Executive Summary Review - Howling Moon Designs - Lesson #2 - Very Early Stage

The further along a company has gone towards generating real revenues and income, the easier it is to attract capital.

Howling Moon Designs has yet to deliver a prototype and is asking for enough money for the 3-4 years it will take to build the game.

Unless you've make a lot of money for investors doing it before or have a big customer lined up, investors are highly unlikely to risk a large amount of money for 3-4 years of development work.

Investors would rather finance marketing and expansion instead of research and development. You need to show as much as possible how the money will go towards sales and marketing and crunch down on your research and development timeline. There aren�t that many venture capitalists who are interested in funding ideas anymore.

Next - Lesson #3 - Get A Management Team

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How Venture Capitalists Structure Their Investments Continued

� A 30% annual return may sound high to you. The reason why venture capitalists require such a high return is that anyone can purchase shares in the public markets in major companies and get a 15 to 18% return on their equity. Venture capitalists do not have this flexibility because, as a private company, your shares are not very liquid. Investors are locked in for a period of years and face the risk of your company failing. They therefore need a higher rate of return to compensate for this risk.

� Of every 10 investments, no one can predict at the outset which will be successful and which ones will not. On average 1 to 2 will be very successful, 1 to 2 will go bankrupt and the rest will be what are known as the "walking wounded." They will continue to operate but investors will never recover their investments in these companies. Venture capitalists therefore need to average out the good investments against the bad to ensure their 30% annual return.

� An example is a department store that is unsure which items will sell the best over the next season. For that reason store managers will put a high markup at the beginning and at some point have to mark some of the products down. They just do not know which products they will have to mark down at the beginning of the season.

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Firms Closer to a Payoff Get Venture Capital

"Venture capitalists, often the financiers for nascent businesses, in 2005 favored more mature "late-stage" companies in Colorado's biotechnology, technology and software sectors, according to a venture-capital survey to be released today.
The MoneyTree Survey, which largely mirrors another venture- capital survey released Monday by accounting firm Ernst & Young, identified 75 Colorado deals totaling $612 million in 2005, up from $413 million in 2004.
Tuesday's report, released by accounting giant PricewaterhouseCoopers, showed 16 deals for $115 million during the fourth quarter, up from $93 million during 2004's fourth quarter.
Despite the surge, 2005's figures are still below those in 2003, when Colorado companies raised $633 million, the largest amount since 2001's $1.3 billion.

The biggest beneficiaries in 2005 were late-stage companies.
Venture capitalists preferred businesses they believed were poised to deliver returns sooner rather than later, said Matt Kosmicki, technology partner at PricewaterhouseCoopers in Denver.
He noted that Colorado has emerged as a biotech hub, as current or former workers at the University of Colorado Health Sciences Center on the Fitzsimons campus in Aurora have gone on to start companies.
It's the same thing for the technology sector, where workers have branched from established firms to launch their own. "

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Striking Out With VCs?

"Bill burns needed capital, and he needed a lot of it. The co-founder, president, and CEO of Minrad, a manufacturer of medical devices and pharmaceuticals based in Buffalo, was convinced he was on the verge of something big. Minrad's products--which include an anesthetic that can be inhaled rather than injected and a lighting system to help surgeons increase their accuracy--had the ability to make medical procedures quicker and safer for both patients and doctors.

Burns had landed several long-term contracts with pharmaceutical manufacturers and distributors around the world. Now the 11-year-old company, which generated about $3.5 million in sales in 2004, needed cash to expand its anesthetics plant in Bethlehem, Pa., and beef up its sales staff. Burns had already raised and burned through his most recent $3 million round of venture capital. But when he started fishing around for more, he found that VC investors had grown more risk averse than they had been in the past. Indeed, only 19% of venture financing was invested in start-up and early-stage companies in the third quarter of 2005, compared with 22% a year earlier, according to the National Venture Capital Association.
Then a pair of investors suggested that Burns forget the VCs and investigate a complex and relatively obscure financial vehicle known as a PIPE. PIPEs, or private investments in public equity, allow publicly traded companies--in most cases, small- and mid-cap firms that trade over the counter--to sell stock to high net worth investors at discounted prices. These days, most of those investors are hedge funds, which now boast more than $1 trillion in assets. Many of those funds are interested in investing in early-stage companies--and PIPEs are one of their preferred ways of doing so. Last year about $3 billion in PIPE investments was plowed into more than 300 companies with less than $5 million in annual sales, according to Michael Membrado, a New York City securities attorney who advises early-stage companies on such deals and has done extensive research on the topic.
Burns was intrigued. Of course, there was one immediate problem to address. Minrad was not a publicly traded company. And given the current state of the market, Burns doubted he would be able to stage an IPO anytime soon.
It turns out he didn't have to. Traditional IPOs get all the attention, but they're not the only way for private companies to tap public markets. Most of the companies that get funds through PIPEs go public by listing stock on the Over the Counter Bulletin Board, or by merging with defunct publicly traded companies, commonly referred to as shells. The payday is smaller than in a traditional public offering--but so are the costs and the headaches involved.
Burns liked the idea of gaining access to so much capital. He also liked the idea of wading slowly into the stock market.
Burns liked the idea of gaining access to so much capital. He also liked the idea of wading slowly into the stock market, rather than trying to go public right out of the box with an IPO on a major exchange. So in the spring of 2004, he and his financial advisers began hunting for a shell company. In December, Minrad merged with Technology Acquisition Corp., which was founded in the 1970s and had been idle for the past decade. After the merger was complete, Minrad took the shell's spot on the OTC Bulletin Board under a new ticker symbol, MNRD.OB, and Burns began to court PIPE investors.
During the next few months, with his investment bank playing matchmaker, Burns made 35 presentations to hedge fund managers and wealthy private investors from around the world. In May, two funds, Australia-based Rubicon and Northbrook, Ill.-based Crestview Capital Funds, stepped up to lead the deal and negotiate its terms. Several other hedge funds and individual investors signed on, and last June, just six months after taking Minrad public, Burns landed $11.3 million in financing. It had taken him eight years to raise the same amount from angel investors and venture capitalists."

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Executive Summary Review - Howling Moon Designs - Lesson #1 - How Are You Different?

You have to be different to attract investment dollars. A common question venture capitalists will ask is "what is your unfair competitive advantage?" They want to see not only that you have an edge over your competitors but that it's such a big advantage that it's almost unfair.

The description of Destiny Online sounds extremely similar to that of Project Entropia, the leading competing game in this market. The competitive advantages listed are:

"The character you create will allow the player to have the ability for full customization. We will gain the rights of a high quality engine to use for the game. Inside the game world we are able to show over 15 different revenue streams that allow us to make money. The game world will always be changing and offer main new areas for the players. As well the partnership with Vognesvit helps provides us with an engine and a well experienced team."

One of the main benefits of Project Entropia is that players can create a truly unique character through an intuitive user interface. In addition, Project Entropia does offer a number of revenue streams for its players. I'm left unclear as to how this game will be excitingly different.

You will always be compared to the gorilla in the market � the company that is leading the industry. You need to make sure that you clearly differentiate yourself from your competition. A simple table which highlights the different characteristics is usually a great visual to include in your plan.

Next - Lesson #2 - Very Early Stage

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How Venture Capitalists Structure Their Investments

- It is first important to understand how venture capitalists achieve their targeted rates of return of 30% per year. Not every company will make this return on equity but there are ways around it.

- Much depends on the exit value of your company. A 30% rate of return reflects a price-earnings ration of 3. If the investor can exit at a higher price-earnings ratio they will earn more than their 30% desired return.

- Another way to reach this target is by offering options. An option is the right to purchase shares of your company in the future at a pre-determined price today. If you grow at 20% annually and your earnings were 100 in the first year, your earnings would be 120 in the second year and 145 in the third. By using options the investor can then immediately purchase additional shares at 100 and sell them for 145 which can be added to their 20% annual return to reach the desired 30%.

- A 30% return is an average figure and relates to the degree of perceived risk. If you have an early stage company you will need to provide a high rate of return. If you have a more mature business that has traction and you need financing for expansion or working capital, 30% may not be the required target due to the lower risk level.

- Younger companies may also be forced to give up a disproportionately high percentage of shares to compensate for the high degree of risk. However, venture capitalists will frequently sell a certain amount back to you based on you meeting clearly defined performance objectives.

- Another investment structure is subordinated debt. This usually caries a high yield and is usually not accompanied by equity. Subordinated debt is ideal for companies with solid cash flow and who need addition capital to grow thereby raising the value of their shares before raising any equity capital.

