Understanding Advisory Capital
Sam Huleatt asked:
What is Advisory Capital?
“Advisory capital is an investment of experience, expertise, social capital, and public authority into a company in return for some form of equity in the company”
Advisory Capital, a new variation of venture capital investing, is the direct result of a changing landscape among venture capitalists and entrepreneurs. This landscape has seen a flux of startups that are able to bootstrap on the cheap, forsaking traditional venture rounds while still achieving tremendous market success. Examples of such successes include many web 2.0 companies such as Flickr, JotSpot and Weblogs. Even traditional venture capital firms have acknowledged this shift in financing requirements. Guy Kawasaki has a fascinating post on how he built Truemors for $12,107.09. Charles River Ventures recently launched its Quick Start Program, offering up to $250,000 in the form of convertible note loans to promising entrepreneurs.
States George Lipper of the National Association of Seed and Venture Funds:
“The [issue] is the mismatch between the needs of worthy start-up entrepreneurs for relatively small amounts of venture funding and institutional venture capitalists who cannot dedicate the time to justify dealing with small investments. Hence, we’ve watched a steady erosion of the share of venture capital (and therefore VC’s time) directed to the seed and start-up stage to about 2% of available capital…while expansion and later stage investments claim 80%+”
For startups, advisory capital can be the best of both worlds: the ability to eliminate cash investment (resulting in significantly less dilution for founders) while issuing minimal equity, sufficient to recompense the benefits of the “advisory” portion of a VC or angel relationship. I believe that advisory capital can also be thought of as a “bridge investment,” helping young companies to build their valuations prior to an angel or series A round of investment once initial market traction is obtained.
However, the role of advisory capital consultants is questioned by some. One major concern with such a model is the absence of what Union Square Ventures calls, “capital at risk.” The argument is that the risk of monetary investment “provides the foundation for all the other roles that the VC plays - advice, oversight, connections, etc. Without it you won’t get close to what you get with a VC.” However, Stowe Boyd, the inventor of the advisory capital phrase combats the USV position,
“As some of my existing portfolio of advisory capital clients are acquired, go public, or start paying me dividends, I might start investing hard, cold cash on top of the hard, cold advice I am doling out.”
Returning to my position that advisory capital is best used as a “bridge,” working with the right AC individual or firm should result in connections to and desire for angel investors. Unless a company is simply developing a lightweight application, the need for outside capital will likely always be there. Venture capitalists should ultimately look to develop relationships with these AC firms who can act as a filter, helping to vet investments and implement early-stage best practices; the foundation for long term success.
Ultimately, the advisory capital role is a catalyst to the next stage, an opportunity at the most favorable cost to the founders and a risk-minimizing technique for future investors - a win, win for everyone.
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What is Advisory Capital?
“Advisory capital is an investment of experience, expertise, social capital, and public authority into a company in return for some form of equity in the company”
Advisory Capital, a new variation of venture capital investing, is the direct result of a changing landscape among venture capitalists and entrepreneurs. This landscape has seen a flux of startups that are able to bootstrap on the cheap, forsaking traditional venture rounds while still achieving tremendous market success. Examples of such successes include many web 2.0 companies such as Flickr, JotSpot and Weblogs. Even traditional venture capital firms have acknowledged this shift in financing requirements. Guy Kawasaki has a fascinating post on how he built Truemors for $12,107.09. Charles River Ventures recently launched its Quick Start Program, offering up to $250,000 in the form of convertible note loans to promising entrepreneurs.
States George Lipper of the National Association of Seed and Venture Funds:
“The [issue] is the mismatch between the needs of worthy start-up entrepreneurs for relatively small amounts of venture funding and institutional venture capitalists who cannot dedicate the time to justify dealing with small investments. Hence, we’ve watched a steady erosion of the share of venture capital (and therefore VC’s time) directed to the seed and start-up stage to about 2% of available capital…while expansion and later stage investments claim 80%+”
For startups, advisory capital can be the best of both worlds: the ability to eliminate cash investment (resulting in significantly less dilution for founders) while issuing minimal equity, sufficient to recompense the benefits of the “advisory” portion of a VC or angel relationship. I believe that advisory capital can also be thought of as a “bridge investment,” helping young companies to build their valuations prior to an angel or series A round of investment once initial market traction is obtained.
However, the role of advisory capital consultants is questioned by some. One major concern with such a model is the absence of what Union Square Ventures calls, “capital at risk.” The argument is that the risk of monetary investment “provides the foundation for all the other roles that the VC plays - advice, oversight, connections, etc. Without it you won’t get close to what you get with a VC.” However, Stowe Boyd, the inventor of the advisory capital phrase combats the USV position,
“As some of my existing portfolio of advisory capital clients are acquired, go public, or start paying me dividends, I might start investing hard, cold cash on top of the hard, cold advice I am doling out.”
