Learn2succeed.com Incorporated - Venture Capital Financing for Beginners: How to Raise Equity Capital from Venture Capitalists and Angels

ISBN: 978-1-55270-470-7

Written by:

Learn2succeed.com Incorporated

Published in Canada by:

Productive Publications, P.O. Box 7200

Station A, Toronto, ON. M5W 1X8

Phone: (416) 483-0634 Fax: (416) 322-7434

Canadian Web Site: www.ProductivePublications.ca

American Web Site: www.ProductivePublications.com

Front Cover Art:

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Library and Archives Canada Cataloguing in Publication

Venture capital financing for beginners [electronic resource] : how to raise equity capital from venture capitalists and angels / by

Learn2succeed.com Incorporated.

Electronic monograph.

Issued also in print format.

ISBN 978-1-55270-470-7 (EPUB)

1. Venture capital. 2. Angels (Investors). 3. Private equity. 4. New

business enterprises--Finance. 5. Business enterprises--Finance.

I. Learn2succeed.com Inc

HG4751.V44 2012 658.15'224 C2012-903499-1

All rights reserved. No part of this publication may be reproduced, stored in retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without written permission of the author.

Venture Capital Financing for Beginners

How to Raise Equity Capital from

Venture Capitalists and Angels

If you are already in business or are thinking of starting a business and need money, this book will lead you through the ins and outs of raising equity capital from traditional venture capitalists or from informal investors, commonly referred to as angels.

First, it will take you on a tour of the venture capital business so that you get to know who the players are and how much money is available. Youll learn what they are looking for; their preferences and where to find them. This includes directories as well as over a hundred venture capital conferences throughout North America and overseas.

Second, it will provide you with the profiles of typical angels and the kind of investments they make. Sometimes angels cluster together in groups and combine their skills in helping start-ups and early stage companies to grow. Youll also learn about corporate angels, i.e., companies which may be willing to invest if they can see a good fit with their current operations.

Angels are a little more difficult to locate than traditional venture capitalists, but this book will provide you with some hints on where to find an angel investor.

Whether you are dealing with an angel or a traditional venture capitalist, you will need to negotiate a deal. This is of paramount importance and an entire chapter is devoted to hints on negotiating. It takes the gloves off and puts you in the middle of the fight between protecting your interests versus those of the investor. Youll find out whats in store with the points that are likely to come up in negotiations and the due diligence process.

Youll learn about management fees, the delicate subject of control, restrictive and affirmative covenants. Then, theres all the paperwork: the Term Sheet, the Share Purchase Agreement, the Investor Rights Agreement, the Right of First Refusal and Co-Sale Agreement, the No Shop Agreement and finally the Legal Agreement. Find out whats involved in negotiating all these agreements.

Finally, this book will help you to evaluate your chances of successfully obtaining formal venture capital or investment from an angel or cluster of angels. It takes a realistic approach and will hopefully save you a lot of time and effort in locating equity capital to start or grow your business.

No representation is made with respect to the accuracy or completeness of the contents of this book and both the author and the publisher specifically disclaim any implied warranties of merchantability or fitness for any particular purpose and in no event shall either be liable for any loss of profit or any other commercial damage, including but not limiting to special, incidental, consequential or other damages.

An entrepreneur is a guy who is personally guaranteeing $5 million and has about five bucks in his pocket according to Rick Inatome in a September 1985 article in INC. Magazine. Its still true today but the big challenge is getting the $5 million!

Surveys amongst entrepreneurs show that the need for capital is one of their prime concerns in starting a business.

According to the former Premiers Council in Ontario, the largest constraint to growth identified by start-up companies was a lack of equity capital. Almost three-quarters of those entrepreneurs who were surveyed made this complaint.

The next most common constraint is a lack of debt capital at an affordable cost. Well over half of those surveyed complained of this. Ive already covered this in another book: Bank Financing for Beginners: How to Borrow Money to Grow Your Business by www.Learn2succeed.com .

These concerns came ahead of all others confronting the start-up entrepreneur, such as the time it takes to develop a product or the lack of marketing expertise. They were also ahead of the problems of obtaining qualified help and any lack of technical or scientific expertise.

Interestingly enough, an aggressive response by competitors and a lack of new product ideas were the least of the problems cited.

Indeed, the concerns I expressed above are not simply confined to entrepreneurs at the start-up stage. The lack of equity capital was also cited as the major constraint by companies that were also growing and even by those showing exceptional growth, according to an Ontario Premiers Council Report.

Another study on newly formed businesses in Ontario found that slightly less than half of the existing small companies which they examined did not require any additional funding. In other words, such companies were able to survive on their own internally generated cash flow. About 40% of the companies claimed that they needed additional funding from outside and that they were successful in obtaining it. The remainder, said that, whilst they needed additional funding, they were unable to locate any.

What I do not know about is the number of other companies who also needed additional capital but, because they were unsuccessful, they fell by the wayside and have never been heard of since.

Of those companies who did require additional funding, about two-thirds said that they would be prepared to go into debt in order to secure it. This high portion points to a lack of available equity funding or simply to a reluctance by the entrepreneur to give up ownership in return for outside capital.

No matter which way you cut the cake, external financing is of prime concern to both start-ups and existing small businesses. This is true; whether it be debt or equity.

It has become generally recognized that funding requirements in the $50,000 to $1/2 million range; especially for start-up and early stage businesses is very difficult to obtain. In general, these requirements are too large to raise from family or friends and often too small to be of interest to traditional venture capitalists.

This funding gap has been repeatedly recognized in government studies. It was confirmed in the Canadian House of Commons Report of the Standing Committee on Industry of October 1994 . It was also recognized in the Report of the Manitoba Task Force on Capital Markets in July 1994, which divided the gap into two discernable areas: