How Many Venture Capitalists You Should Contact

How Many Venture Capitalists You Should Contact

If you approach them on your own, your personal time constraints will dictate how many you can contact.

It is an intermediary’s job to determine how many to approach. The intermediary will take you to a larger number of venture capitalists because you cannot guarantee that all of them will be interested. A further number will provide unattractive term sheets. The end goal is to get a reasonable offer on the table from a reputable venture capitalist.

If the venture capitalist has lots of funds and is looking for deals, it is easier to raise capital. In today’s market, venture capitalists are saddled with too many problems from their current portfolio companies.

It is the job of the intermediaries to know which venture capitalists are tapped out and which are looking to invest. They must have a knowledge of the market and know who to take your proposal to.

There is a danger of “over shopping” the deal if you go to too many venture capital companies.
If you are turned down by 4 to 5 highly targeted venture capitalists, something is wrong. Either your company has fundamental flaws, your terms are unreasonable, or your business does not reflect current market trends.

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What Venture Capitalists are Looking For

Venture capitalists are in business to make money. They have to have the ability to select companies that will make more money than their rivals.

There are 2 types of companies. The first is a lifestyle business. These types of companies are centered around the lifestyle of the entrepreneurs. The owners will use the business to drive expensive cars and purchase big houses. These are not businesses that attract venture capital.

The second type of company is a gazelle. These companies are run by entrepreneurs who want to build world-class organizations.

There are three ways for a venture capitalist to exit from your business: acquisition, public offering or management buyout. Half of the decision to invest in your company is derived from if the venture capitalist can see a clear exit.

An example of a gazelle is Hewlett-Packard. Mr. Hewlett and Mr. Packard wanted to build a world class company. They recognized that they did not have the necessary skills so they hired professional management and became mentors and the elderly statesmen for the company. They were able to exit from the company and it became a huge success.

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Why the Venture Capitalist is Interested in You & How to Handle Confidentiality

Why the Venture Capitalist is Interested in You

Venture capitalists want to make money. They will either see you as an entry point into a new industry that that has potential or one where they are already invested in but you provide an exceptional case.

The venture capitalist makes their decision on two variables: greed and the probability of failure or success. If your company presents a great deal but is accompanied by extraordinarily high risks, the venture capitalist will not invest.

How to Handle Confidentiality

An intermediary should always sign a confidentiality or non-disclosure agreement (NDA). It is a 1 to 5 page document that acknowledges you have sensitive information that if released could harm your business and it should not be shared.

Venture capitalists, however, will not normally sign a confidentiality agreement. They see so many companies in the same industry that they cannot sign one agreement and risk not being able to invest in other potential good deals.

For more information, visit www.EvanCarmichael.com.

What the Proposal / Executive Summary Looks Like

Make it so that your mother or grandmother can understand it. Entrepreneurs too often fill their business plans with of acronyms, tech terms, and buzz words. Intermediaries can usually tell after the first paragraph how difficult it will be to raise capital for your business.

Condense what you do and what you want into a statement that you can make very promptly in seconds or minutes. If you cannot communicate quickly, you will lose the investor’s interest.

You need to have a logical persuasion chain. You must persuade the venture capitalist to invest in your company just as you would persuade a customer to buy your product or service.

If you cannot explain your business on the back of an envelope, you will not get financed. You need to grab the investor’s attention in the first 3 to 5 minutes. If you cannot get their basic interest, you will not get their money.

Venture capitalists see 2 to 3 deals per day and will say no most of the time. You need to distinguish yourself through clarity.

Prepare an elevator pitch. Imagine getting on an elevator at the 20th floor of a building with the venture capitalists and getting a commitment by the time you reach the lobby.

Harold Ross’ first prospective for the New Yorker was no more than couple hundred words. It was so clearly laid out that you could read it today, 80 years later and still recognize that it describes the New Yorker.

The venture capitalists will also look to the people behind the company. They are looking to see what the reputations of your chairman and board of directors are. This will help create credibility and trust.

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Venture Capital Coming Back

"McQuilken, chairman of the eCoast Technology Roundtable that promotes hi-tech development in the Seacoast region, is pleased venture capitalists invested $176 million in deals for 2004, a 5 percent increase over the $167 million invested in 2003. "

"McQuilken said venture-capital investing nationally increased at an 8 percent rate in 2004. "

""If you look at the numbers, we could be doing better. In general, it seems to me that New Hampshire is not getting its share of investment money," McQuilken said. "The good news is that the overall investment climate decline since 2000 seems to have abated." "

"Venture capital and angel, or early stage investments, are crucial in sustaining economic growth."