Returning to my position that advisory capital is best used as a “bridge,” working with the right AC individual or firm should result in connections to and desire for angel investors. Unless a company is simply developing a lightweight application, the need for outside capital will likely always be there. Venture capitalists should ultimately look to develop relationships with these AC firms who can act as a filter, helping to vet investments and implement early-stage best practices; the foundation for long term success.
Ultimately, the advisory capital role is a catalyst to the next stage, an opportunity at the most favorable cost to the founders and a risk-minimizing technique for future investors - a win, win for everyone.
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Start-up Success: How to Find Venture Capital
Clinton Douglas IV asked:
Have you ever wondered how some companies find funding while others, possibly yours, barely hold their head above water? Often, the key to success during the delicate start-up years is having the right amount of capital to launch development and marketing efforts. Once a company’s well established, funding can support even stronger growth and expansion initiatives. Venture capital acquisition can help. Venture capital is funding provided to budding new, fast-track companies by other professional investors.
Venture capitalists review several companies, choosing just a few to invest in based on management credibility, long-term growth potential and business integrity, among other things. These venture capitalists may use funds from high net worth individuals, foundations, corporations, pension funds or their own personal capital equity to help support the success of new business ventures. Their various investments in start-up companies collectively represent an investment portfolio, thus reducing overall risk. These investors focus on acquiring a high rate of return in a five to seven year period.
While many venture capitalists are generalists, or supply funding alone to a broad range of specialized sectors, others offering expertise in one or more key roles within the company. Seed investing refers to funding provided before a real product or business is even created, or when a company is at the very early, ground-floor development stages.
Venture capital sponsored fairs, panel discussions and seminars are great vehicles for venture capital relationship building. Attorneys, consultants, business brokers and accountants also offer contacts with venture capitalists. When seeking funding, relationships are key and competition is high. First, identify a small number of companies or individuals holding similar goals to your company’s. Make sure you agree when it comes to business growth, geographic positioning and investment scope.
Venture capital assessment demands a great deal of time and energy, from presenting a well-developed business plan and executive summary, to educating your investors about your goals, budget, industry and growth potential. Remember to communicate with your contacts on a regular basis, nurturing the relationship and keeping them informed of progress and news. Above all, stay optimistic, learn from your mistakes and adapt your strategy.
The following organizations can provide a wealth of information for those researching venture capital avenues and sources:
- The National Venture Capital Association, www.nvca.org
- The Center for Venture Education, kauffmanfellows.org
- Emerging Markets Private Equity Association, empea.net
- Venture Capital Task Force, vctaskforce.com
- Private Equity Central, privateequitycentral.net
- Wall Street Journal’s Start-up Journal, startupjournal.com/partners/kennedy.html
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Have you ever wondered how some companies find funding while others, possibly yours, barely hold their head above water? Often, the key to success during the delicate start-up years is having the right amount of capital to launch development and marketing efforts. Once a company’s well established, funding can support even stronger growth and expansion initiatives. Venture capital acquisition can help. Venture capital is funding provided to budding new, fast-track companies by other professional investors.
Venture capitalists review several companies, choosing just a few to invest in based on management credibility, long-term growth potential and business integrity, among other things. These venture capitalists may use funds from high net worth individuals, foundations, corporations, pension funds or their own personal capital equity to help support the success of new business ventures. Their various investments in start-up companies collectively represent an investment portfolio, thus reducing overall risk. These investors focus on acquiring a high rate of return in a five to seven year period.
While many venture capitalists are generalists, or supply funding alone to a broad range of specialized sectors, others offering expertise in one or more key roles within the company. Seed investing refers to funding provided before a real product or business is even created, or when a company is at the very early, ground-floor development stages.
Venture capital sponsored fairs, panel discussions and seminars are great vehicles for venture capital relationship building. Attorneys, consultants, business brokers and accountants also offer contacts with venture capitalists. When seeking funding, relationships are key and competition is high. First, identify a small number of companies or individuals holding similar goals to your company’s. Make sure you agree when it comes to business growth, geographic positioning and investment scope.
Venture capital assessment demands a great deal of time and energy, from presenting a well-developed business plan and executive summary, to educating your investors about your goals, budget, industry and growth potential. Remember to communicate with your contacts on a regular basis, nurturing the relationship and keeping them informed of progress and news. Above all, stay optimistic, learn from your mistakes and adapt your strategy.