For more information, visit www.EvanCarmichael.com.

How to Attract Venture Capital

"Have you ever been to a conference where selected entrepreneurs are invited to present their ideas to a panel of investors who then critique their chances of getting funded? If not, then you've really missed out -- these meetings are probably one of the best ways aspiring entrepreneurs can get a glimpse of what professional investors are looking for in what they call a "fundable company."

Recently, the Software Council of Southern California asked if I'd like to attend their event, VentureNet, to see what the latest trends were. I eagerly accepted, but my interest was not so much in what was going on at the stage level, but in picking the brains of the professional investors to see what they'd say "behind the scenes." Now, before I share what I learned, let me just make a few qualifying statements:
1. Every professional investor has a slightly different perspective on what's important. Yes, there are some things we all seem to emphasize, but our differences can be extensive. Thus, this article represents the opinions of just the particular cross-section I happened to interview on this one occasion.
2.The individuals I interviewed were very candid and, to protect them from being "profiled" with any one statement, no direct quotes will be made.
The professional investors offering opinions from which this article was extracted include: David Cremin, managing director of DFJ Frontier; Michael Song, a partner with Rustic Canyon; Bill Collins, managing partner of Publex Ventures; and Robert Kibble, managing partner of Mission Ventures. Some additional comments and insights were also provided by Jon Kraft, chair of the Software Council of Southern California.
So what do these gentlemen prefer to see in a company before they get excited enough to write a check? What, if anything, has changed from what they used to look for during the dot.com craziness of the late 90s?
Here's what they said is important now:
Seasoning. They're looking for more experienced, older entrepreneurs who have "been there, done that." The time of investing in the 19-year-old kid who's a tech-genius isn't necessarily gone, but the kid had better be able to find an older, seasoned executive to join his team.
Customers. Contrary to putting the emphasis on the team or the revenue numbers, there seemed to be a new emphasis on the customer:"

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Executive Summary Review - Howling Moon Designs - Highlights - A Growth Market

Online gaming is big business and while the online gaming market for PCs is expected to drop over the coming years, one exciting and rapidly growing area is Massive Multiplayer Online Role Playing Gaming.

According to Wikipedia, "a massively (or massive) multiplayer online role-playing game or MMORPG is a multiplayer computer role-playing game that enables thousands of players to play in an evolving virtual world at the same time over the Internet. MMORPGs are a specific type of massively multiplayer online game (MMOG)." An estimated 20 million people worldwide are spending time in massively multiplayer online role-playing games.

Project Entropia (http://www.project-entropia.com/) is a popular MMORPG where players can construct buildings, create businesses and make investments to build their in-game wealth, which they can then cash out back into hard currency. The projected GNP for the Project Entropia universe in 2005 is 1.5 billion PED, or US$150 million.

This is definitely a growth market and, while still very early stage, could be a big money-maker for savvy investors.

Next - Lesson #1 - How Are You Different?

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What Happens After the Due Diligence Process

- If the venture capitalists are interested in your company after completing their due diligence, they will offer a binding term sheet. It will reflect the draft term sheet that has already been agreed to but this one will be a legal contractual agreement. Then the real negotiations start.

- There are different types of financing to consider: debt, equity, and mezzanine.

- Debt financing is the most objective and is therefore the easiest to negotiate. If you have the assets to support the debt and the income to support the interest payments, the negotiation period will be very short.

- Equity financing negotiating is more complicated and revolves around agreeing on valuation and percentage ownership. Discussions usually requires several days.

� Mezzanine financing involves a mix of equity, debt, convertible debentures and preferred shares. Negotiating the technical aspects of each so that an agreement can be reached between the investor and your company can be time consuming.

� Another dictating factor is the number and variety of financing offers that you receive. It is the intermediary's role to help you bring more than one offer to the table and assist you in evaluating and negotiating which one is best suited to your company's needs based on their previous experience.

� Venture capital term sheets are time limited. You have to quickly make up your mind if you want to accept or reject the offer. The short time period is in place to prevent you from using one term sheet to solicit new offers from other venture capitalists.

For more information, visit www.EvanCarmichael.com.

Executive Summary Review - Howling Moon Designs - Overview

Howling Moon Designs is a gaming company proposing to create a Massive Multiplayer Online Role Playing Game (MMORPG), Destiny Online. Destiny Online will be a real world economic system that allows players to get jobs in the game, open stores, enter tournaments, sell items on a website, go on quests, and be part of teams.

The company is in the startup phase and projects that the game will take 3 to 4 years to complete. It is run by Lee Ing from Ontario.

Next - Highlights - A Growth Market

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How Long the Due Diligence Process Takes

- The due diligence process will very rarely last one or two weeks.

- Remember that the venture capitalist is also working on other transactions beyond your company.

- The due diligence will typically last at least one month. If there are any complex issues such as environmental approvals that have not yet been met, further delays are likely.

- When you are considering raising capital, make sure to get all your company records and documentation together in advance. You do not want to wait until you get a draft term sheet before trying to find important documents that the venture capitalist will need to move forward.

- More and more venture capitalists are also worrying about environmental assessments. You may consider getting your company and property assessed before approaching an investor.

- The venture capitalists will also want to speak with your clients, suppliers and bankers to get an understanding of how your company is regarded by the outsiders who deal with you on a daily basis.

For more information, visit www.EvanCarmichael.com.

How Long the Due Diligence Process Takes

- The due diligence process will very rarely last one or two weeks.

- Remember that the venture capitalist is also working on other transactions beyond your company.

- The due diligence will typically last at least one month. If there are any complex issues such as environmental approvals that have not yet been met, further delays are likely.

- When you are considering raising capital, make sure to get all your company records and documentation together in advance. You do not want to wait until you get a draft term sheet before trying to find important documents that the venture capitalist will need to move forward.

- More and more venture capitalists are also worrying about environmental assessments. You may consider getting your company and property assessed before approaching an investor.

- The venture capitalists will also want to speak with your clients, suppliers and bankers to get an understanding of how your company is regarded by the outsiders who deal with you on a daily basis.

For more information, visit www.EvanCarmichael.com.

Angel network offers presentation template

"Angel network offers presentation template
The Wisconsin Angel Network has added to its Web site a template for young companies to use when they make presentations to potential investors.
The template is available at www.wisconsin angelnetwork.com.
The network operates an online database that contains 60 entrepreneurial deals seeking equity investors. Its list of accredited investors includes 14 organizations that represent more than 200 angel investors, the organization said."

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Reader Question - Business Plan Guide

Hi - I'm interested in writing a business plan and would like to know what you would suggest as a good guide. I'm financially literate and have been involved in a number of different industries, so this guide doesn't necessarily have to be from a "beginners" perspective. Hope you can help.

David


Hi David,

This is one of the most frequently asked questions that I get. Having a solid business plan is critical for arranging the financing you need to grow your business as well as establish the confidence for yourself and your partners that your idea really could take off.

In response to a lot of feedback from website visitors, I put together a Sample Business Plan. It covers the important areas including:

1. Executive Summary
2. Company Description
3. Market Analysis
4. Marketing and Sales Activities
5. Products and Services
6. Operations
7. Management and Ownership
8. Funds Required and Their Users
9. Financial Data
10. Appendices or Exhibits

It can be found at: http://www.evancarmichael.com/Sample-Business-Plan/index.html

Another useful resource is the Business Development Bank of Canada. They have a free sample guide available as well. Since the link changes, simply type in BDC business plan into Google and it will pop up.

Good luck!

Evan.

For more information, visit www.EvanCarmichael.com.

What the Venture Capitalist Due Diligence Process Looks Like

- The venture capitalist due diligence process is intense and can take weeks or months depending on the complexity of your company. It will be the most intensive look at your company that you have ever experienced.

- The venture capitalists will want to know everything from your standard articles of incorporation, directors, and shareholder agreements up to the details of how your business processes are run.

- The purpose of the initial meeting and draft term sheet is to get an approval in principle. From there the venture capitalist will carefully examine the details of your company before making an official offer.

- An intermediary can be helpful in speeding up the process, especially when dealing with the lawyers on both sides. The intermediary is responsible for "cracking the whip" and ensuring the process is progressing. The faster you can make lawyers work, the lower your bill will be. Generally, if you give lawyers enough time, they will make sure to use it and bill you accordingly.

For more information, visit www.EvanCarmichael.com.

Will your venture capital firm eliminate your management team?