"He says our society has gotten away from large-scale research and development projects - like how federal government initiatives led to the development of the Internet - and that the "innovative technology" sector that has begun to fill that void will be hurt without more funding."

"Because of the risk involved in funding up-and-coming companies, individual and venture-capital company investments often make the difference between success and failure. "

""They just die on the vine," said Jeff Sohl, director of the Center for Venture Research at the University of New Hampshire. "

"The Center for Venture Research tracks investment data and patterns regionally and nationally, and Sohl explained the overall investment climate is healthier today because venture capitalists have become more careful. "

"In fact, Sohl estimates there is as much as $40 billion in venture-capital reserves nationwide. He said in 1999-2000, venture capitalists were doing deals with one of four companies they came across. Today, the ratio is one out of 10. Sohl said this discrimination is a sign of investing sanity. "It’s what the market can handle." "

"There has also been a change in exit strategies for many developing companies, Sohl explained. IPOs, or initial public offerings, have become rarer, and more companies set themselves to be acquired or merge even before later-stage venture-capital funding is needed. "

""Early stage investing is alive and well," said Elliot Katzman, a general partner at Kodiak Venture Partners in Waltham. Kodiak was an early stage and sustaining investor in Vette Corp., and Katzman has overseen deals with four New Hampshire-based companies, including Mindreef in Hollis and Pragmatech in Nashua. "

"Katzman has also been on both sides of the venture-capital funding fence. In the 1990s, as CFO of Atria Software, he led an IPO and a $1 billion merger with Pure Software, the largest software merger of its time. "

""We see more plans than we can ever look at," Katzman said of the requests from early stage companies seeking more funding for expansion. "

"Kodiak focuses on companies in the communications, information technology, semiconductor and software industries, and has a $316 million fund. "

"Katzman said there is an abundance of venture capital. What has changed in the past few years, he said, "is the threshold for quality." "

"Because of the high-stake money risks involved, Katzman said good venture investing requires a lot of due diligence and a touch of "paranoia" to ensure investors aren’t mismatched with businesses. "

""What we look for is a world-class person, somebody to bet on," Katzman said. "It’s a people-first equation. Can the founder take the company to the next level?" "

Read more here.

For more information, visit www.EvanCarmichael.com.

Venture Capital On The Comeback

"The venture capital sector is beginning to bounce back after the tech bubble burst in March 2000, investment decision makers say. "

"Venture capital firms are being much more cautious about the new firms they invest in during this post-bubble period, said decision makers for four venture firms and Mark Heesen, president of the National Venture Capital Association. "

"At the national level, venture capital investments have remained fairly constant at between $4 billion and $6 billion for 11 consecutive quarters, said Heesen, who participated in a year-in-review panel discussion hosted by the Greater Cincinnati Venture Association. "

""We are in a good period for entrepreneurs right now, and we shouldn't mess it up," said Heeson. "

"It's still difficult for start-ups to get seed money, as investors want to wait until a firm acquires some market experience, said Bob Zieserl, managing partner of KB Partners in Northbrook, Ill.. "

""The experience in venture capital in recent years has been that those who go in early are not rewarded," said Zieserl, whose company has $100 million under management. "

"Jack Wyant, whose Cincinnati-based Blue Chip Venture Co. has $600 million under management, said a cautious new attitude is reflected by the numbers. "The size of the deal and the size of the investment have become smaller." "

"Health care and software and software services are two of the best growth opportunities for the future, the experts agreed. "

Read more here.

For more information, visit www.EvanCarmichael.com.

How to Introduce Yourself to a Venture Capitalist

The first option is to approach venture capitalists yourself. This is a very time consuming process and you risk taking your mind and attention away from your business.

The best way to find a venture capitalist is through an intermediary. They know the important players on the street and what they are looking for and investing in. The venture capitalist relies on recommendations of the people they trust. If the intermediary has established friendly relationships with them, it will boost your chances of getting in.

Going after a venture capitalist without an intermediary is like going to court and trying to represent yourself instead of having a lawyer.

For more information, visit www.EvanCarmichael.com.

How Long it Takes to Get the Money

It will usually take between 3 and 4 months. It is very rare to obtain the money in under this 3 to 4 month period.

Raising money is not like hiring people or purchasing new machinery. It is about building confidence between yourself, your company, and the investor. There is a certain of amount of due diligence that will be needed to build this confidence.

Your ability to project your company in both a strategic and factual way will be critical to your success.

The timing also depends on the sophistication of the entrepreneur. It the financing presentation is well laid it, it will make it much easier for the intermediary to get you in front of a venture capitalist.