The following organizations can provide a wealth of information for those researching venture capital avenues and sources:
- The National Venture Capital Association, www.nvca.org
- The Center for Venture Education, kauffmanfellows.org
- Emerging Markets Private Equity Association, empea.net
- Venture Capital Task Force, vctaskforce.com
- Private Equity Central, privateequitycentral.net
- Wall Street Journal’s Start-up Journal, startupjournal.com/partners/kennedy.html
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Expand Your Business using Venture Capital
Abe Cherian asked:
You may publish this article in your ezine, newsletter on your web site as long as the byline is included and the article is included in it’s entirety. I also ask that you activate any html links found in the article and in the byline. Please send a courtesy link or email where you publish to: support@multiplestreammktg.com
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Expand Your Business using Venture Capital By Abe Cherian Copyright ? 2005
Venture capital is a possible source of funding for new, relatively unproven enterprises that appear to have promising futures. However, such money is often hard to come by.
Be realistic in your quest for venture capital. Venture capital firms expect a business to be able to return their investment not only with interest, but with a large profit.
Many venture capital firms are affiliated with banks, insurance companies, other financial institutions and large corporations. Some are owned by individuals or private groups of investors and a few are publicly held.
Once you accept venture capital, you have relinquished some of your autonomy and accepted the understanding that the venture capital firm will take a large share of the profits you earn.
As an entrepreneur, you should understand the nature of a vendor firm, before pursuing this as a financing source. This type of investor expects a projected return on Investment that is directly related to risk.
The greater the risk, the greater the return expected. Typically however, an investment firm will not be interested in getting involved with a new firm until the business has established itself in some way, so the risk factor can be determined.
The venture capital firm and its interest usually depends upon the stage of the new firm’s development. Once the new firm has established itself and has a working organizational structure, a viable business plan and start up arrangement a venture capital firm may be interested.
However, some firms prefer a later stage of new business development, perhaps when the new company is in its second or third round growth state and needs more capital either to carry out expansion plans or to tide it over until a merger or public offering carries it to the next stage of corporate growth.
A company’s business plan serves as the primary analytical tool for the venture capitalist. In analyzing the plan, a venture capital firm would most likely focus on three features.
The product or service- Investors seek product or service innovations that give the company a strong competitive advantage. A new idea, backed by market surveys measuring the appeal of the product or service and its potential market may be tempting to such investors.
Management capability- No matter how good your product or how innovative your service, the quality and experience of the management is a key factor in the success of your business. The astute investor is well aware of this and looks for solid evidence of such skill.
The industry’s growth- Investors also want to be sure that your products or services is in a growth field. A significant or revolutionary product improvement, by itself, may not have appeal in a declining product or service category.
Most venture capitalists purchase common or convertible stock rather than burden the fledgling enterprise with interest payments on debt or debentures. They may possibly want more than 50 percent ownership.
Additionally, while the venture capitalists may insist on sitting on the Board of Directors or offering management and technical advice, they are rarely interested in the day to day management of the enterprise, unless its survival and their investment is at stake.
Keep in mind that the minimum investment is generally from $25,000-$1,000,000, but investment ceilings are almost unlimited.
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You may publish this article in your ezine, newsletter on your web site as long as the byline is included and the article is included in it’s entirety. I also ask that you activate any html links found in the article and in the byline. Please send a courtesy link or email where you publish to: support@multiplestreammktg.com
——————————–
Expand Your Business using Venture Capital By Abe Cherian Copyright ? 2005
Venture capital is a possible source of funding for new, relatively unproven enterprises that appear to have promising futures. However, such money is often hard to come by.
Be realistic in your quest for venture capital. Venture capital firms expect a business to be able to return their investment not only with interest, but with a large profit.
Many venture capital firms are affiliated with banks, insurance companies, other financial institutions and large corporations. Some are owned by individuals or private groups of investors and a few are publicly held.
Once you accept venture capital, you have relinquished some of your autonomy and accepted the understanding that the venture capital firm will take a large share of the profits you earn.
As an entrepreneur, you should understand the nature of a vendor firm, before pursuing this as a financing source. This type of investor expects a projected return on Investment that is directly related to risk.
The greater the risk, the greater the return expected. Typically however, an investment firm will not be interested in getting involved with a new firm until the business has established itself in some way, so the risk factor can be determined.
The venture capital firm and its interest usually depends upon the stage of the new firm’s development. Once the new firm has established itself and has a working organizational structure, a viable business plan and start up arrangement a venture capital firm may be interested.
However, some firms prefer a later stage of new business development, perhaps when the new company is in its second or third round growth state and needs more capital either to carry out expansion plans or to tide it over until a merger or public offering carries it to the next stage of corporate growth.
A company’s business plan serves as the primary analytical tool for the venture capitalist. In analyzing the plan, a venture capital firm would most likely focus on three features.
The product or service- Investors seek product or service innovations that give the company a strong competitive advantage. A new idea, backed by market surveys measuring the appeal of the product or service and its potential market may be tempting to such investors.
Management capability- No matter how good your product or how innovative your service, the quality and experience of the management is a key factor in the success of your business. The astute investor is well aware of this and looks for solid evidence of such skill.