"Entrepreneurs and their management teams approach venture capitalists to fund not only their ideas, but also their approach to executing those. One doubt that nags at many, however, is that the venture capital firm will use their financial leverage to terminate the founding management team, replacing them with the venture capitalists' personal choices for successors.
Do venture capitalists ever eliminate the extant management team?
Only when necessary to serve the best interests of all of the company’s shareholders. Partial changes to the team are generally initiated by the extant management team and tend to reflect upgrades as the company grows and evolves. Occasionally, changes may be initiated by the by the venture capitalists and/or the board of directors when things have gone terribly awry and a change is necessary to preserve shareholder value and the venture capitalists’ investment value.
When a company's life cycle is examined, it's clear that some managers' skill sets are best suited to managing a particular segment of that cycle, rather than being appropriate for the company's entire life-cycle. For example, a specific manager may excel at launching to the $1 million to $20 million level, but another type of manager may be required to run the company as sales grow beyond that range. "

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The Next Steps After The Meeting

- If the venture capitalists are interested, they will very quickly come up with a draft term sheet for you which gives an overview of the conditions under which they would make an investment in your company. (see next page for a sample term sheet)

- They provide a draft term sheet so that they can get an understanding of what the deal could look like and ensure that there is not a disconnect between you and them on valuation, methodology or type of financing.

- The draft term sheet is not a commitment on the part of the venture capitalist. It is not a legally binding agreement. It is a proposed framework under which the venture capitalist is prepared to do business. The most important element of the draft term sheet is the valuation. If you are too far apart on valuation the deal will not go any further.

- The due diligence process is not a 24 or 48 hour process, it is quite time consuming. In order to save time the draft term sheet is put forward to ensure that a negotiable transaction can be reached before investing further effort.

- There are also considerable up front fees that the entrepreneur will have to pay. Among these are the venture capitalist's legal fees. Some venture capital firms will also require a $20,000 to $30,000 non-refundable payment up front before going forward.

- The time period given to accept or reject the draft term sheet is not very long. You will have to commit to it or drop it fairly quickly.

For more information, visit www.EvanCarmichael.com.

Reader Question - Do I Need To Be Charismatic?

Hi Evan,
I have recently discovered your website and browsing the various resources that your site offers. I appreciate them very much. I am a fresh graduate from UBC in Applied Science, Electrical Engineering. I started working at Canada's number 2 telecommunications provider shortly after my graduation from UBC. I have searched within the organization to examine the leadership qualities exhibited by the company's executive leadership team. I have come to realize that leadership is based on very simple ideas.

I feel that I have the ideas and the intelligence (don't we all) to create and grow leading businesses. One quality that I feel I lack is charisma. I am not awkward, but I am not a salesman. In your experience, does someone like myself have the potential to grown that charismatic personality, or should I focus my career on developing my stronger traits, such as my analytical and creative abilities? If I will always be someone who lacks the charisma to charm all my audiences, should I give up the idea of being the CEO of leading edge companies, and focus on other roles, or do you think I could still fill such a role successfully?

Again, I would like to thank you for the resources that you have made available. I have a couple of business opportunities awaiting me, and I am in the due diligence stage of one of them. Because of the generosity of your site and the relationship it has built, I will openly look for ways that I can employ your services. Can you tell that I have been reading some of your Marketing advice from Michael Hepworth?

Sincerely,

Matthew


Hi Matthew,

The key is to know what you're good at and find a way to make money doing it. I've met a lot of entrepreneurs who have built multi-million dollar companies who are not very charismatic at all.

By the same token, I've made many charismatic people who have failed miserably at being an entrepreneur.

What you need to do is pick an industry that you are passionate about and you can be outstanding in.

Every company needs a team of people to be successful. The first step in building this team is recognizing what your individual weaknesses are. Surround yourself with people who complement your skills and can help you build a world class organization.

Good luck!

Evan.

For more information, visit www.EvanCarmichael.com.

VCs Invest $127M in Startups

"As venture capitalists begin to disburse the money they raised last year, venture firms said Tuesday they invested a total of $127.3 million in 15 startups in technologies ranging from video intelligence software to chemicals designed to test if your brain is rotting. Here are the financing highlights:

· CoLucid Pharmaceuticals picked up a $16.5-million first round of venture investing to develop a migraine molecule it acquired from Eli Lilly. Pappas Ventures seeded the Indiana-based company and Domain Associates led the first round of financing with Triathlon Medical Ventures and Pearl Street Venture Funds.

· OnVantage closed a second round of venture investment worth $18 million from venture capital all-stars such as Draper Fisher Jurvetson and Norwest Venture Partners. The company supplies technology for the professional meetings and events planning market. The Santa Clara, California-based company was founded through the merger of seeUthere Technologies and PlanSoft in 2004, according to CEO John Chang. Jim Lussier of Norwest will take a board seat along with Bill McGlashan of Texas Pacific Group Ventures.


· Gather.com, a web site for sharing user-generated content, won a second round of venture financing, pulling together $6 million from former Lotus CEO Jim Manzi, among others. The company, based in Boston, is positioning itself as a portal for blog swapping. It will allow users to rate what they read. The best writers, or content producers, will filter to the top. The startup has established a system of rewards and advertising to compensate content makers for their contributions. Other investors include Southern California Public Radio, American Public Media Group, and Gather CEO Tom Gerace.

· Theregen, a regenerative medicine startup, picked up $1.5 million from Sanderling Ventures to develop its heart therapy product. The U.S. Food and Drug Administration has approved the San Francisco company’s bid to start testing its drug in phase I trials.

· NovusEdge raised $6.5 million in its second round of venture financing as the security startup appoints a new chief executive. Peter Nohren has taken the helm of the firm, which has raised $18.9 million to date. The financing came from InterWest Partners and Sevin Rosen Funds and is designed to help the Austin, Texas-based company to expand its research, development, and sales efforts. The startup has already sold into Lockheed Martin Atlas V, Warren Air Force Base, and several hospitals."

For more information, visit www.EvanCarmichael.com.

How Intermediaries Can Help

- Preparing for the meeting is a key role of intermediaries. They will go through a number of rehearsals with you and sit down for several sessions that could last for a couple of hours each to go over the likely questions you will be asked. They will also make sure you have the right answers committed to memory and can back up your assumptions properly.

- A successful meeting with venture capitalists will result in good chemistry having been developed early on and at the end of the meeting. The venture capitalists will have openly expressed an interest in moving on and there will be a general level of enthusiasm at the end as supposed to the objective analysis of the business plan which occurs at the beginning of the meeting.

- The intermediary knows the venture capitalists and their different accounts. Intermediaries know the sensitive points and help tailor each presentation to the particular venture capitalist. Every venture capitalist will have a different approach and the intermediaries will help you prepare for their potentially hostile questions.

- Preparing for the meeting is much like preparing for a case in court. You only have one chance at it and you better do it right!

For more information, visit www.EvanCarmichael.com.

Reader Question - Starting A Company

Evan,

I wanted to start a small importing/exporting company buying and selling handbags and ladies accessories. Can you give me direction as to what the best steps to take are? Also if there are any resources that I can research or use to get this going?

Thanks.

Karmela




Karmela,

Congratulations on your ambition to start a business!

My top three suggestions for you are the following:

1) Model Success. Find someone who has achieved business success who you admire. Look at people in your industry as well as outside your industry. For example, who is the most successful importing / exporting company right now for handbags? What about importers / exporters for other products? Who are some other successful entrepreneurs you look up to? By studying their stories and learning how they got started you can create a model of success for your own business. For some ideas you can visit my Modeling Masters blog at http://www.evancarmichael.com/Masters/Masters.html

2) Start Small. As an entrepreneur you�re bound to have many great ideas as to where your business can go. There are always new markets to tackle, new products to sell, and new opportunities to conquer. Many entrepreneurs, however, try to take on too much too quickly. The first year of a small business is about survival � making enough to pay the bills and ensuring you�re still going to be around next year. Most entrepreneurs who act big too quickly end up going bust. Build your foundation, dream big and take small steps today for what will soon be your outstanding company!

3) Set Goals. When you have a clear sense of what you want to do with your business, you are much more likely to achieve success. If you start driving without any destination in mind then you could spend your entire time driving around in circles! Take some time and write down where you want to take your business. Make long term goals as well as short term ones � what are you going to do this week to move forward on one of your long term goals? Set your direction and take steps every day to get closer to your goals.

Good luck in building your business and keep me posted!

Evan.

For more information, visit www.EvanCarmichael.com.

Length of the First Meeting

- The first meeting will very rarely last more than an hour. It is really designed solely to understand if you have the "horses for the courses." This can certainly be understood in that first hour. The due diligence process will then follow.