Make contact with intermediaries and venture capitalists before you need the money. This way they can track your progress, they know you before you need it and it will make it easier for you to obtain the necessary capital. Nobody likes to be rushed, especially venture capitalists.

For more information, visit www.EvanCarmichael.com.

Valuating a Business & How to Introduce Yourself to a Venture Capitalist

Valuating a Business

Over the past 3 to 4 years, venture capitalists have been very conservative with their investments. This is because they have had so many problems within their current portfolios that they cannot afford to take the same risks on new companies.

The method of valuation will also depend on your industry. In a traditional, or smokestack, industry there are typically many comparative examples. Here you can work from the earnings before interest, tax and depreciation (EBITDA) of similar companies and apply a ratio to your own business.

New products and technologies pose a valuation problem due to the lack of comparative companies. It is much more difficult to valuate these businesses.

How to Introduce Yourself to a Venture Capitalist

The first option is to approach venture capitalists yourself. This is a very time consuming process and you risk taking your mind and attention away from your business.

The best way to find a venture capitalist is through an intermediary. They know the important players on the street and what they are looking for and investing in. The venture capitalist relies on recommendations of the people they trust. If the intermediary has established friendly relationships with them, it will boost your chances of getting in.

Going after a venture capitalist without an intermediary is like going to court and trying to represent yourself instead of having a lawyer.

For more information, visit www.EvanCarmichael.com.

High Growth Companies Seek Alternative Funding Sources

"Small American companies are raising their revenue forecasts for the coming year, and may avoid bank loans and look into non-traditional financing, a new PricewaterhouseCoopers survey reported this week.

The survey, which focused on "trendsetter" firms -- 360 fast-growing private companies with revenues between $5 million and $150 million -- during the fourth quarter of 2004, paints an optimistic picture of the economy. Margins were up for 31% of companies surveyed, and down for just 15%, while 24% increased their prices (7% decreased them).
However, interest rates spiked upward -- the average in the fourth quarter was 5.73%, up 41 basis points from the third quarter -- and 22% of businesses increased their credit lines by, on average, 10.4%. That may explain why 32% of those surveyed expect to look at non-bank financing, including angel investors (an option for 18% of CEOs surveyed), venture capital (18%), private placement (15%), and IPO (3%).

What's that money going toward? Well, growth, for one -- new borrowers grew 568% over the past 5 years, versus a growth rate of 251% for non-borrowers. Moreover, the new borrowers expect to see 46% stronger revenue growth in the coming year than non-borrowers. They'll be investing their capital in IT, new product and service development, advertising, and sales promotion, they reported. Whether those high interest rates will pay off remains to be seen."

Read more here.

For more information, visit www.EvanCarmichael.com.

How to Valuate Your Business

How to Valuate Your Business

The venture capitalists will usually look at your projected, or pro forma, earnings 3 to 5 years from the point of their investment. From there they will deduct a 30% annual return that they expect to receive and will subtract a further percentage for the fact that you are a private and therefore non liquid company. This is known as the pre-money valuation.

Right now, investment money is scarce and the venture capitalists are dramatically lowering business valuations.

How Northern Crown Capital Valuates a Business

2008 Financial Projections

Earnings Before Tax
$5,865,000

Tax Rate
42%

Taxes
$2,463,300

Net Earnings
$3,401,700


Amount Seeking to Raise Today
$3,500,000

Discounted Value of Future Opportunity, 5 Years Out

2008 P/E Ratio
15

Value of Company in 2008
$51,025,500

Discount Rate Applied
30%

Year 2008
$51,025,500

Year 2007
$35,717,850

Year 2006
$25,002,495

Year 2005
$17,501,747

Year 2004
$12,251,223

Value of Company at Investment in 2003
$12,251,223

Less: Investment Amount
$3,500,000

Present Value
$8,751,223

Discount for Risk & Private Company
40%

Less: Discount for Risk & Private Company
$3,500,489

Private Company Value
$5,250,734

Present Value (What the Owner Keeps)
$5,250,734
60.00%

Financing (What the Investor Gets)
$3,500,000
40.00%

Total
$8,750,734
100.00%

For more information, visit www.EvanCarmichael.com.

Interview With Tim Draper

"Draper, a third-generation venture capitalist and managing partner of Draper Fisher Jurvetson in Menlo Park, Calif., is renowned for his ability to look at the big picture and pick a winner.

He was an early backer of Hotmail and suggested the use of viral marketing via the Web to spread an Internet product. He has set up an international network of Draper affiliates to tap promising startups worldwide. And he is such an ardent supporter of entrepreneurs that he wrote a rock song celebrating their exploits, then had a widely known singer put it to music (more on that later) and sent 5,000 copies to clients for Christmas. On the CD's cover is a photo of Draper, dressed in safari clothes and sitting astride an elephant."