The industry’s growth- Investors also want to be sure that your products or services is in a growth field. A significant or revolutionary product improvement, by itself, may not have appeal in a declining product or service category.
Most venture capitalists purchase common or convertible stock rather than burden the fledgling enterprise with interest payments on debt or debentures. They may possibly want more than 50 percent ownership.
Additionally, while the venture capitalists may insist on sitting on the Board of Directors or offering management and technical advice, they are rarely interested in the day to day management of the enterprise, unless its survival and their investment is at stake.
Keep in mind that the minimum investment is generally from $25,000-$1,000,000, but investment ceilings are almost unlimited.
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Will Your Business Benefit From Venture Capital?
Naz Daud asked:
Not all businesses can attract venture capital. Venture capital is provided by a firm of professional investors that are generally seeking high growth business opportunities to invest in. They provide funds to help you grow your business but in return they often want shares in the business.
If you have a brilliant idea that has huge growth potential and are struggling to raise money through the normal channels then this route might be ideal for you. Be prepared to give away a large chunk of your business and remember that most venture capitalists will also want a say in how your business is run!
This method of raising funds is also a great way to get some fresh minds looking at your business idea. Venture capital investment companies have been investing in great ideas for many years and know how to turn great concepts into reality.
Do not approach a venture capital company if all you are seeking is money to clear your existing debts. They will not be interested! They are also not interested in providing funds so that you can buy your dream car or luxury house.
They are in the business of providing funds so that they can make money for themselves with the funds they provide you to assist your growth. Got the idea?
A well researched and carefully crafted business plan will definitely help you. How are you going to use their money? They will want to see it being used for growth, sales, marketing and creating value for them. They will not be happy if you use their funds to make a beautiful office! Remove any expenses that are not critical for growth and show them how you can generate profits and a return from their investment.
When a venture capitalist firm looks at your idea, they are also examining you. Millions of people have great ideas and to be honest, the majority of these people do not have a clue how to execute a plan.
If they like your idea, then they will want to get to know you in detail. What are your work ethics like? Why should they back you over the hundreds of other people that are competing with you for their money? Remember that they are most likely to be seeking a brilliant person with a great idea that can deliver them a “home run.”
It also costs a lot of time and money presenting your idea to venture capitalists! They do not give anybody any money at the first meeting. In fact they might even meet you a dozen times only to completely reject your idea at the end! Be prepared for this and possibly try out your business plan with a more than one firm at the same time.
The costs will not be that much greater to present your case to two different companies at the same time! Remember that you are also dealing with personalities and one wrong word and they will kick you out before you can count to ten. I never said that it was going to be easy, did I?
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Not all businesses can attract venture capital. Venture capital is provided by a firm of professional investors that are generally seeking high growth business opportunities to invest in. They provide funds to help you grow your business but in return they often want shares in the business.
If you have a brilliant idea that has huge growth potential and are struggling to raise money through the normal channels then this route might be ideal for you. Be prepared to give away a large chunk of your business and remember that most venture capitalists will also want a say in how your business is run!
This method of raising funds is also a great way to get some fresh minds looking at your business idea. Venture capital investment companies have been investing in great ideas for many years and know how to turn great concepts into reality.
Do not approach a venture capital company if all you are seeking is money to clear your existing debts. They will not be interested! They are also not interested in providing funds so that you can buy your dream car or luxury house.
They are in the business of providing funds so that they can make money for themselves with the funds they provide you to assist your growth. Got the idea?
A well researched and carefully crafted business plan will definitely help you. How are you going to use their money? They will want to see it being used for growth, sales, marketing and creating value for them. They will not be happy if you use their funds to make a beautiful office! Remove any expenses that are not critical for growth and show them how you can generate profits and a return from their investment.
When a venture capitalist firm looks at your idea, they are also examining you. Millions of people have great ideas and to be honest, the majority of these people do not have a clue how to execute a plan.
If they like your idea, then they will want to get to know you in detail. What are your work ethics like? Why should they back you over the hundreds of other people that are competing with you for their money? Remember that they are most likely to be seeking a brilliant person with a great idea that can deliver them a “home run.”
It also costs a lot of time and money presenting your idea to venture capitalists! They do not give anybody any money at the first meeting. In fact they might even meet you a dozen times only to completely reject your idea at the end! Be prepared for this and possibly try out your business plan with a more than one firm at the same time.
The costs will not be that much greater to present your case to two different companies at the same time! Remember that you are also dealing with personalities and one wrong word and they will kick you out before you can count to ten. I never said that it was going to be easy, did I?
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Venture Capital - an Overview!
Seomul Evans asked:
Are you a startup company that needs funds to launch? Are you an established company in need of funds for expansion? Are you running a company stricken with huge credit lines and in dire need of funds? Whatever the reason is that you need funds for; venture capital provides you the solution to all your financial needs.
