Meir Liraz - How to Raise Venture Capital Money the Easy Way: A Step by Step Guide to Attracting investors and Investments

How to Raise Venture Capital Money The Easy Way

A Step by Step Guide to Attracting investors and Investments

By Meir Liraz

Other books by Liraz Publishing that may interest you:

How to Sharpen Your Managerial Skills

How to Manage a Business

How to Start Up Your Own Business

Business Plan Template

How to Advertise Your Business

The 100 Top Inspirational Anecdotes and Stories

How to Effectively Manage Your Sales Team

How to Start a Service Business

How to Open a Store

How to Start a Construction Company

How to Start an Export Business

How to Start a Manufacturing Business

How to Finance a Business

How to Develop a Strategic Plan for Your Business

Copyright by Meir Liraz. All rights reserved.

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b. Detailed guide that will walk you step by step and show you exactly how to effectively use the above Excel Financial Projections Creator.

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d. Small Business Management: Essential Ingredients for Success (eBook) - Learn effective business management tricks, secrets and shortcuts to make your business a success.

V enture capital financing is a method used for raising money, but less popular than borrowing. Venture capital firms, like banks, supply you with the funds necessary to operate your business, but they do it differently. Banks are creditors; they expect you to repay the borrowed money. Venture capital firms are owners; they hold stock in the company, adding their invested capital to its equity base. While banks may concentrate on cash flow, venture capital firms invest for long-term capital. Commonly, these firms look for their investment to appreciate three to five times in five or seven years.

One way of explaining the different ways in which banks and venture capital firms evaluate a small business seeking funds is: Banks look at its immediate future, but are most heavily influenced by its past; venture capitalists look to its longer run future.

To be sure, venture capital firms and individuals are interested in many of the same factors that influence bankers in their analysis of loan applications from smaller companies. All financial people want to know the results and ratios of past operations, the amount and intended use of the needed funds, and the earnings and financial condition of future projections.

But venture capitalists look much more closely at the features of the product and the size of the market than do commercial banks.

B anks are creditors. They're interested in the product/market position of the company for assurance that this product or service can provide steady sales and generate sufficient cash flow to repay the loan. They look at projections to be certain that owners/managers have done their homework.

Venture capital firms are owners. They hold stock in the company, adding their invested capital to its equity base. Therefore, they examine existing or planned products or services and the potential markets for them with extreme care. They invest only in firms they believe can rapidly increase sales and generate substantial profits. The reason for this is that venture capital firms invest for long-term capital, not for interest income. A common estimate is that they look for three to five times their investment in five or seven years.

Of course, venture capitalists don't realize capital gains on all their investments. Certainly they don't make capital gains of 300 to 500% except on a very limited portion of their total investments. But their intent is to find venture projects with this appreciation potential to make up for investments that aren't successful.

Venture capital is risky due to the difficulty of judging the worth of a business in its early stages. Therefore, most venture capital firms set rigorous policies for venture proposal size, maturity of the seeking company, management of the seeking company, and "something special" in the plan that is submitted. They also have rigorous evaluation procedures to reduce risks, since their investments are unprotected in the event of failure.

M ost venture capital firms are interested in investment projects requiring an investment of $500,000 to $5,000,000. Projects requiring under $500,000 are of limited interest because of the high cost of investigation and administration; however, some venture capital firms will consider smaller proposals if the investment is intriguing enough.

The typical venture capital firm receives over 400 proposals a year. Probably 90% of these will be rejected quickly because they don't fit the established geographical, technical or market area policies of the firm - or because they have been poorly prepared.

The remaining 10% are carefully investigated. These investigations are expensive. Firms may hire consultants to evaluate the product, particularly when it is the result of innovation or is technologically complex. The market size and competitive position of the company are analyzed by contacts with present and potential customers, suppliers, and others. Production costs are reviewed. The financial condition of the company is confirmed by an auditor. The legal form and registration of the business are checked. Most importantly, the character and competence of the management are evaluated by the venture capital firm, normally via a thorough background check.

These preliminary investigations may cost a venture firm between $2,000 and $3,000 per company investigated. They result in perhaps ten to fifteen proposals of interest. Then, second investigations, more thorough and more expensive than the first, reduce the number of proposals under consideration to only three or four. Eventually, the firm invests in one or two of these.

Most venture capital firms' investment interest is limited to projects proposed by companies with some operating history, even though they may not yet have shown a profit. Companies that can expand into a new product line or a new market with additional funds are particularly interesting. The venture capital firm can provide funds to enable such companies to grow in a spurt rather than gradually as they would on retained earnings.

Companies that are just starting or that have serious financial difficulties may interest some venture capitalists, if the potential for significant gain over the long run can be identified and assessed. If the venture firm has already extended its portfolio to a large risk concentration, they may be reluctant to invest in these areas because of increased risk of loss.

Although most venture capital firms will not consider a great many proposals from start-up companies, there are a small number of venture firms that will do "start-up" financing. The small firm that has a well thought-out plan and can demonstrate that its management group has an outstanding record (even if it is with other companies) has a decided edge in acquiring this kind of seed capital.

Most venture capital firms concentrate primarily on the competence and character of the management. They feel that even mediocre products can be successfully manufactured, promoted, and distributed by an experienced, energetic management group.