Venture Capital

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Typically used to provide larger funds than Business Angels traditionally give, venture capital (VC) is the form of funding most widely associated with Information Technology ventures. However, it is a popular misconception that during the Internet/IT boom of 1997-2000 venture capital was freely available with no questions asked—it never was and never will be.

VC is designed to prime and nurture the initial strategic growth of companies that have the potential to rapidly become a dominant market force. Historically, venture capitalists were prepared to take a higher risk; this was offset by their exclusive interest in firms with potentially lucrative rates of return and obtaining disproportionately higher stake holdings. VC typically delivers the crucial investment in return for a large equity stake.

One of the reasons why VC funding is so attractive to IT entrepreneurs is that the cash is unsecured; if the project fails you don't lose your car, home, and other assets. VCs also provide you with enough money to pay yourself a fair salary.

Venture capitalists typically invest in companies in five classic ways:

♦ Seed capital—This is provided to develop the concept of a product or service and is often used to fund patents and trademarks, as well as establish the marketing, business, and future funding requirement in detail. Amounts to nurture a good idea are small.

Since the Internet/IT boom ended, nearly all venture capitalists have stopped funding start-ups. They want you to take the initiative, demonstrate that the idea works, and come back to them when you have some initial sales experience. If seed capital is ever offered, remember, it's best used to make the case for additional funding.

♦ Start-up capital—Enables the business operation to be set up, initial staff to be hired, and enables the product or service to be launched.

♦ Early expansion capital—Allows firms to gear up for increasing development and sales.

♦ Development capital—Used to expand the business, fund a buyout, or clean up the shareholding. By the time you are ready for development capital, your business will be well established with a sound, saleable product, proven market, and productive staff.

♦ Turnaround finance VCs—Used more and more to restructure good firms that are faltering. This has to be done quickly to work. With the funding normally comes a rethinking of the management, marketing, and product to correct inherent problems.

Although venture capitalists are prepared to take high risks, often investing where others fear to tread, they extract the highest price. During the Internet boom they used to send out scouts to talent spot potential ideas and pioneers at conferences and financing shows. Now they reduce their own risks by concentrating on sectors such as IT, Biotech, or Retail. Some only invest in firms at particular stages of development or in a particular geographical region. Ask them what they are looking for, how much they have in funds, how many projects they have invested in during the past 12 months, and what is the minimum amount they like to invest.

Sending in unsolicited business plans is the least likely course of action to succeed. Referrals to VCs by professional advisors such as attorneys, accountants, bankers, and even other VCs are more successful. To have any chance of success even then, your business plan must demonstrate the following:

♦ A strong marketing need for the program you plan

♦ You can develop and sell it at a profit

♦ You have the right programmers and managers in place

♦ You have a win-win exit strategy

Even at the height of the IT boom, only one in a hundred business plans would attract an investment. Table 5-1 lists the culls that VCs usually follow:

Table 5-1




Business plans (BPs) received



BPs fully read



Invited to present



Invested in



According to John Nesheim, author of Hi-Tech Start Up (Free Press, 2000), for every startup that receives money only one in 10 goes Public. In addition, the McKinsey analysis of U.S. Census data from "Secrets of Software Success" (Harvard Business School Press, 1999) says that 60 percent go bust or leave minimal residual worth.

You are going to need a superlative business plan, a great product, and adroit management if you are going to end up in the final 1 percent. From your very first contact with a venture capitalist, you will need to demonstrate strong business acumen, exemplary market knowledge, and a confident and succinct way of making each point. When you are eventually invited to an interview, stage a 3-minute elevator pitch.

Note Most countries have VC Organizations that can provide you with lists of funders, their areas of specialization, and typical size of investment.

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Better Business Planning

A business plan is an essential document for anyone commencing a new business, already in business and critical for anyone seeking funding from a venture capitalist. The business plan needs to be comprehensive, well thought and should contain sound business reasons. You can get all the info you need here.

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