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The Venture Presentation Process — Frequently Asked Questions
What is Venture Capital?
Venture Capital is money provided to companies in return for a large equity stake in the company. Venture Capitalist’s hopes the company grows so they end up with a large and valuable equity stake in a large company. These investments are made while a company is private, so this business is sometimes referred to as Private Equity.
What is the Structure of a Venture Capital firm?
Most charters of Venture Capital firms are to seek high returns of at least five to ten times the money invested by investing in early stage companies. Venture Capital firms are led by General Partners who manage the firm’s capital, make investment decisions and raise additional capital for their VC firm when needed. General Partners put up some of the money themselves, but most of the money comes from Limited Partners who are willing to make the long-term, risky investment into a Venture Capital fund in return for extraordinary returns.
What type of investment does a Venture Capitalist look for?
The General Partners in a Venture Capital firm want to make an investment where they can commit a large amount of capital to a firm that will grow quickly and create an "exit event" as soon as possible. This "exit event" usually takes the form of an Initial Public Offering (IPO) or Acquisition.
How do VCs add value?
The main value-add is providing early stage firms with sufficient capital to grow their businesses. Venture Capital firms are at the center of entrepreneurial activity, so many VC firms can also help you find partners, customers, and employees. A General Partner of the VC firm will also likely become a member of your board after an investment is made. They will help you with difficult strategic decisions since they usually have a lot of industry experience and influence. They will also help you raise capital in the future since they want their investment to continue to grow.
How do VCs find early stage companies to invest in? How do I get in contact with VCs?
By far and away the leading way a VC finds an investment is through referrals from their contacts in the industry. These contacts are usually through professionals in the Private Equity business such as attorneys, accountants, investment bankers, research analysts and leaders in your specific industry. Many of these professionals have relationships with General Partners in Venture Capital firms.
How do I get in contact with professionals in Private Equity?
If you are a successful early stage firm, most likely attorneys, accountants and investment bankers have already been in touch with you. Many of these professionals make it their business to seek out early stage companies, since they generate fees from you as you grow and require their services. Many of these professionals will also provide you with free services in the beginning in the hope of generating larger fees later.
If Private Equity professionals have not found you yet, you can locate them by asking other small businesses in your industry whom their accountants and attorneys are. These professionals are also always present at gatherings of growing businesses such as Information Technology and Biotech events.
What should I present to Professionals interested in my business?
You should have a Business Plan or Offering Memorandum describing your business, a detailed financial model with your projections, and a PowerPoint presentation if it is a meeting in person. If you do not have these documents or are unsure how they should look your VenturePresentation.com documents should be helpful in this regard. We have prepared an Offering Memorandum, but it can easily be used as a Business Plan by taking out the Offering and Risk Factor sections. Private Equity professionals will also want to see the Income Statement, Balance Sheet and Cap Table.
A word on presenting your venture to anyone in the Private Equity industry. Treat the presentation like they will be making the investment decision because based on your presentation. They will be deciding if they would like to work with you and help you in your capital raising effort.
Do VCs read Business Plans/Offering Memorandums without referrals?
Sometimes. General Partners and their Associates read hundreds of Business Plans a week and the Business Plans/Offering Memorandums from referrals go to the top of the pile. If a referral is not available or if you are trying to blanket VCs in your area, try and send your Business Plan/Offering Memorandum and Financial Plan to VCs that invest in your industry. Research the VCs web site or ask people in the industry what types of firms they invest in. On the VCs web site they usually list their portfolio companies, which are the companies they have an equity stake in.
Where can I get a comprehensive list of VCs?
Here is a web site where just about every VC in the US is listed: http://www.vfinance.com/
What should I have prepared when I meet with VCs?
Have the following:
• Offering Memo/Business Plan
• Financial Model (Income Statement, Balance Sheet)
• PowerPoint Presentation (also have hard copies)
• Demo of the product or solution (if possible)
The goal of a meeting with a VC is to get them to the next step in their due diligence. If possible have customer references available so they can continue kicking the tires of your company. VCs also like to look at a sales pipeline if you have one.
What are VCs looking for specifically?
Approach the VC meeting from a sales approach. You need to make the Venture Capitalist believers in your story. VCs always invest in people, and they look for leadership and integrity among other qualities. VCs are also looking for a company that can grow quickly with venture money and dominate a segment of the market. In addition, VCs base their decisions on activity in the public market. If wireless stocks regain strength in the market, then private equity interest in wireless stocks will also increase.
What are VCs focusing on in light of tough market conditions in the last year?
VCs are focusing on a path to profitability. Most VCs are only willing to make investments in companies that will reach profitability with the funds that are invested. Gone are the days where you only focus on revenue growth and get financing later. Your model needs to show positive cash flows from operations with the new investment.
VCs are also struggling with their own portfolio companies, and many VCs are not making new investments until market conditions improve dramatically.
How will VCs value my company?
Valuation is not a science, but VCs will value your company in a variety of ways. One way is by taking discounted revenue multiple to comparable companies that are publicly traded in your industry. Another valuation technique is a discounted cash flow analysis, but this is based on many assumptions. The earlier stage the company, the more guess work involved.
What if my company has not generated any revenue or very little revenue?
It is difficult to get VC money without revenues, but not impossible. If you can demonstrate you have a good product or solution with a large market opportunity and good partnerships with industry leaders, VCs may be interested. However, revenues are the best way to demonstrate a proven business model.
How should I value my company and how do I get the best valuation?
If you feel strongly about the valuation of your company or existing investors require a certain valuation, include this in your Offering Memorandum. However, the best way to value your company is to get multiple term sheets from different VCs and sit down with your advisors and choose the best one. If you have a close relationship with a particular VC and have only one term sheet (which is a whole lot better than no term sheet) you probably should give great consideration to taking the money after talking with your advisors. There are always some things that you can negotiate, as with any contract, but as an early stage company, it is best to take the money and focus on the execution of your business. Also, it is not in the interest of an early stage VC to be extremely draconian (although it may seem that way at current values) with respect to valuation because they want to make sure the founders and management have an incentive to see the business succeed.
Where can I find an example of a Venture Capital Term Sheet?
There is a good example of term sheet among other documents at the following web sites:
http://www.allbusiness.com/ (click on "Investment" under "Finance and Accounting")
What help do I need in analyzing a term sheet before I accept it?
Always have an attorney or private equity professional read any term sheet on your behalf before you sign. You need to be aware of all of the issues within it. Onerous liquidation preferences or anti-dilution provisions could make it difficult for you to raise capital in the future.
Where can I find Angel Investors if VCs are not ready to invest in my company?
Usually Angel Investors are found among friends or family who are willing to invest in you and your company. Professionals in Private Equity also have relationships with Angel Investors, so get to know Accountants and Attorneys focused on early stage companies even if you do not need or cannot afford their services. The best kind of Angel Investor is someone who has experience in your industry and is willing to ride through the up and downs of your business and industry.