How Venture Capital Works
Investors release funds to those companies that they feel have enough potential to be successful. Venture capital firms are managed by different individuals from various fields and sometimes by the venture capitalists themselves.
Now, we know that venture capitalists release funds to companies that are in need of money to develop and advertise. What do the venture capitalists get in return for this? They get a share of the equity and a part of the ownership. Sometimes they will even settle for seats on the board of directors. It all depends on how much you need and how they give you as well as how much they want in return.
Venture capitalists are not just the ones who give out money. That is not the sole reason though for companies to approach them. It is their line of contacts as well as the reputation that comes with it that are more attractive to companies. While money is important, it is not everything in business. Your contacts; who you know are just as important a factor. If you are associated with the right venture capital firm, which has a very good address book of associates and decent network then your work is done. You have got a great deal right there itself.
The venture capitalists just do not barge into any and every business that asks for their capital. They do their homework too and they do comply with their ground rules.
Broadly, there are three things that they take into consideration.
1. First is the value system of the company who seeks funds from them. This makes them ascertain how strong the morals are and would be able to assess the core strength of the company. If this is satisfactory then the company can weather any storm. So this becomes very relevant.
2. Second is the rate of return of money invested. This is for obvious reasons. No free lunches here. You got to know how much you would get if you are investing something. This will be checked out and if satisfied then there will be confidence in the minds of the venture capitalists to invest.
3. Third, they would look for an exit option. Business is a gamble at the end of the day. You got to know when to jump ship. You got to make the provisions at the start itself. They would look for one and if they know they can sneak out unharmed when the ground slips under the feet, then they will give a confident okay to the project.
There are various jargons that are used in case of venture capital investments. There is sweat equity, which as the name suggests is all about the sweat investment. The lawyers and other professional just work without getting paid and invest with their sweat. They do this only if they have faith in the firm. Later on for their sweat investment would expect to be rewarded with huge contracts and other lucrative services.
If you need funds to just do the groundwork and develop a blueprint of the business and the venture capitalists then it is called pre-used funding. If the funds are given to develop a model product and recruit a management group then it is called self-funding.
In case, the funds are given to aid with the completion of product and the starting of marketing then it is called startup funding.
There are development funding, Mezzanine funding, expansion funding, mergers and acquisitions and a lot more jargons that is associated with venture capital.
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Are you a startup company that needs funds to launch? Are you an established company in need of funds for expansion? Are you running a company stricken with huge credit lines and in dire need of funds? Whatever the reason is that you need funds for; venture capital provides you the solution to all your financial needs.
How Venture Capital Works
Investors release funds to those companies that they feel have enough potential to be successful. Venture capital firms are managed by different individuals from various fields and sometimes by the venture capitalists themselves.
Now, we know that venture capitalists release funds to companies that are in need of money to develop and advertise. What do the venture capitalists get in return for this? They get a share of the equity and a part of the ownership. Sometimes they will even settle for seats on the board of directors. It all depends on how much you need and how they give you as well as how much they want in return.
Venture capitalists are not just the ones who give out money. That is not the sole reason though for companies to approach them. It is their line of contacts as well as the reputation that comes with it that are more attractive to companies. While money is important, it is not everything in business. Your contacts; who you know are just as important a factor. If you are associated with the right venture capital firm, which has a very good address book of associates and decent network then your work is done. You have got a great deal right there itself.
The venture capitalists just do not barge into any and every business that asks for their capital. They do their homework too and they do comply with their ground rules.
Broadly, there are three things that they take into consideration.
1. First is the value system of the company who seeks funds from them. This makes them ascertain how strong the morals are and would be able to assess the core strength of the company. If this is satisfactory then the company can weather any storm. So this becomes very relevant.
2. Second is the rate of return of money invested. This is for obvious reasons. No free lunches here. You got to know how much you would get if you are investing something. This will be checked out and if satisfied then there will be confidence in the minds of the venture capitalists to invest.
3. Third, they would look for an exit option. Business is a gamble at the end of the day. You got to know when to jump ship. You got to make the provisions at the start itself. They would look for one and if they know they can sneak out unharmed when the ground slips under the feet, then they will give a confident okay to the project.
There are various jargons that are used in case of venture capital investments. There is sweat equity, which as the name suggests is all about the sweat investment. The lawyers and other professional just work without getting paid and invest with their sweat. They do this only if they have faith in the firm. Later on for their sweat investment would expect to be rewarded with huge contracts and other lucrative services.
If you need funds to just do the groundwork and develop a blueprint of the business and the venture capitalists then it is called pre-used funding. If the funds are given to develop a model product and recruit a management group then it is called self-funding.
In case, the funds are given to aid with the completion of product and the starting of marketing then it is called startup funding.