Your Objective in the First Meeting

- To persuade the venture capitalist to move to the next level.

For more information, visit www.EvanCarmichael.com.

Reader Question - Selling My Invention

Dear Evan,

Claudio and I have been to some of your meetings which we enjoyed, we have developed a new wheelbarrow, it is a sort of self loading, but we are unable to find some manufacturers to take on this project, we had lot of good remarks from industries, we have corrected the negative remarks, and have a new prototype, drawings, but we don't have the necessary finances, it would be an ideal find an industry maybe in China to take over and maybe sell the all thing, we have filed in USA/ Argentina/PCT. And there should be no problems with the patent as we had some actions taken, but not really important, we have addressed them. Can you please give some advice on what next?

I thank you and hope to see you again.

All the best Maria Carosi


Hi Maria,

Moving from being an inventor to being an entrepreneur can often be a very challenging step. For an inventor to be successful he or she must be focused on satisfying a human need, which is to enhance our experience by giving us useful tools.

There are a couple of options that you can take. In terms of financing, your best bet would be to speak with angel investors (wealthy individuals like doctors, dentists, lawyers, etc.). They are usually reached through informal networks - your friends and family would be a good place to start to see if they know anyone who they can introduce you to. I've also written a section on my website dedicated to finding angel investors at http://www.evancarmichael.com/Angel-Investors/index.html.

A second option is to contact the BDC (Business Development Bank of Canada). They are a government run organization with a mandate to help Canadian entrepreneurs. They are not going to automatically approve you but they do take more risks compared to the typical banks.

You should also focus on getting some more traction with potential customers. You said that you've spoken with industries and have received good remarks. Will they purchase your product up front? Will they give you a letter of intent? Will they provide testimonials?

Often customers are great financing options for startup entrepreneurs. If they won't agree to buy up front then at least you can get their support to show potential investors. If you can show an investor or lender that you have clients lined up you've done more than 90% of the other business plans they've seen this month.

A final thought you might consider is to think about if you really want to run a business or not. Many inventors like to create but do not like the work that comes with operating a company. You need to focus on what you're the best at and bring others on who can complement you.

Good luck!

Evan.

For more information, visit www.EvanCarmichael.com.

Other Information the Venture Capitalist Will Ask For

- Venture capitalists will not go into too much detail in the first meeting.

- They essentially want to meet your team and assess them. They will then decide if they want to move forward with you or not and begin their due diligence procedure, a process which continues right up until closing day.

- Ultimately the potential investors wants to make sure that they clearly understand how your business operates and how your team can work together to fulfill the objectives of the company.

For more information, visit www.EvanCarmichael.com.

Executive Summary Review - WaterWorld - Lesson #3 - The Business Model

The business model section of a plan is important because it outlines how your company will make money. The business model has to make sense, be a win for all parties involved, and be realistic.

WaterWorld's business model is to "sell directly to media executives and wholesale buyers in exchange for advertising and publicity. We give up a percentage of the sales garnered from the particular media. They in turn will distribute our products to their customers at the retail level. In many instances WaterWorld will get the orders directly and ship straight to the end user and then remit earnings to the media that generated the sale."

The typical business model for a media company such as a television station is to sell advertising � not products. They get paid based on the amount of air time you want and during which time as supposed to how successful your advertising is.

This strategy may work with smaller outlets who are having a hard time attracting enough companies to fill their advertising spots but does not lend itself well to the larger players.

Just as you need provide proof that your product works, you need to demonstrate to investors that your business model works and makes sense � especially when you're assumptions are based on activities that are outside the norm. Have media companies already agreed to this method of cooperation? Who are they? What have they said? How many more can you get and is this enough to push the product?

Reduce the risk for the investor by showing them that the business model works and is well thought out.

Would you like your Executive Summary reviewed? Click on the "Get Your Plan Reviewed" button at the top of the page.

For more information, visit www.EvanCarmichael.com.

Modest increase predicted in venture capital investments

"Venture capitalists had a good year in 2005 and are expecting more of the same in 2006. Despite lackluster initial public offering activity, a healthy mergers and acquisitions market made up for the loss in exit strategies. Although Mark Heesen, president of the National Venture Capital Association in Arlington, Va., says the industry will start seeing some of the effects of the lagging IPO market in 2006.

Venture capitalists in the United States have consistently been investing between $4.6 billion and $6 billion per quarter for the past 14 quarters and that shows good stability, Mr. Heesen says.
This year's investment will be a slight uptick coming in around the low $20 billion range, he says. But he doesn't expect any huge increase in investments in 2006, nothing above 10 percent.
"And that's good news," Mr. Heesen says. "That means venture capitalists are not running wild again."
For 2006 he doesn't expect a huge ramp up in investment activity in new sectors but rather continued growth in relatively new areas of investment for VCs like energy, bioinformatics and mobile computing."

For more information, visit www.EvanCarmichael.com.

Angel capital helps to pave the way for venture investments

"Would there be Major League baseball without a system of minor-league teams to nurture young talent? Not a chance. In baseball, which so often imitates life, a good "farm system" keeps the big leagues supplied with the next generation of players.
The story is much the same when it comes to venture capital investments, so often cited as the life’s blood of high-growth start-up companies. Unless there are sufficient numbers of up-and-coming deals percolating in the pipeline, venture firms won’t have ample choices in Wisconsin about where to put their money. Wisconsin’s venture capital investments won’t grow over time unless there are a sufficient number of investments taking place earlier in the game.
While there’s nothing minor-league about the investors involved or their work, angel investors in Wisconsin are the private equity equivalents of a “farm system.” Angel investors, who work either in networks or as individuals, often provide some of the first real money for start-up companies. They also offer coaching, mentoring and real-world experience that young firms otherwise might never get.
A year ago in Wisconsin, there were only six active angel networks – active being defined as a network that had made at least one investment. Today, there are 11 active networks and at least three more are poised to invest once they find deals that meet their standards and expectations.
The Wisconsin Angel Network, formed a year ago this month, has been charting angel activity statewide and helping provide infrastructure for investors and entrepreneurs alike. There are 14 members of WAN (a public-private project of the Wisconsin Technology Council) representing more than 200 investors. These are people who have enough money to invest in the right start-up company – and who often come with the right kind of expertise.
The newest member of WAN is the NEW Capital Fund LP. Technically a private equity fund rather than an angel network, the $10 million fund was raised much in the same way that angel funds get started. About 75 people, mostly from Northeast Wisconsin, have committed capital with the idea of investing in 10 to 12 deals over the next five years.
“For those of us who live in the New North, we have no doubt about the potential that exists in our region,” said general partner Charlie Goff, who announced the fund Monday in Appleton.
So far this month, there have been announcements about three major venture capital or private equity investments in Wisconsin: $14 million for TomoTherapy, $12 million for EraGen and $7 million for Guild.com. Each of those companies attracted angel investment dollars at some point in their development, and their growth may not have occurred without that kind of private equity infusion.
The Wisconsin Angel Network is helping provide more fertile ground of angel networks and investors by putting on training seminars (yes, there’s an art to angel investing), establishing and charting industry metrics, producing on-demand video presentations and providing other resources. The biggest tool in WAN’s kit is its online storehouse of potential deals, called the “Deal-Flow Pipeline,” which is available to accredited members at wisconsinangelnetwork.com."

For more information, visit www.EvanCarmichael.com.

Important Business Plan Questions They Will Ask

- The main questions about your business plan will surround the assumptions you have made. Mistakes are most often made at the assumption level. Prepare for your assumptions to be tested.

- Avoid unstated or assumed assumptions. Make sure to write down every assumption that you have made in your financial projections. This is a critical part of developing the persuasion chain and convincing the venture capitalist to understand your numbers and eventually invest in your company.

- Intermediaries such as Northern Crown Capital will ensure that you are ready. They know the questions that are likely to be asked and ensure that you have the right answers memorized before going in. You must be confident when walking in the room and in answering every question if you hope to instill confidence in the venture capitalists.

For more information, visit www.EvanCarmichael.com.

Executive Summary Review - WaterWorld - Lesson #2 - Have You Done It Before?

One of the most important factors that investors look at is the management team. Has the president done it before and does he or she have the team to make the company successful or not?

Investors would rather put their money behind an average business plan with an outstanding president than an outstanding business plan with an average president.

In the WaterWorld summary the reader learns that president Mark Hall has various university degrees and is a small business lawyer from Minnesota. It also states that he "has helped start several small businesses for other entrepreneurs." What are these businesses? How was he involved? Did they turn into successful businesses? These are much more important areas to focus on than the university degrees.

The plan also states "We have several trusted and reliable persons who will assume positions in the company, after funding, that will significantly enhance our ability to serve the public, media executives and wholesale buyers through their years of industry experience." Who are these individuals? Why are they interested and what will their roles be?

Again, the investor is looking to maximize opportunity and minimize risk. This is done by betting on someone who has done it before. Whatever experience you do have running a business and being successful, leverage it in your plan. Investors care much more about your previous experience than your educational background.

If you don't have all the experience yourself, bring in a team and make sure to mention who they are and what their backgrounds are. Even having a reputable and experienced board of advisors can sometimes make the difference between getting funded or not.

Next - Lesson #3 - The Business Model

Would you like your Executive Summary reviewed? Click on the "Get Your Plan Reviewed" button at the top of the page.

For more information, visit www.EvanCarmichael.com.

Venture Capital: Investors pull out crystal balls for 2006

"Will Nasdaq end the year above 3,200? Will Amazon.com get bought by Wal-Mart? And which way is Google's stock headed?
Those are a few of the questions that Seattle-area venture capitalists and private equity investors pondered in my annual predictions column. So here is a look into the minds of five investors as they try to figure out where things are headed in 2006.
ANDY DALE, BUERK DALE VICTOR, SEATTLE:
Favorite investment sectors for 2006: Health and travel services that tap into the aging baby boomer population. "We are still pursuing the consumer and service sectors, probably a little bit more in traditional business as we have seen valuations for technology and Internet companies go up pretty dramatically recently."
Comeback company: Infospace.
Dying company: General Motors.
Nasdaq close on Dec. 29: 2425, up 10 percent.
Number of IPOs in the state: Six. "There are several venture-backed companies that are maturing to a point of having those options."
Will Google's stock increase or decrease (percentage): Decrease 25 percent. "I think they are going to have some blip related to either expanding too fast -- not able to keep up with their growth -- or at some point I think the competition is going to get to them."

Will venture capital investments increase or decrease: Increase. "It will be principally driven by the increase of new funds raised by people from California. California money will come back consistently."
Bold business prediction for 2006: Interest rates and inflation up 10 percent. Real estate peaks and oil goes down.
Super Bowl winner: Seattle Seahawks.
TOM HUSEBY, SEAPOINT VENTURES, BELLEVUE:
Favorite investment sectors for 2006: Mobile applications. "The fact that there is an active, always-on IP address in people's pocket or purses is becoming a hugely impactful thing in a bunch of investment areas."
Comeback company: Qpass. "If you had to look at a complete business cycle comeback, I have a hard time picking any candidate that is stronger than Qpass."
Dying company: "Any enterprise software company that is not rapidly moving towards software as a service or some reoccurring revenue model is going to be in trouble."
Nasdaq close on Dec. 29: 2,500, up 13 percent.
Number of IPOs in the state: Five. "I think it is going to be a better market."
Will Google's stock increase or decrease (percentage): Final close of $475, up 14 percent for the year. "I think the concept of a Google morphing into a network by backing metro-area networks will be viewed as an experiment that they don't follow up on."
Will venture capital investments increase or decrease: Increase. "I think we went through a very quiet period here in the Northwest. I think 2005 was abnormally low for some reason given what is happening in the economy."
Bold business prediction for 2006: "There is going to be a tremendous sorting out between content providers and infrastructure providers in the brave new digital world. Companies who have picked both will suffer for that indecision."
Super Bowl winner: Seattle Seahawks
T.J. McGILL, EVERGREEN PACIFIC PARTNERS, SEATTLE:
Favorite investment sectors for 2006: "We continue to like 'luxury' consumer products and services. The national and local housing market will slow in 2006, and consumer spending will follow it; however, the luxury sector of consumer spending will remain strong. Even in a sluggish economy, baby boomers continue to have significant disposable income and are willing to spend it on luxury goods. Additionally, we view functional foods and healthy foods as a rapidly growing category -- you are seeing the crossover in distribution of these products from traditional health foods stores into the grocery and club channels -- which will drive volume and dollar growth for this category. And you are also seeing some of the multinational consumer product companies entering the category -- a good sign."
Comeback company: Microsoft. "While the company does not need to 'come back,' the stock does. I think Microsoft stock will be up 30 percent in 2006. You have a company generating huge amounts of free cash, a server business growing at 20 percent year over year, a new operating system being launched this year, and a growing installed base of X-Box console owners who will continue to buy X-Box software -- which has great margins. Google can't own every part of the software business."
Dying company: Cutter & Buck. "I think the brand is getting tired, there have been a number of management changes and board struggles that have probably contributed to the company losing focus. It is tough to sustain a premium brand in that environment."
Nasdaq close on Dec. 29: 2,293, up 4 percent. "Who cares about the Nasdaq -- it's so 'new economy.' I like the S&P 500 and I think it will be up 6 percent in 2006. Not a very robust year, but better than Nasdaq."
Number of IPOs in the state: Four
Will Google's stock increase or decrease (percentage): Down 10 percent."

For more information, visit www.EvanCarmichael.com.

Major Questions You Should be Prepared For

- The first meeting is primarily a question and answer session to see if you have the right management team in place. However, the venture capitalist can have specific questions for you to test such things as your technology. They may bring in a technology expert to get further clarification on points made in your business plan.

- The venture capitalist can also use this meeting to test you on sensitive areas such as your company valuation and the eventual exit strategy. Investors will not want to go too far down the road with you if you cannot agree to basic terms with them. If you think your company valuation is $100 million and they determine your value to be $20 million, you have a sizable gap that may be too large to close and come to mutually acceptable terms on.

- Another potential problem is that if you are wedded to your company and do not ever want to sell, it decreases the likelihood of an investor exit which lowers your chance of receiving the necessary capital you need to grow.

- One example from Northern Crown Capital's experience was when they found a perfect venture capital match for their client but the company's management started disagreeing in front of the venture capitalists during the meeting. The marketing people were arguing with the research people and the venture capitalist needless to say did not invest.

For more information, visit www.EvanCarmichael.com.

Executive Summary Review - WaterWorld - Lesson #1 - Does It Work?

The summary provides the reader with information on what the benefits of the drinks are. For example, the company claims that the Victory drink can restore energy lost through exercise, training, and game time exertion, allow the heart muscles to withstand vigorous and strenuous exercise, fight and prevents lactic acid build-up, reduce and eliminate cramping, and boost energy reserves and accelerates muscle recovery time.

What is missing is the proof that it works. You need to demonstrate to potential investors that what you have is real. Show test studies, include testimonials, provide lab reports, have supporting quotes from respected individuals in your market. In other words "Show me the money!"

The problem is, while your product is probably excellent and can deliver on all the promises you are making, you need to remember that most of the other companies seeking capital out there are not marketing such reliable products. Unless you demonstrate that the product actually works then you are immediately lumped in with all the other "junk" business plans.

Investors see so many business plans every day that they are looking for reasons to say no. Don't make it easy for them to turn you down by not having supporting evidence for your claims.

Next - Lesson #2 - Have You Done It Before?

Would you like your Executive Summary reviewed? Click on the "Get Your Plan Reviewed" button at the top of the page.

For more information, visit www.EvanCarmichael.com.

Stable financing is a constant concern for small businesses

"Sam LaVergne's small business, South End Cabinet Co. in Charlotte, has grown fast -- jumping from four to 32 employees in 18 months. He's hoping to move into a bigger space next month, but financing the move and his payroll has been a struggle.
Money from family and other investors fell through in October and LaVergne had to let his employees go. Now he's trying to convince banks, private equity firms and angel investors to back him.
"Capital is a must-have," LaVergne said. "You can't make sound, strategic decisions without it. You're just living hand-to-mouth."
Sustaining sufficient cash flow remains one of the toughest challenges for small entrepreneurs. In a survey conducted of 400 area small business owners, access to capital ranked as the third most pressing need, behind lower taxes and more customers, according to results released this week.
And financing isn't getting easier to tap. With interest rates rising, loans are more expensive. And a key government program for small businesses recently backed fewer loans.
Most small entrepreneurs scrape together cash from family and friends or by taking out a second mortgage and maxing credit cards, said Steve Partridge of the Charlotte Chamber.
LaVergne (pronounced "le vern") took out an equity line of credit when he quit his day job as an lawyer and went into business with his brother in 2002. They started and then sold a small home-building company before creating South End Cabinet Co. in August 2004.
SBA-guaranteed loans decrease
Relatively few small businesses tap into government-backed financing, according to the Charlotte-Mecklenburg 2005 Small Business Survey. Only 21 percent of companies with 20 to 99 employees used such programs. Smaller companies used government financing less often.Some entrepreneurs turn to the Small Business Administration, which partially guarantees loans, to make them more attractive to lenders.
But lenders issued 3,000 fewer SBA-guaranteed loans during the first quarter of fiscal 2006 (which started Oct. 1), compared with the same time last year.
And fees for SBA-backed loans are likely to rise because of growing defaults. About $500 million of Gulf Coast loans are expected to default this fiscal year because of Hurricane Katrina.
LaVergne said he likely wouldn't qualify for SBA financing because his credit score has taken a dive from 780 to the 400s because of his debt load.
Eileen Joyce with the Charlotte SBA office said poor credit would prove problematic.
The SBA programs come in most handy if there's not enough collateral to back a loan and the bank wants the agency to guarantee it, she said."

