Raising Venture Capital

"This section is meant to serve as an information brief of the vc process. Opportunity Florida has access to venture capital funding sources, but is required to screen each proposal for specific criteria and presentation. Should you have a project / product in need of funding, please contact us. All information is handled with the strictest degree of confidentiality."

Venture capital comes in different stages. Early money is sometimes known as "friends and family money" and as the name implies is sourced as such. This is the money usually used to take an idea to formal concept and as well as from concept to business plan. Seed capital or start-up money is that money raised to develop a plan. The next step "early stage" is the point in time when a proto-type commonly called a "beta unit" is developed. The risk factor for investors at the early stages is extremely high as are the emotional ties to the project. In most cases there is a direct relationship between risk and reward. The chart below illustrates the typical "life cycle" of a commercial enterprise.

SEED STAGE

EARLY STAGE

EXPANSION STAGE

LATER STAGE

BUSINESS PLAN:
4-10+ years to exit.
Founding entrepreneurs develop the business model, company goals and long-term product strategy. VC provides start up capital and helps refine the planning process.

PRODUCT DEVELOPMENT:
3-7 years to exit.
Key managers and technical experts develop product prototypes. VC funds and supports operating and development efforts.

PRODUCT REFINEMENT:
2-5 years to exit.
Company tests, refines and starts initial manufacturing of prototypes to eliminate major technical or product risks. VC finances operations and provides business expansion expertise.

MARKETING:
1-4 years to exit.
Management works to increase market presence and develop second generation products. VC provides funding and consultation to achieve positive cash flow.

PROFITABILITY:
0-2 years to exit.
VC and management team position the company for an IPO or acquisition. IPO/Acquisition - Entrepreneurs, management, employees and VCs are rewarded for hard work and investment - cash-out subject to lock-up period and SEC restrictions.

MAXIMUM >------------------------R I S K / R E W A RD------------------------> MINIMUM



My experience and consulting has been in working with VCs that fund entities only in the "Early - through -Later" stages, where a company's products and services are moving beyond the conceptual / research and development (R&D) stage. Understanding the goal of these post-startup venture capitalists is essential for any business seeking "product to market" capital. Most venture capitalists (VC) are emotionally unattached to a deal. Their primary and core issue is simple: "What is the exit strategy and potential internal rate of return (IRR) to the proposed investment." Exit strategy is the point when the VC reaps the rewards of his investment. Whether the company is acquired or goes public, this is the point when the VC liquidates his investment. For the VC to resolve the exit strategy and the IRR requirement, a series of other criteria questions must be reviewed. Some of the most basic criteria questions are as follows:
  1. Is the proposed investment entity a company or is it a product?
    This seems a rather intricate question and it is, but it is basic to the VC exit strategy. If the product or service is limited in scope, and specific to only a sub-set of a market whole, then the exit strategy would most likely be limited to an acquisition only. Remember, the VC has no intention on riding long term with an investment. Most VCs are seeking at least a ten times return within an investment life of only 3 - 5 years. So, they immediately look to see if the product or service could be folded into one of the existing market?s leading entities.

  2. What is the size of the market?s annual revenues and what is the projected market share of the investment?
    The projection that answers this question is primary to the VC's determination of the investment's estimated valuation. Obviously, the miscalculation of this single concern regarding market size has been the downfall to many VCs in the dot-com sector. Projecting and defining the potential size of the Internet market, in which there lies no history has been a disaster for many. The successes, or rather lack of successes regarding "business to consumer" (b-c) dot-com companies has been tremendous. It is estimated that during FY 2001 one third of dot-com companies had run out of cash and were forced to close. The vast majority of these companies that are expected to fail are the b-c companies. With a historic and measurable market, it is much easier for the VCs to define and project the size of the 'business to business' (b-b) dot-coms.

  3. What is the projected burn rate of the investment?
    This question is simple and essential to identifying the amount of investment necessary to carry the company to exit. Whether stated per month or per annum, the burn-rate simply identifies the amount of cash necessary for the company to pay its expenses prior to profitability and positive cash flow or exit.

  4. What is the capacity of the management team?
    Very rarely does the management team of a company remain the same after start-up. The expertise necessary to develop a product or service is very rarely the same that is required to manage a company to exit. Remember, the VC is putting his/her money into the deal with only the exit strategy in mind. The VC wants and usually demands a management team in place that has the experience to take the company to exit. This is the one area where those seeking venture capital stub their toes most, founders are usually too attached and unwilling to give up day to day control of the company's operation. What they don't understand is that the management established by the VC, provides the objectivity and disciplined experience necessary to benefit the company, not the cause and emotional ties of the company founders.

These are the very core elements of understanding the dynamics of sourcing venture capital to a project. The perspectives of those seeking the funding and those of venture capitalists must be acknowledged and linked. As more VCs get burned as the dot-com bubble continues to burst, the criteria is only going to become more stringent and inflexible. The best potential for one seeking venture capital is to appreciate these issues. For more info or you wish to discuss a project, email: click here!