There are development funding, Mezzanine funding, expansion funding, mergers and acquisitions and a lot more jargons that is associated with venture capital.
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9 Things You Should Know About Dealing With Venture-Capital Brokers
David. A. Goldsmith asked:
You want to buy a new company, expand operations, acquire a business, or raise capital. You’ve decided to go for venture capital funding versus a bank loan for a multitude of reasons from the risks involved to the amount you need to carry out your plan.
Do you know as much as you’d like about gaining capital? Most people don’t. Their expertise is in their business, not in capital funding. Here are ways to protect yourself from vultures, deals you can’t afford, and the nightmares of both.
Some quick explanations:
A venture capitalist (VC) is a person, group of people, company, or group of companies with money to invest in your business.
A VC broker represents you (or possibly a VC) and arranges the parties to create a deal. This article is about working with the broker.
Since many brokers are ethical, why such a negative slant? Over two months, two of our consulting clients nearly lost their shirts dealing with brokers. One broker tried to quadruple dip on a VC deal by taking a commission, bringing in another broker (who needed a commission), taking excessive points on growth targets, and adding interest fees into a contract making the deal impossible. Had our Boston-based client signed with his current and (estimated) future numbers, his decade-old business would have perished.
Another broker wanted a client in Connecticut to sign a broker-exclusivity contract, forcing our client to pay commissions on any type of financing, regardless of whether the deal originated through the broker or not. If an SBA loan or unrelated VC came through, our client would pay $400,000 in unearned commissions.
(With each client, the broker used four or more of the nine strategies below that would be harmful to your fulfilling your capital needs.)
Every deal has its own merits and challenges. Regardless, nine general tips to consider are:
1. Don’t sign exclusivity contracts barring you from finding your own funding. A) On one hand, a broker has every right to protect his intellectual property by preventing you from bypassing him and striking a deal with one of the contacts he’s introduced you to. B) On the other hand, beware of anything preventing you from gaining funding from any other source without going through the broker.
2. Avoid long-term cancellation clauses that hold you hostage for a year or more. Sixty to ninety days is reasonable. You’ve got to be able to move on. A broker’s objective in creating a long cancellation clause is to prevent you from securing funding with the VC they’ve introduced you to while at the same time making it difficult for you to find any funding. Keep your options open and agree to 90 days giving you time to find new opportunities.
3. Prevent double dipping. A savvy broker has multiple compensation channels: initial commission, commission on additional funding you get during a 1 or 2-year term, compensation if the business is sold during specified time frame, percentage of interest on monies lent, etc. Read fine print, several deals that have passed over our desks in the past 6 months have had hidden compensation clauses that would have made any deal difficult to swallow had they had signed with the broker. (Have legal representation from an expert in VC funding.)
4. Know the type of funding you want before you start searching, and bind your broker to the specifics with a contract. Looking for a VC with an equity position who wants shares and is interested in growing the firm, or do you just want financing? Initially, the two can appear similar. In one VC deal, the company looking for funding thought they were getting an equity partner, but the VC only wanted to achieve 3.5 times their ROI in 5 years in monthly fees and interest. The final terms of the agreement: the “receiver” would get $2.9 million, but would pay back $6 million in 5 years. It was not the deal he expected.
5. Remember that VC funding is all negotiation–between you, the VC, and the broker. First, never let the broker think that you don’t have other options. If they think you’re between a rock and a hard place, you’re in trouble. Second, VCs know the financing game in and out, and often they will tell you the deal is dead and not call back for weeks just to get you hungry. Sometimes the broker is in on this strategy. You must be patient. Third, even with contracts, the broker may only secure a few deals a year to make a great living. If they’ve invested four months on the project, they want the deal as badly a you do. Then ask for concessions. Realize they might jump up and down and scream as part of their negotiations. It’s a common strategy; look past it. In every deal, conditions change, and you must remember that commissions, fees, and terms can also change.
6. Know your broker’s loyalty, and make sure it’s to you, not to the VC, or solely to the broker’s own best interests. Think of real estate. The seller’s agent’s loyalty rests with the seller: the buyer’s agent’s with the buyer. Work only with people you trust.
7. Be careful of brokers in disguise. Some mask themselves as venture capitalists and yet have no money. What’s the problem? You think you’re working with an investor whose income is contingent upon the growth and success of the deal/business; in fact, you’re working with a commissioned salesperson who hasn’t invested a cent in the venture and only stands to gain as long as he links two parties. The only way you may ever know is when the deal is being written up and you catch the fine-print line for commission to XYZ firm.
8. Use a VC’s leverage if the broker is unreasonable. One of our clients worked with a broker whose stubbornness kept on getting in the way of the deal. Everyone was giving in a little to make the package work. Our client told the VC he couldn’t afford the deal, because the broker was not participating in the concessions. The VC (with greater financial leverage) wanted the deal enough that he negotiated a compromise with the broker, and everyone was happy.