For more information, visit www.EvanCarmichael.com.

What Happens in the Meeting

- Meetings with venture capitalists are also referred to as "the dog & pony show." It provides the first opportunity for investors to meet the management of your company face to face and assess the people behind the business. You could have a brilliant business plan backed by poor management. This will only become apparent to the venture capitalist in the meeting.

- There is an old British banking expression that asks: "Is someone the horse for the course?" In other words, do you have the right management team for the task at hand. It then follows that different horses are needed for different courses.

- The point of this initial meeting is to test the management face to face. The venture capitalist wants to build confidence with the management team.

- The intermediary�s prime role is to get a "dog & pony show" together with a number of venture capitalists.

- The venture capitalist may question your business plan to test you. Make sure to have someone with you who understands the finances and who knows the product or technology.

- The meeting will usually start off with a 5 minute update as to what has happened since you submitted your business plan. The rest of the meeting will be a question and answer session.

- People like to do business with people who they have an affinity for. The development of trust between yourself and the investor is paramount. They must get a feeling that they can work with you and that there is positive chemistry.

- As an example, an entrepreneur who walks into a meeting dripping in gold, diamonds and flamboyant suits will have a hard time raising capital because the venture capitalists will not feel comfortable with this person.

For more information, visit www.EvanCarmichael.com.

Executive Summary Review - WaterWorld - Highlights - A Ready Market

What's good about this company is that it is attacking a ready market. Many companies seeking capital can only really be successful when a new technological breakthrough has been made, government approval has been granted, or an entirely new market has been developed.

This increases the risk for the investor as there is uncertainty if the necessary changes will occur or not. Before making a decision, investors will weigh the opportunity of putting money into a company against the risk of losing it all. Most entrepreneurs do their best to show the opportunity of investing in their company but do not focus any energy on demonstrating how the investor's risk will be minimized and money will be safe.

The markets that WaterWorld is targeting are existing, multi billion dollar industries which are looking for new, innovating products to solve their pain.

Next - Lesson #1 - Does It Work?

Would you like your Executive Summary reviewed? Click on the "Get Your Plan Reviewed" button at the top of the page.

For more information, visit www.EvanCarmichael.com.

Health Care Venture Capital Funding Reaches Highest Level In Three Years, According to Healthcare Corporate Finance

"During the year ended December 31, 2005, the size of the health care venture capital market grew to nearly $7.3 billion invested, according to Irving Levin Associates, Inc. Compared with 2004, the amount of total dollars invested increased by more than 5%, but compared with 2003, it increased by close to 32%. The total number of health care venture capital deals increased by 11% in 2005, compared with 2004.
Biopharmaceuticals accounted for the greatest amount of venture capital invested in a single sector, with nearly $2.1 billion committed during the year, based on 102 deals with disclosed prices. Medical Devices and Pharmaceuticals each accounted for approximately $1.4 billion in venture capital. There were 97 investments with disclosed prices in Medical Devices, and 70 in Pharmaceuticals. Biotechnology secured nearly $1.3 billion in 86 venture capital transactions announced during 2005."

For more information, visit www.EvanCarmichael.com.

Executive Summary Review - WaterWorld - Overview

WaterWorld Enhanced Drinking Water (http://www.waterworldedw.com) is a manufacturer of energy drinks and spring water. The company has three functional energy drinks as part of its Peak Performance line of products. The three drinks are:

Amore', a sexual enhancement beverage with a natural aphrodisiac with a cherry/grape flavor that keeps him up and her feeling flush with a gentle warm feeling.

Trucker's Fuel, a tea flavor with a mild lemon twist drink for those who drive for a living or need to stay awake during a long day or need to study all night.

Victory, a lemon tasting beverage that can greatly reduce muscle fatigue, joint soreness, cramping, energy loss, and will speed energy recovery and increase energy reserves.

The company is in the startup phase and is run by Mark Hall, a Minnesota based small business lawyer. It is projecting to break even 6-12 months after funding and is searching for $1-4 million in capital at a $10 million valuation.

Next - Highlights - A Ready Market

Would you like your Executive Summary reviewed? Click on the "Get Your Plan Reviewed" button at the top of the page.

For more information, visit www.EvanCarmichael.com.

The Intermediarys Role in Putting the Plan Together

- Intermediaries do not put your plan together but will help you clarify your offering. They will know how attractive your proposal looks from an investor's point of view and be able to help you improve it

- The basic business plan is put together by the entrepreneur and the intermediaries know what the venture capital hot buttons are and how to turn them on or off. They can help ensure that the most attractive elements of your plan are clearly brought up to maximize the chance of investment by the venture capitalist.

- As an example, there are many entrepreneurs who have intelligence, common sense, and a great business sense but are not skilled at writing things down on paper and creating a logical business plan. Northern Crown Capital has helped such individuals in clarifying their business plan and assisted them in then going after a significant capital investment.

For more information, visit www.EvanCarmichael.com.

Reader Question - Finding Investment Capital

Good evening, my name is Chris and I am looking for some information on angel investment or venture capital for a future investment. I am looking at purchasing a bar/restaurant in Dutch St Maarten. The business is already up and running and has been very sucessful for a many number of years. The business is being sold well below market value and is not currently on the market. I am looking at moving on this business very quickly because once it hits the market it will not be on there very long. I am a little bit shy on the total investment which is why I am contacting you. Any information you have would be of great help. And if you are unable to help, any information you have on anyone who would help would be greatly appreciated.

Thanks for your help.

Chris


Hi Chris,

There are a number of ways to valuate a business. The model we typically use is discounted cash flow (DCF). In DCF, you take an estimate of the company's future earnings and discount it back to today to get the present value. Investors will often add a risk premium as well as a premium for being a private company.

The restaurant business is not one that lends itself to venture capitalists very well. VCs are looking for an average return of 30% per year which is hard to create in restaurants unless you are planning very serious expansion.

It could be of interest to the right angel investor. You would have to show what their return on investment would be and how quickly they will be able to recoup their investment. Other elements to keep in mind are how they might be able to exit the investment and how involved do you want them to be in the management of your business. For a more complete guide on Angel Investors visit: http://www.evancarmichael.com/Angel-Investors/index.html

If the business has been successful for a number of years they should have a healthy balance sheet and historical financials. This could lend itself to a leveraged buyout situation where you finance the acquisition through a heavy debt load. The cash flow would obviously have to be enough to cover your debt payments. You can discuss this with your bank as well as work with private firms provided that the numbers make sense.

Good luck!

Evan.

For more information, visit www.EvanCarmichael.com.

Executive Summary Review - Howling Moon Designs - Lesson #3 - Get A Management Team

One of the most important rules for venture capital investors is make sure the company has a solid management team. Investing in early stage companies is as much about the team as it is about the idea, if not more. Venture capitalists want to see that you have some experience and that you have competent people around you.

Howling Moon Designs lays out an organization structure and identifies the team members they will need to make the project a success, but at the moment the company has only one person.

In the plan it is also unclear as to what the founder�s previous experience has been and what other companies he has helped to success.

A venture capitalist is unlikely to invest in a company with one person and a limited track record.

You need to build a team around you with complementary skills. If you do not have much experience in running companies then build a board of advisors with people who have. You want to show as much as possible that you have the existing personnel in place already to make this business a success.

Would you like your Executive Summary reviewed? Click on the "Get Your Plan Reviewed" button at the top of the page.

For more information, visit www.EvanCarmichael.com.

