a critical mass beyond a loyal early adapter market. It seems like the mentality of these smaller business owners is, using the example of the popular TV show, Deal or No Deal, to hold out for the $1 million briefcase. What about that logical contestant that objectively weighs the facts and the odds and cashes out for $280,000?

As we discussed the dynamics of this market, we were drawn to a merger and acquisition model commonly used by technology bell weather, Cisco Systems, that we felt could also be applied to a broad cross section of companies in the high tech niche. Cisco Systems is a serial acquirer of companies. They do a tremendous amount of R&D and organic product development. They recognize, however, that they cannot possibly capture all the new developments in this rapidly changing field through internal development alone.

Cisco seeks out investments in promising, small, technology companies and this approach has been a key element in their market dominance. They bring what we refer to as smart money to the high tech entrepreneur. They purchase a minority stake in the early stage company with a call option on acquiring the remainder at a later date with an agreed-upon valuation multiple. This structure is a brilliantly elegant method to dramatically enhance the risk reward profile of new product introduction. Here is why:

For the Entrepreneur: (Just substitute in your technology industry giant’s name that is in your category for Cisco below)

1. The involvement of Cisco – resources, market presence, brand, distribution capability is a self fulfilling prophecy to your product’s success.

2. For the same level of dilution that an entrepreneur would get from a VC, angel investor or private equity group, the entrepreneur gets the performance leverage of “smart money.” See #1.

3. The entrepreneur gets to grow his business with Cisco’s support at a far more rapid pace than he could alone. He is more likely to establish the critical mass needed for market leadership within his industry’s brief window of opportunity.

4. He gets an exit strategy with an established valuation metric while the buyer helps him make his exit much more lucrative.

5. As an old Wharton professor used to ask, “What would you rather have, all of a grape or part of a watermelon?” That sums it up pretty well. The involvement of Cisco gives the product a much better probability of growing significantly. The entrepreneur will own a meaningful portion of a far bigger asset.

For the Large Company Investor:

1. Create access to a large funnel of developing technology and products.

2. Creates a very nimble, market sensitive, product development or R&D arm.

3. Minor resource allocation to the autonomous operator during his “skunk works” market proving development stage.

4. Diversify their product development portfolio – because this approach provides for a relatively small investment in a greater number of opportunities fueled by the entrepreneurial spirit, they greatly improve the probability of creating a winner.

5. By investing early and getting an equity position in a small company and favorable valuation metrics on the call option, they pay a fraction of the market price to what they would have to pay if they acquired the company once the product had proven successful.

Let’s use two hypothetical companies to demonstrate this model, Big Green Technologies, and Mobile CRM Systems. Big Green Technologies utilized this model successfully with their investment in Mobile CRM Systems. Big Green Technologies acquired a 25% equity stake in Mobile CRM Systems in 1999 for $4 million. While allowing this entrepreneurial firm to operate autonomously, they backed them with leverage and a modest level of capital resources. Sales exploded and Big Green Technologies exercised their call option on the remaining 75% equity in Mobile CRM Systems in 2004 for $224 million. Sales for Mobile CRM Systems were projected to hit $420 million in 2005.

Given today’s valuation metrics for a company with Mobile CRM Systems’ growth rate and profitability, their market cap is about $1.26 Billion, or 3 times trailing 12 months revenue. Big Green Technologies invested $5 million initially, gave them access to their leverage, and exercised their call option for $224 million. Their effective acquisition price totaling $229 million represents an 82% discount to Mobile CRM Systems’ 2005 market cap.

Big Green Technologies is reaping additional benefits. This acquisition was the catalyst for several additional investments in the mobile computing and content end of the tech industry. These acquisitions have transformed Big Green Technologies from a low growth legacy provider into a Wall Street standout with a growing stable of high margin, high growth brands.

Big Green Technologies’ profits have tripled in four years and the stock price has doubled since 2000, far outpacing the tech industry average. This success has triggered the aggressive introduction of new products and new markets. Not bad for a $5 million bet on a new product in 1999. Wait, let’s not forget about our entrepreneur. His total proceeds of $229 million are a fantastic 5- year result for a little company with 1999 sales of under $20 million.

MidMarket Capital has borrowed this model combining the Cisco hybrid acquisition experience with our investment banking experience to offer this unique Investment Banking service. MMC can either represent the small entrepreneurial firm looking for the “smart money” investment with the appropriate growth partner or the large industry player looking to enhance their new product strategy with this creative approach. This model has successfully served the technology industry through periods of outstanding growth and market value creation. Many of the same dynamics are present today in the high tech industry and these same transaction strutctures can be similarly employed to create value.

Danil Ava


Venture capital commonly known as VC or Venture is a type of private equity capital typically provided to early-stage, high-potential, and growth companies in the interest of generating a return through an eventual realization event such as an IPO or trade sale of the company. Venture capital investments are generally made as cash in exchange for preferential shares in the invested company. Often venture capital investors identify and invest http://www.launchfn.com/>early stage capital in high technology industries such as biotechnology and IT.

The most competent core skill within VC is the ability to identify novel technologies that have the potential to generate high commercial returns at an early stage. By definition, VCs also take a role in managing entrepreneurial companies at an nascent stage, thus adding skills as well as capital hence differentiating VC from buy out private equity which typically invest in companies with proven revenue, and thereby potentially realizing much higher rates of returns.

A venture capitalist or VC firm bring in managerial and technical expertise in addition to the capital thus looking to the growth of the investment .The capital generally is a pooled fund that is primarily invested in enterprises which the standard capital market or bank loans refer as high risk, so it is a high risk versus high profit high loss scenario mostly  Venture capital also helps with job creation, the knowledge economy and used as a proxy measure of innovation within an economic sector or geography.

Early stage venture capital is most attractive for new companies with limited operating history that are too small to raise capital in the public markets and are too immature to secure a bank loan in absence of a fixed asset or collateral or complete a debt offering. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get major control over company decisions, in addition to a significant portion of the company’s ownership (and consequently value).

Young companies wishing to raise http://www.launchfn.com/>early stage venture capital require a combination of extremely rare yet sought after qualities, such as innovative technology, potential for rapid growth, well thought through business model and impressive management team. VCs typically reject 98% of opportunities presented to them reflecting the rarity of this combination.

a little concerned


The business is a success, but in order to take it to the next level, we need two things…

1) An idea of how to adjust the way we work in order to set us apart from the competition (we believe that we have this)

2) Venture capital to put the idea into motion (larger advertising budget, facilities, more people etc)

The problem is, how do we secure funding from a venture capital company without giving away the idea and intellectual property we have that we know will improve the business?

Once the idea is seen by others in the industry, they will start to replicate the idea, so we must hit first, hit hard and cover a wide area.
with a successful business, I wouldn’t be giving away 51% of the company for any amount of money…who would?