9. Lastly, brokers, like you, are looking out for their own pockets. To combat this, try to put more emphasis on bonuses based on the long-term viability of the funding and the growth of the business rather than solely on the introduction. Incentives encourage brokers to build the most potentially successful deals.
Most brokers are ethical. They don’t want to take you to the cleaners. Their future successes rest on their reputations for making good deals. But just in case you get a vulture, you now have ways to find out early and prevent yourself from getting in a jam. And as you probably know, always consult with your attorney when entering into a relationship with a broker or investor.
Acquiring capital to fund future projects is exciting and daunting. Although common sense will guide you to avoid pitfalls and seize opportunities, you won’t know everything about this area. Therefore, gaining outside help from experts in this area is wise no matter how many times you’ve done it. After all, you’re strongest doing what you do best: leading and managing your organization.
© David and Lorrie Goldsmith
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You want to buy a new company, expand operations, acquire a business, or raise capital. You’ve decided to go for venture capital funding versus a bank loan for a multitude of reasons from the risks involved to the amount you need to carry out your plan.
Do you know as much as you’d like about gaining capital? Most people don’t. Their expertise is in their business, not in capital funding. Here are ways to protect yourself from vultures, deals you can’t afford, and the nightmares of both.
Some quick explanations:
A venture capitalist (VC) is a person, group of people, company, or group of companies with money to invest in your business.
A VC broker represents you (or possibly a VC) and arranges the parties to create a deal. This article is about working with the broker.
Since many brokers are ethical, why such a negative slant? Over two months, two of our consulting clients nearly lost their shirts dealing with brokers. One broker tried to quadruple dip on a VC deal by taking a commission, bringing in another broker (who needed a commission), taking excessive points on growth targets, and adding interest fees into a contract making the deal impossible. Had our Boston-based client signed with his current and (estimated) future numbers, his decade-old business would have perished.
Another broker wanted a client in Connecticut to sign a broker-exclusivity contract, forcing our client to pay commissions on any type of financing, regardless of whether the deal originated through the broker or not. If an SBA loan or unrelated VC came through, our client would pay $400,000 in unearned commissions.
(With each client, the broker used four or more of the nine strategies below that would be harmful to your fulfilling your capital needs.)
Every deal has its own merits and challenges. Regardless, nine general tips to consider are:
1. Don’t sign exclusivity contracts barring you from finding your own funding. A) On one hand, a broker has every right to protect his intellectual property by preventing you from bypassing him and striking a deal with one of the contacts he’s introduced you to. B) On the other hand, beware of anything preventing you from gaining funding from any other source without going through the broker.
2. Avoid long-term cancellation clauses that hold you hostage for a year or more. Sixty to ninety days is reasonable. You’ve got to be able to move on. A broker’s objective in creating a long cancellation clause is to prevent you from securing funding with the VC they’ve introduced you to while at the same time making it difficult for you to find any funding. Keep your options open and agree to 90 days giving you time to find new opportunities.
3. Prevent double dipping. A savvy broker has multiple compensation channels: initial commission, commission on additional funding you get during a 1 or 2-year term, compensation if the business is sold during specified time frame, percentage of interest on monies lent, etc. Read fine print, several deals that have passed over our desks in the past 6 months have had hidden compensation clauses that would have made any deal difficult to swallow had they had signed with the broker. (Have legal representation from an expert in VC funding.)
4. Know the type of funding you want before you start searching, and bind your broker to the specifics with a contract. Looking for a VC with an equity position who wants shares and is interested in growing the firm, or do you just want financing? Initially, the two can appear similar. In one VC deal, the company looking for funding thought they were getting an equity partner, but the VC only wanted to achieve 3.5 times their ROI in 5 years in monthly fees and interest. The final terms of the agreement: the “receiver” would get $2.9 million, but would pay back $6 million in 5 years. It was not the deal he expected.
5. Remember that VC funding is all negotiation–between you, the VC, and the broker. First, never let the broker think that you don’t have other options. If they think you’re between a rock and a hard place, you’re in trouble. Second, VCs know the financing game in and out, and often they will tell you the deal is dead and not call back for weeks just to get you hungry. Sometimes the broker is in on this strategy. You must be patient. Third, even with contracts, the broker may only secure a few deals a year to make a great living. If they’ve invested four months on the project, they want the deal as badly a you do. Then ask for concessions. Realize they might jump up and down and scream as part of their negotiations. It’s a common strategy; look past it. In every deal, conditions change, and you must remember that commissions, fees, and terms can also change.
6. Know your broker’s loyalty, and make sure it’s to you, not to the VC, or solely to the broker’s own best interests. Think of real estate. The seller’s agent’s loyalty rests with the seller: the buyer’s agent’s with the buyer. Work only with people you trust.