"There has been an increase in venture funding to later-stage companies. How do seed and early-stage companies compete for funds?

It is a free market. There is usually money if there is a great entrepreneur with a strong vision and a solid model going into a large market. The early companies often need to refine their business models if they want seed funding.

What can be done to encourage entrepreneurship?

Good technical education. Good business schools, and get the two to talk to each other. Business plan competitions are great for the community."

Read more here.

For more information, visit www.EvanCarmichael.com.

The Types of Businesses Venture Capitalists Prefer & How to Select the Right Venture Capitalists for Your Firm

The Types of Businesses Venture Capitalists Prefer

Venture capitalists will not invest in anything illegal or immoral. Anything that involves laundered, dirty, or offshore money will not attract venture capital investment.

Otherwise, a venture capitalist will look at any business providing that it meets their criteria of providing a return on investment, having good management, supplying a sound business plan, and demonstrating a developed product or service with revenues.

Some venture capitalists as a matter of policy will restrict themselves to investing in a specific industry. It is the role of the intermediary to know which firms would be willing to invest in your company.

How Much Money To Ask For

There is no such thing as an overcapitalized small company.


How to Select the Right Venture Capitalists for Your Firm

Some venture capitalists have highly targeted funds. These fund managers would have a full knowledge of your industry and be able to help spot the opportunity for your business.

Be comfortable with the venture capitalists. Seeking their money is only the beginning of a relationship with them. They will become board members and have a major say in the development of the company’s strategy and policies. It is important that you have good chemistry together, respect each other, and can get along.

An intermediary such as Northern Crown Capital can help you determine the right venture capital company for you.

For more information, visit www.EvanCarmichael.com.

Most Business Plans Too Long

"Growthink announced today that over half of new companies make the mistake of developing business plans that are too long for investors to effectively evaluate. The question is then, how long should the ideal business plan be?

According to Growthink, a business plan needs to be whatever length is required to excite the investor, prove that management truly understands the market, and detail the execution strategy. From surveys of investor needs, Growthink has found that 15 to 25 pages of text is the optimum length in which to accomplish this. However, in reviewing hundreds of business plans in the last year, Growthink found that over 60% went beyond the length preferred by investors.

The long length of these plans forces the time-constrained investor to skim certain sections of the plan, even if they are generally interested, which could lead them to miss essential elements. However, if the plan is too short, the investor will think that the business plan has not been fully developed, or he or she will simply not have enough information to make an investment decision.

Many management teams feel that their company is too complex to describe in 15 to 25 pages. While this is sometimes true, the business plan is not meant to tell the whole story. Rather, the company must be “boiled down” into its essential elements. If the investor is interested, there will be plenty of additional time to tell the whole story.

To summarize, the goal of the business plan is to create interest – not to have an investor write you a check. In creating interest, the full story of your company need not be told. Rather, the plan should include the essential elements regarding why an investor should invest and spend more time examining the business opportunity. The shorter length does not mean that your business plan should take less time to prepare. Rather, it will take more time. As Mark Twain once said, “If I had more time, I would write a shorter story.” Likewise, condensing your business plan to a concise, compelling document is challenging and time consuming. Fortunately the rewards are significant."

Read more here.

For more information, visit www.EvanCarmichael.com.

Stages of Financing & What to Consider Before Raising Venture Capital

Stages of Financing

The first stage of financing is to raise money from personal savings, credit cards, friends, and family. It is sometimes known as “golf-course preferred” when you ask people to invest in your company after meeting socially or playing a round of golf together.

You need to build significant critical mass before you can attract an outside angel or venture capital investor and eventually to secure an initial public offering (IPO). The developing of the necessary critical mass can take years of hard work.

There are some companies called incubators that will take an early stage business and guide them through the entire process of building an enterprise but will take a large percentage of your company in return.

What to Consider Before Raising Venture Capital

Venture capitalists want to see more than an idea. They want to see that you have a client list, a finished product that is beyond the beta stage, a clearly defined need in the market place, and sales. They want to see that you have significant traction in place.

Although during some periods, venture capitalists were willing to take a long-term perspective; this is a very rare phenomenon. Most venture capitalists want to see a return in a very short period of time.

An essential characteristic of a successful entrepreneur is the ability to raise capital.
Develop a relationship with your banker before you need the money. The final decision of whether to give you a loan or not rests with the loan officer. If she knows you and understands your business, your chances of receiving the money increase dramatically.

For more information, visit www.EvanCarmichael.com.