Venture Capital: Dispelling the Urban Legends

"Recently, I met with a small business representing itself as having developed a revolutionary, proprietary technology. Upon arriving, I explained that I was there representing a limited partner and did not discuss my venture capital company in any detail. When the discussion turned to the company’s funding needs, they expressed a strong preference for obtaining all of the needed capital-- $10 million-- from individual and angel investors, based on their belief that venture capital investors would demand too much ownership of the company in connection with the needed investment and require control of the board of directors. They also expressed their fear that venture capital investors would micro-manage the company and would, at the first opportunity, replace the management team and force the premature sale of the company, reaping all of the rewards for themselves.
Unfortunately, many other firms needing capital to execute their operating plans share the concerns expressed by this small business, however erroneous. Indeed, ambivalence regarding venture capital firms is rampant among entrepreneurs in early- and expansion-stage companies. On the one hand, many entrepreneurs require the funding and business experience and judgment such entities can bring. Yet fears abound regarding what the venture capital firm will demand of—or take from--the entrepreneurs’ company once the capital is invested. "

For more information, visit www.EvanCarmichael.com.

Executive Summary Review - Howling Moon Designs - Lesson #2 - Very Early Stage

The further along a company has gone towards generating real revenues and income, the easier it is to attract capital.

Howling Moon Designs has yet to deliver a prototype and is asking for enough money for the 3-4 years it will take to build the game.

Unless you've make a lot of money for investors doing it before or have a big customer lined up, investors are highly unlikely to risk a large amount of money for 3-4 years of development work.

Investors would rather finance marketing and expansion instead of research and development. You need to show as much as possible how the money will go towards sales and marketing and crunch down on your research and development timeline. There aren�t that many venture capitalists who are interested in funding ideas anymore.

Next - Lesson #3 - Get A Management Team

Would you like your Executive Summary reviewed? Click on the "Get Your Plan Reviewed" button at the top of the page.

For more information, visit www.EvanCarmichael.com.

Fewer Venture Capital-Funded Companies Go Public in 2005

"When the number of venture-capital-funded companies going public tripled in 2004, some hailed it as the beginning of a tech revival, predicting that the technology and biotech sectors -- which Maryland has tagged economic drivers -- would again become investor darlings.
They were wrong.
Initial public offerings of venture-funded companies plummeted 40 percent last year, to 56 from 93 a year earlier, according to data from the National Venture Capital Association and Thomson Venture Economics released yesterday. Money raised was down as well, dropping 33 percent to an average of $79.7 million per offering, compared with $118.4 million in 2004.
Maryland's numbers were up -- to three venture-funded IPOs from zero in 2004 -- but the average earned, at $77.2 million, was below the national mean. The total number of companies going public was down slightly to 233 from 249 in 2004.

"This is definitely under where we'd like to see things," said Mark Heesen, president of the National Venture Capital Association based in Arlington, Va. "[At the end of 2004], people were saying the [2005] IPO market will be similar to, if not better than, 2004. That certainly did not happen."
Heesen interpreted the data as proof that investors, both individual and institutional, are still avoiding technology and even biotechnology following the stock bubble burst of a few years ago. At the tech boom's height in 2000, 264 venture-funded companies went public. By 2001, the number had dropped to 41, and then into the 20s until 2004, when the upsurge to 93 offerings led to so many false hopes. "

For more information, visit www.EvanCarmichael.com.

Capital Ideas From The Internet | January 2, 2006

InformationWeek | Investments | Capital Ideas From The Internet | January 2, 2006

"Dozens of financiers seeking to profit from new technology ventures crowd into a sun-drenched suite at the law firm of Morrison & Foerster 39 floors above midtown Manhattan. Standing behind a lectern in front of the room, pointing to a PowerPoint presentation partially washed out by the sun's glare, James Haft has just 15 minutes to persuade these investors to fund his nascent venture. The fact that the core business of the startup--U.S. Condo Exchange, or USCondex--is selling condos doesn't seem to bother the crowd of angel investors and venture capitalists looking to make money off of IT.
USCondex, which bills itself as the eBay of the condo industry, is the type of business many investors will bet on these days: a provider of business and consumer services in which the Internet serves as a foundation. Haft doesn't describe USCondex as a realty brokerage or a technology company, but as a media and digital venture that employs an array of acronym technologies--XML, SQL, ASP, RSS, and PHP, to name a few--as the platform of its business.

The payoff for tech investors today is in the exploitation, not the creation, of technology. "At the end of the day, there's far more money made from people who figure out how to use technology than create it," says Haft, CFO and co-founder of USCondex. "It's not the sheer technology that's interesting, but the know-how in a business sense to create a compelling venture."
What many had dreamed would happen during the go-go days of the Internet boom in the late 1990s is being realized now: the creation of viable IT-based businesses that exploit the Internet platform. Back then, investors pumped billions of dollars into Net-based ventures only to see their equity evaporate into the ether of the dot-com implosion. Now, with tens of millions of consumers having broadband access, and open-source tools such as XML and Really Simple Syndication, businesses that were a mere pipe dream a five years ago can become viable.
Funds received by Internet ventures accounted for nearly half of all venture investments in the United States in 2005, according to Dow Jones/VentureOne, which tracks venture-capital investments. VCs pumped $7.64 billion into Net-based ventures in the first nine months of 2005, up 16% from a year earlier. That's still below the levels of the heyday of the Internet explosion when more than $8 of every $10 invested in new ventures went to Internet-based companies. In 2000, more than $77.5 billion of the $94.6 billion that VCs invested went to Internet companies."

For more information, visit www.EvanCarmichael.com.

Angel Investors Are Aiming Higher

Angel Investors Are Aiming Higher

"A few weeks ago at the Arizona Angel Investor Conference in Phoenix, Pat Sullivan, co-founder of software success story ACT!, and John Purtell, one of his financial backers, reenacted a negotiating session that took place between them back in 1986. The reenactment demonstrated to the would-be entrepreneurs in the audience how their own negotiations might unfold.


At key points, Purtell, the investor, had to correct himself. He recalled that during the negotiations he had insisted on two investor seats on the ACT! board of directors. "Today, you wouldn't do that," he explained. "You wouldn't want to be on a board without the right insurance."
When the discussion turned to the stock ACT! would issue to the angel investors, Purtell made another correction. At the time, his group took common stock, he recalled. "Today the investors would want preferred stock" to provide more protection in case the investment soured.
CHANGING TIMES. Those kinds of corrections were, in many respects, more instructive than the actual negotiations about the pre-money and post-money valuations between Sullivan and Purtell. Since the ACT! deal was negotiated 18 years ago, so-called angel investments have become less angel-like and more venture-capital-like.
Many angels took big hits after 2000 as Internet-related businesses crashed and burned. For investments that survived the carnage associated with the Nasdaq decline, more problems surfaced when the entrepreneurs and their angels sought venture capital to finance additional growth. The VCs routinely insisted on "down round" -- valuations lower than what the angels had originally accepted. All of this prompted angels to organize themselves and seek out more legal protections, the kind that have long been standard for VCs.
The transformation of the angel community is quite radical, historically speaking. William Wetzel, a retired University of New Hampshire business professor and the first academic to seriously research angel investing, used to bemoan in his research studies the difficulty entrepreneurs faced in finding angel investors. They tended to be lone rangers, or else they just invested with a few close friends or colleagues.
TEAMING UP. Today's angels organize themselves into local investor groups, which meet every few weeks or months to discuss opportunities and listen to presentations from promising entrepreneurs. Some of these groups even have part- or full-time executive directors who sift through candidates on behalf of the money guys (and gals). About 200 of these organizations are scattered around the U.S. and Canada, and they even have a trade organization, the Angel Capital Assn. (www.angelcapitalassociaton.org).
Angels also have big bucks behind them. Whereas in the 1980s they typically invested $50,000 to $100,000, today's angel investment is more on the order of $500,000 up to $1 million. Moreover, instead of bowing out in favor of venture capitalists for follow-up rounds, angels increasingly hang around to make second-round investments. The Angel Capital Assn. crowed in a news release last summer that a 2004 survey listed three of its members among the top venture-capital firms in the U.S.
Recent research by William Wetzel's successors at UNH indicates that 225,000 angel investors committed $22.5 billion to 48,000 ventures in 2004. That's roughly equal to what venture capitalists invested during the same year, according to data from the The MoneyTree Survey, a collaboration between PricewaterhouseCoopers, Thomson Venture Economics, and the National Venture Capital Assn."

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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.

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Reader Question - Do I Need To Be Charismatic?

