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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Who Are Angel Investors?

Who Are Angel Investors?

"Angel investors are individuals who invest in emerging business ventures. Angels typically provide both capital and know-how to companies who are in either their start-up or expansion phases. To reflect the increased risk of investing in such firms, angels seek a higher rate of return versus traditional public stock investments."

"Angel investors fulfill the financing need that exists between capital provided by friends and family and capital provided by venture capitalists. Individual angel investors often write checks from $25,000 to $100,000. Recently, angel investing has become more organized, and angel groups often invest from $250,000 to $500,000 at a time to deserving ventures."

"Angel investors often have similar financing criteria as venture capitalists. They want to see proprietary intellectual property, a large market size, management team members with expertise and experience and a current valuation that allows for a good return on investment."

Read more here.

For more information, visit www.EvanCarmichael.com.

Northern Crown Capital’s Non-Disclosure Agreement

CONFIDENTIALITY AGREEMENT



BETWEEN: Northern Crown Capital Inc.
Suite 1705
8 King Street East
Toronto, Ontario M5C 1B5

Attention:
Michael Dinnick, Partner
Tel: (416) 364-6777
Fax: (416) 777-9605


AND: ABC Company
Street Address
City, Province / State
Postal / Zip Code

Attention:
Contact Name
Tel: (xxx) xxx-xxxx


RE: ABC Company
(the “Company”)


Northern Crown Capital Inc. (“NCCI”) has requested certain information (the “Information”) concerning the Company, which the Company considers valuable and confidential. As a condition of the Company furnishing NCCI with such information, NCCI hereby acknowledges and agrees that any and all written or oral information now or hereafter furnished to them concerning the Company, is confidential and that the Company’s business and operations could be damaged if any of the Information is disclosed to third parties.

NCCI agrees that such Information:

shall be kept confidential by NCCI and will not be disclosed, divulged or provided to any person without the Company’s prior written consent; provided however, that such Information may be disclosed:

(i) to the smallest practicable number of NCCI’s directors, officers, and employees, if any, who need to know such Information;

(ii) if such disclosure is required by law;

shall not be used by NCCI, and NCCI shall not permit the use of such Information, in a manner or for a purpose detrimental to the Company;

shall not be deemed to include information which:

(a) is public knowledge or becomes generally available to the public other than as a result of disclosure by the Company;

(b) becomes available to NCCI on a non-confidential basis, from a source who is not bound by a Confidentiality Agreement with the Company, and is in NCCI’s possession prior to disclosure by the Company.

In the event that discussions relating to this evaluation cease for any reason whatsoever, NCCI shall, within three (3) days of receipt of written notice by the Company promptly deliver to the Company and shall not retain, or permit its directors, officers, or employees to retain, any and all originals, copies, or extracts from the documents containing the Information.

It is understood and agreed that, in the event of any breach or threatened breach of the terms hereof, the Company shall be entitled to equitable relief, in addition to any other remedies which may be available to it, in any court of competent jurisdiction.

NCCI hereby acknowledges and agrees that the Company makes no representation or warranty, express or implied, as to the accuracy or completeness of the Information, and that the Company shall have no liability as a result of NCCI’s use of, or reliance upon the Information.

Acceptance of this Agreement by NCCI and the Company, and the terms set forth above shall be evidenced by the countersigning of this letter, and returning a copy of same to the parties.

Dated at City, Province / State this day of , 2003.


Northern Crown Capital Inc. ]


_______________
Partner


ABC Company




_______________
Contact Name

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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.

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.

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. (see next page)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.

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: Examples

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.

For more information, visit www.EvanCarmichael.com.

Who Are Angel Investors?

" According to Growthink, angel investors are individuals who invest in emerging business ventures. Angels typically provide both capital and know-how to companies who are in either their start-up or expansion phases. To reflect the increased risk of investing in such firms, angels seek a higher rate of return versus traditional public stock investments. "

" Angel investors fulfill the financing need that exists between capital provided by friends and family and capital provided by venture capitalists. Individual angel investors often write checks from $25,000 to $100,000. Recently, angel investing has become more organized, and angel groups often invest from $250,000 to $500,000 at a time to deserving ventures. "

" Growthink has found that angel investors often have similar financing criteria as venture capitalists. They want to see proprietary intellectual property, a large market size, management team members with expertise and experience and a current valuation that allows for a good return on investment. "

Read more here.

For more information, visit www.EvanCarmichael.com.

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.