2005's Angel Investor

"You've probably heard the rumors: Angel investors aren't as angelic as they used to be. Such investors, generally wealthy individuals, have been essential to American entrepreneurs, betting on early-stage ventures that frighten most other investors. But angels are getting a lot harder to please. And that has implications for any entrepreneur seeking seed funding. "

"The good news is that angels are picking up much of the slack from venture capital funds, which are increasingly focusing on later-stage outfits. Last year alone, 42,000 angels plowed $18.1 billion into early-stage companies, compared with a mere $304 million plunked down by VCs, according to a recent study by the University of New Hampshire's Center for Venture Research."

"But while angels have always had high hopes for the companies they invest in, these days they rely a lot less on their guts than they do on the facts, says David Rose, chairman of the New York Angels, a 50-member group in Manhattan."

"Not surprisingly, the shift dates back to the dot-com crash -- which made all investors more risk-averse. As a result, most angels are interested only in companies that are likely to post positive cash flow within 12 to 18 months. "I want to know if I can double, quadruple, or increase my investment tenfold in five years," Rose says. Unless you already have a service or product, a few customers, and an exit plan, that's not likely to happen."

Read more here.

For more information, visit www.EvanCarmichael.com.

Gamma Raises First Round Venture Capital

"Gamma Enterprise Technologies, a leading provider of SAP data management solutions, today announced that it has raised its first round of institutional investment from two venture capital firms. "

"Gamma Enterprise Technologies, a leading provider of SAP data management solutions, today announced that it has raised its first round of institutional investment from two venture capital firms. "

"Gamma Enterprise Technologies, a leading provider of SAP data management solutions, today announced that it has raised its first round of institutional investment from two venture capital firms. "

""Gamma addresses a big pain point in the enterprise," said Brian Garrett, Principal at Palomar Ventures. "Their focus on reducing the complexity of SAP data management and the footprint of the database is targeted directly at a growing need." Garrett noted that although the VC investment represents the company's first round of financing, "this is no start-up. Gamma's strong entrepreneurial roots have enabled it to build up a blue-chip customer base without any institutional investors." "

"Morgan Rodd, partner at ArrowPath Venture Capital, pointed out, "The SAP data management sector is a large and growing opportunity, and one in which Gamma Enterprise Technologies is already a leader. Gamma's products are in use by dozens of Global 2000 companies that have significant and growing SAP data management needs." "

"Among its customers, Gamma counts companies with household names like Hershey Foods, Whirlpool, IBM, Bayer and Hasbro in a wide range of industries from finance (MONY Life Insurance) to hi-tech (Symbol Technologies) to transportation (Amtrak) to municipal government (City of Edmonton). "

Palomar
"Palomar Ventures (www.palomarventures.com) was launched in 1999 by veteran venture capitalists to focus on early stage information technology companies that demonstrate the potential for exceptional growth and market leadership. The partners at Palomar have contributed their energy, strategic insight, network of corporate relationships and recruiting skills to assist in building nearly 50 public companies. Palomar Ventures is currently investing Palomar III, a $225 million fund. Selected investments include Continuous Computing, Composite Software, Dorado, Efficient Networks, Gluecode, Inovys, KnowNow, Network Inference, Syntricity, Virtela and Voxify. "

ArrowPath
"ArrowPath Venture Capital (www.arrowpathvc.com) is a leading venture capital firm that focuses on investing in early stage information technology companies providing enterprise and infrastructure technologies. These technology areas include enterprise software, network security, data and storage networking, web services, and other data-center technologies. Through its strategic relationships with a number of leading e-commerce and Fortune 500 companies, ArrowPath Venture Capital brings an end-user's perspective to company building and venture investing. "

Read more here.

For more information, visit www.EvanCarmichael.com.

Raising Venture Capital

"Venture capital is available to entrepreneurs with great ideas backed by solid business plans, venture capital officials said. It also fuels the local economy. "

"Forest Park-based Esco Communications of Ohio wants $1 million in venture capital to help fund its planned acquisition of a Lexington-based tech firm. "

""The really attractive thing is, this is one man," said Esco President Michael Weisman. "He has a backlog of sales. With my salespeople, I can build up sales from the customer touches I already have." "

"Esco provides telecommunications hardware to business customers. That includes telephone systems, closed-circuit TV systems, on-site security systems and nurse communication systems in hospitals. "

"Weisman sought venture capital first because he didn't expect banks to be willing. "

"He doesn't want to give up part of his stake in the company, which venture capital financing would require. But he's willing to do that to bring in capital that likely will be needed to do the acquisition. "

""When the opportunity arises, sometimes you have to look at that," Weisman said. "

Read more here.

For more information, visit www.EvanCarmichael.com.