Hi Evan,
I have recently discovered your website and browsing the various resources that your site offers. I appreciate them very much. I am a fresh graduate from UBC in Applied Science, Electrical Engineering. I started working at Canada's number 2 telecommunications provider shortly after my graduation from UBC. I have searched within the organization to examine the leadership qualities exhibited by the company's executive leadership team. I have come to realize that leadership is based on very simple ideas.

I feel that I have the ideas and the intelligence (don't we all) to create and grow leading businesses. One quality that I feel I lack is charisma. I am not awkward, but I am not a salesman. In your experience, does someone like myself have the potential to grown that charismatic personality, or should I focus my career on developing my stronger traits, such as my analytical and creative abilities? If I will always be someone who lacks the charisma to charm all my audiences, should I give up the idea of being the CEO of leading edge companies, and focus on other roles, or do you think I could still fill such a role successfully?

Again, I would like to thank you for the resources that you have made available. I have a couple of business opportunities awaiting me, and I am in the due diligence stage of one of them. Because of the generosity of your site and the relationship it has built, I will openly look for ways that I can employ your services. Can you tell that I have been reading some of your Marketing advice from Michael Hepworth?

Sincerely,

Matthew


Hi Matthew,

The key is to know what you're good at and find a way to make money doing it. I've met a lot of entrepreneurs who have built multi-million dollar companies who are not very charismatic at all.

By the same token, I've made many charismatic people who have failed miserably at being an entrepreneur.

What you need to do is pick an industry that you are passionate about and you can be outstanding in.

Every company needs a team of people to be successful. The first step in building this team is recognizing what your individual weaknesses are. Surround yourself with people who complement your skills and can help you build a world class organization.

Good luck!

Evan.

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.

For more information, visit www.EvanCarmichael.com.

Executive Summary Review - Howling Moon Designs - Overview

Howling Moon Designs is a gaming company proposing to create a Massive Multiplayer Online Role Playing Game (MMORPG), Destiny Online. Destiny Online will be a real world economic system that allows players to get jobs in the game, open stores, enter tournaments, sell items on a website, go on quests, and be part of teams.

The company is in the startup phase and projects that the game will take 3 to 4 years to complete. It is run by Lee Ing from Ontario.

Next - Highlights - A Growth Market

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Executive Summary Review - Howling Moon Designs - Highlights - A Growth Market

Online gaming is big business and while the online gaming market for PCs is expected to drop over the coming years, one exciting and rapidly growing area is Massive Multiplayer Online Role Playing Gaming.

According to Wikipedia, "a massively (or massive) multiplayer online role-playing game or MMORPG is a multiplayer computer role-playing game that enables thousands of players to play in an evolving virtual world at the same time over the Internet. MMORPGs are a specific type of massively multiplayer online game (MMOG)." An estimated 20 million people worldwide are spending time in massively multiplayer online role-playing games.

Project Entropia (http://www.project-entropia.com/) is a popular MMORPG where players can construct buildings, create businesses and make investments to build their in-game wealth, which they can then cash out back into hard currency. The projected GNP for the Project Entropia universe in 2005 is 1.5 billion PED, or US$150 million.

This is definitely a growth market and, while still very early stage, could be a big money-maker for savvy investors.

Next - Lesson #1 - How Are You Different?

Would you like your Executive Summary reviewed? Click on the "Get Your Plan Reviewed" button at the top of the page.

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Reader Question - Business Plan Guide

Hi - I'm interested in writing a business plan and would like to know what you would suggest as a good guide. I'm financially literate and have been involved in a number of different industries, so this guide doesn't necessarily have to be from a "beginners" perspective. Hope you can help.

David


Hi David,

This is one of the most frequently asked questions that I get. Having a solid business plan is critical for arranging the financing you need to grow your business as well as establish the confidence for yourself and your partners that your idea really could take off.

In response to a lot of feedback from website visitors, I put together a Sample Business Plan. It covers the important areas including:

1. Executive Summary
2. Company Description
3. Market Analysis
4. Marketing and Sales Activities
5. Products and Services
6. Operations
7. Management and Ownership
8. Funds Required and Their Users
9. Financial Data
10. Appendices or Exhibits

It can be found at: http://www.evancarmichael.com/Sample-Business-Plan/index.html

Another useful resource is the Business Development Bank of Canada. They have a free sample guide available as well. Since the link changes, simply type in BDC business plan into Google and it will pop up.

Good luck!

Evan.

For more information, visit www.EvanCarmichael.com.

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.

Northern Crown Capitals Non Disclosure Agreement

CONFIDENTIALITY AGREEMENT



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



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 , 2005.


Northern Crown Capital Inc. ABC Company



_________________________ _________________________
Partner Contact Name

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Reader Question - Selling My Invention

Dear Evan,

Claudio and I have been to some of your meetings which we enjoyed, we have developed a new wheelbarrow, it is a sort of self loading, but we are unable to find some manufacturers to take on this project, we had lot of good remarks from industries, we have corrected the negative remarks, and have a new prototype, drawings, but we don't have the necessary finances, it would be an ideal find an industry maybe in China to take over and maybe sell the all thing, we have filed in USA/ Argentina/PCT. And there should be no problems with the patent as we had some actions taken, but not really important, we have addressed them. Can you please give some advice on what next?

I thank you and hope to see you again.

All the best Maria Carosi


Hi Maria,

Moving from being an inventor to being an entrepreneur can often be a very challenging step. For an inventor to be successful he or she must be focused on satisfying a human need, which is to enhance our experience by giving us useful tools.

There are a couple of options that you can take. In terms of financing, your best bet would be to speak with angel investors (wealthy individuals like doctors, dentists, lawyers, etc.). They are usually reached through informal networks - your friends and family would be a good place to start to see if they know anyone who they can introduce you to. I've also written a section on my website dedicated to finding angel investors at http://www.evancarmichael.com/Angel-Investors/index.html.

A second option is to contact the BDC (Business Development Bank of Canada). They are a government run organization with a mandate to help Canadian entrepreneurs. They are not going to automatically approve you but they do take more risks compared to the typical banks.

You should also focus on getting some more traction with potential customers. You said that you've spoken with industries and have received good remarks. Will they purchase your product up front? Will they give you a letter of intent? Will they provide testimonials?

Often customers are great financing options for startup entrepreneurs. If they won't agree to buy up front then at least you can get their support to show potential investors. If you can show an investor or lender that you have clients lined up you've done more than 90% of the other business plans they've seen this month.

A final thought you might consider is to think about if you really want to run a business or not. Many inventors like to create but do not like the work that comes with operating a company. You need to focus on what you're the best at and bring others on who can complement you.

Good luck!

Evan.

For more information, visit www.EvanCarmichael.com.

VCs Settle for a Bit Less

"Venture capitalists suffered fewer big losses, but also scored fewer big wins during 2005 as they became increasingly risk averse, according to a study released Tuesday.

VCs may have finally finished shooing the dot-com dogs out of their portfolios.

The percentage of projects that finished in the red, with the VCs getting back less than they invested, dropped. Of the 154 deals done during 2005, VCs were left holding the short end of the stick on 48, down from 62 investment failures out of the 183 deals done in 2004, according to the study by the National Venture Capital Association and Thomson Venture Economics.

That’s an 8 percent decrease, after correcting for the drop in absolute deals done.

However, there also was a distinct lack of lucrative deals in 2005. Fewer VCs saw returns between four and 10 times the money they put in—the sweet spot for an industry that prides itself on predicting the next big thing.

Only 30 of the 154 deals in 2005—19.5 percent—returned strong cash-on-cash winnings. That’s down from the 21.3 percent of deals with solid returns in 2004.

Unimpressive Returns
VCs are taking fewer risks on their investments and mild, unimpressive returns are the result. The percentage of VC exits that yielded between one and four times return on the capital invested, a conservative level, increased 13 percent. About 38 percent of the deals done in 2005 fell into this range, up from 33 percent in 2004.

It may also be the product of a more conservative investment strategy that focuses on later-stage companies that have well-developed products and well-defined business models.

Some financing rounds this year were bigger than typical tech IPOs. Vonage, the biggest VC deal of the year, collected $200 million in its fifth round of financing (see Vonage to Raise $200M). Compare that to the median amount raised at IPO by venture-backed startups through the first three quarters of 2005: $47 million.

Vonage investors NEA, 3i, Meritech Capital, and Institutional Venture Partners, doubled down their bets on the prominent private company to $408 million and brought Bain Capital Ventures aboard for more support. A convertible debt round worth $250 million brought the company’s total coffers to $658 million (see Vonage Raises Another $250M)."

For more information, visit www.EvanCarmichael.com.