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.

For more information, visit www.EvanCarmichael.com.

Sourcing Angel Capital

"Since Nasdaq's April plunge, angel investors have become a lot more careful about where they put their cash. Frontier asked David Gerhardt, head of angel group The Capital Network, for some funding advice in these more demanding times."

"What's important to investors now that didn't matter eight months ago?

Customer verification. Entrepreneurs need to really talk to customers or potential customers. They need to get a sense that customers will buy their product and pay enough for it."

"Have expectations changed about time frame and return?
Angels start to get excited nowadays when they see a 5-to-10-times return over three to five years. Before, the window was just 18 months to two years."

"Which industries do investors like?
There's more interest in health sciences. It was hot 10 years ago, then the bubble popped. Now, it's back. That's the cycle. Maybe next week it will be wireless."

Read more here.

For more information, visit www.EvanCarmichael.com.

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.

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.

For more information, visit www.EvanCarmichael.com.

Early Stage Venture Capital

" While venture capital is on the rebound, funds have gravitated toward more mature companies--those with proven business plans, a lot of customers and steady revenues. Thomson Venture Economics, which is tracking the trend, reported recently that early stage companies grabbed just one-fifth of all venture capital investments last year. Historically, venture capitalists have invested about a third of their funds in such companies."

"That's leaving many entrepreneurs, including Hazarika and Meador, to learn the art of bootstrapping a business."

""VCs are much more cautious about investing in concepts and now tend to wait until there is some proven customer traction," said Carl Haacke, founder of Skylight Consulting and author of "Frenzy: Bubbles, Busts, and How to Come Out Ahead.""

Read more here.

For more information, visit www.EvanCarmichael.com.

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.

Angel Investors Accept More Risk

"Virtually all startups are financed by wealthy individuals. They're far too risky for banks and usually fall outside the comfort range of venture capital firms, which typically begin investing after initial sales prove a market exists for the product or service."

"Six of 10 "angel" investments go bad."

Read more here.

For more information, visit www.EvanCarmichael.com.

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.

For more information, visit www.EvanCarmichael.com.

Why Banks Say No

Finally, according to a CFIB survey of entrepreneurs who have applied for bank loans, here are the most common reasons the banks give them for why their application was rejected:
• 26.6%: Too much outstanding debt
• 26.6%: Lack of owner equity
• 24.8%: Insufficient cash flow
• 17.2%: Too new in business
• 13.7%: Poor industry conditions
• 11.6%: No reasons were given
• 7.8%: Products not considered profitable
• 4.1%: Inadequate business plan
• 4.0%: Environmental risk factors

These are the major warning signs that bankers will look out for before approving your loan. Before submitting your application you must try as hard as you can do anticipate and counter possible arguments in each of these areas.

One disturbing fact is that over 11% of entrepreneurs who get their loan applications rejected are not given a reason from the banks as to why this happened. The most important thing you can do if you get rejected is to listen to your banker. Always find out the reasons why you got turned down. Then ask what you can do over the next couple of weeks or months to improve your business so that they will accept your application.

For more information, visit www.EvanCarmichael.com.

Meeting With Angel Investors

"When it comes to raising money for your startup, don't expect any miracles: Angels don't descend from heaven. In most cases, angel investors will already know you or be introduced by a mutual friend. This is partly because they need to have confidence and trust in you to take a risk on you and your business, but also because they simply like hanging out with entrepreneurs. Angel investors like being mentors, and they typically like to experience the entrepreneurial life vicariously."

"Angels are interested not just in you; they also want to know about your team. They want to get to know the people working with you and see that you've gathered an experienced and innovative management team to help you grow your business."

" You'll need to weigh three factors to help you decide when to schedule the meeting where you'll ask the angel for the investment:"

"1. State of your relationship with the angel investor. The right time to ask for money is when your relationship is comfortable and trusting and when you sense the investor will be open to the request."

"2. Cash needs of your business. A useful calculator for estimating your company's cash needs is available on our site here. It will take, at a minimum, many months to close on your round of fundraising, so you’ll need to understand your cash flow well enough to plan several months in advance for how much you'll need and when."

"3. Time it'll take to close the deal. It takes time to raise money from relatives, friends and angel investors--just like it takes time to raise money from venture capitalists. Entrepreneurs expect it to take six to 12 months to close a round of venture capital. For raising money from relatives, friends and angels, it could take as little as three months to close a round from five to six investors. For raising a larger round from 10 to 15 investors, it could easily take well over 6 months."

Read more here.

For more information, visit www.EvanCarmichael.com.

Who Makes The Decisions?

When applying for a loan it is also important to know who is going to be making the final decision as to whether you get accepted or rejected.

According to recent CFIB data, the decision maker breakdown looks like this:
• 36% of decisions are made by the head or regional offices
• 31% of decisions are unknown who the final decision maker is
• 25% of decisions are made by the local branch office
• 8% of decisions are made by automated credit scoring models
What is interesting to note is that most of the decisions are still made by real people, not computers. And people make emotional decisions, not always rational ones. By presenting your case and letting the decision maker get to know you and your story, you can increase the chance that they will say yes.

For more information, visit www.EvanCarmichael.com.

Size Of Company

Finally, the size of your company will be a crucial factor in the bank’s decision to give you a loan or not. Again, remember that banks like lending safe capital to low risk borrowers. They do not like high risk entrepreneurs. Therefore, the bigger you are, the safer you are and the more likely you are to get your loan.

The loan rejection numbers by size of your company look like this:
• 0 to 4 employees: 13.6% rejection rate
• 5 to 19 employees: 10.7% rejection rate
• 20 to 49 employees: 6.0% rejection rate
• 50 to 99 employees: 4.1% rejection rate • Over 100 employees: 2.5% rejection rate

For more information, visit www.EvanCarmichael.com.

Business Banking Services

Let’s say you run a website design company. You have two clients. One client uses your services on a regular basis. Every month she comes to you with a plan to update her site and she sees you as a trusted business partner. The other client had you set up her site but you have not heard from her for six months for any improvements or updates. She sees you as a necessary evil to getting her business going and wants to deal with you only when she absolutely has to. Now, say both clients come to you and want site changes but neither can pay up front. They want you to credit their account and they offer to pay you in a couple of months. Assuming you could only grant the credit to one person, who would it be?

The answer is obviously the first client who uses you on a regular basis and sees you as a trusted business partner.

Banks work the same way. The more you use their business services and the more you are in contact with them, the more they get to know you, the more they want to keep you as a client, and the more likely they will give accept your loan application over other businesses, with all else being equal.

Develop this relationship by setting up all of your accounts with one bank. Use them for your checking account, your savings account, your credit cards, your
Loans and lines of credit, and every other business banking service you end up using. When you sit down with your account manager for your loan application and she pulls up your account history on her computer, you want her to be thinking “Wow. This client is really using a lot of our services. I want to do as much as I can to make sure I can keep her at our bank.”

For more information, visit www.EvanCarmichael.com.

Business Experience

Business Experience

Banks want to lend money to established businesses with a track record of experience. The reason is pretty simple: you have proven that you can achieve certain results which make your future projections less risky. If you can show that you have done it before it is easier to have faith that you can do it again compared to a startup with no experience.

Banks prefer companies that have been around for 10 years or more. These companies:

• Get rejected for loans over 50% less frequently than inexperienced firms
• Pay around 0.4% less interest on their loans

If you do not have 10 years of company history, as most entrepreneurs do not, point to your other experiences that will help give you credibility. Maybe you worked as an employee in a small company and helped double their sales. Perhaps you ran another small business and made it profitable within 6 months. When you do not have the company track record, the banker immediately flags your business as having an increased risk of not being able to pay back the loan. You need to show whatever experience you can from related jobs or companies to reduce the banker’s perceived risk and maximize the chance of you securing the loan.

For more information, visit www.EvanCarmichael.com.

Account Manager Turnover

Account Manager Turnover

Your bank account manager is responsible for understanding your business and going to bat for you within the organization when you need a loan approved. If she does not have an established long term relationship with you it will be difficult to get her to pull strings for you.

The chance of you being rejected for a bank loan depending on how many account managers you have is as follows:

• One account manager: 7.1% rejection rate
• Two account managers: 8.5% rejection rate
• Three account managers: 16.3% rejection rate
• Four or more account managers: 22.8% rejection rate.

Develop a good relationship with your banker early. Talk to her before you need the money and she'll be there for you when you actually go for the loan.

For more information, visit www.EvanCarmichael.com.

Key Loan Factors

Key Loan Factors

According to the Canadian Federation of Independent Business (CFIB), there are four key factors that can dramatically increase your chance of obtaining a bank loan. They are: account manager turnover, business experience, business banking services, and size of company.

For more information, visit www.EvanCarmichael.com.