7. Be careful of brokers in disguise. Some mask themselves as venture capitalists and yet have no money. What’s the problem? You think you’re working with an investor whose income is contingent upon the growth and success of the deal/business; in fact, you’re working with a commissioned salesperson who hasn’t invested a cent in the venture and only stands to gain as long as he links two parties. The only way you may ever know is when the deal is being written up and you catch the fine-print line for commission to XYZ firm.
8. Use a VC’s leverage if the broker is unreasonable. One of our clients worked with a broker whose stubbornness kept on getting in the way of the deal. Everyone was giving in a little to make the package work. Our client told the VC he couldn’t afford the deal, because the broker was not participating in the concessions. The VC (with greater financial leverage) wanted the deal enough that he negotiated a compromise with the broker, and everyone was happy.
9. Lastly, brokers, like you, are looking out for their own pockets. To combat this, try to put more emphasis on bonuses based on the long-term viability of the funding and the growth of the business rather than solely on the introduction. Incentives encourage brokers to build the most potentially successful deals.
Most brokers are ethical. They don’t want to take you to the cleaners. Their future successes rest on their reputations for making good deals. But just in case you get a vulture, you now have ways to find out early and prevent yourself from getting in a jam. And as you probably know, always consult with your attorney when entering into a relationship with a broker or investor.
Acquiring capital to fund future projects is exciting and daunting. Although common sense will guide you to avoid pitfalls and seize opportunities, you won’t know everything about this area. Therefore, gaining outside help from experts in this area is wise no matter how many times you’ve done it. After all, you’re strongest doing what you do best: leading and managing your organization.
© David and Lorrie Goldsmith
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How to Raise Venture Capital Successfully
Akhil Shahani asked:
The way technology companies in Silicon Valley and venture capital firms go with each other, you’d think they were like cake and cream. Indeed, the two are inextricably linked, and have fed off each other to (often) create large amounts of wealth for both groups. If you want to jump on that bandwagon and are wondering about how to raise venture capital, we’ve got some words of advice for you.
Before you knock on any doors on Sand Hill Road, you must know a little bit about the elite breed of venture capitalists. These are the eagle-eyed guys looking out for that extra special business idea which can make them bucket-loads of money in quick time. While there are thousands of firms, your search for one can be simplified by using a directory.
Venture capital firms invest in (usually) technology intensive firms with a breakthrough idea that has the potential to return three to five times their investment in about five years. Venture capitalists will invest relatively large sums of money, in the region of a few million dollars, for a stake and a very definite say in the running of the target company. They will bring along their money as well as their expertise, and in return will expect the business to spurt, after which they’ll go out as quickly as they came! Since their expectations are so high, venture capitalists will only back a team that displays strong capabilities and vision. That’s the first lesson on how to raise venture capital – you have to knock their socks off before you can get them to part with their money.
Our next tip on how to raise venture capital is basically horse sense and that is, to be absolutely prepared. We’re sure that you’ve figured out by now that a venture capitalist is not your friendly neighborhood banker-type of person. He will ask you all kinds of uncomfortable and incisive questions, for which you’d better have a good answer. Keep your business plan ready, and know it better than the back of your hand. It’s worthwhile consulting an expert advisor such as Venture Planning Associates who specialize in assisting entrepreneurs in need of funding.
One thing to bear in mind is that the investors’ interest lies in the growth potential of your business, and the returns it can hope to generate. Remember, they don’t care about earning an interest on their investment; they’re after much bigger stuff, which is the valuation of your business a few years down the line. In other words, they will look for opportunities to sell their stake or the business altogether, at an enormous premium. So, be prepared to tell them how they can get out as well!
But passing that test is not enough! You will have to convince the investors of your unshakeable commitment to the project. Ironically, if you ask fellow entrepreneurs how to raise venture capital successfully, they’ll probably advise you to invest some of your own money first. This is because venture capitalists will measure your commitment not only by the hours of work you’re eager to put in, but also by the dollars that you’re willing to invest, or the (voluntary!) pay cut you suggest. So, be prepared to put your money where your mouth is.
And finally, here’s our most important advice on how to raise venture capital, and that is to be persevering. Be prepared to fight it out, to wait and also have doors slammed in your face. If your idea is sound and the proposition irresistible, you can be sure that you’ll land the funding. Just don’t expect it to be a piece of cake!
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The way technology companies in Silicon Valley and venture capital firms go with each other, you’d think they were like cake and cream. Indeed, the two are inextricably linked, and have fed off each other to (often) create large amounts of wealth for both groups. If you want to jump on that bandwagon and are wondering about how to raise venture capital, we’ve got some words of advice for you.
Before you knock on any doors on Sand Hill Road, you must know a little bit about the elite breed of venture capitalists. These are the eagle-eyed guys looking out for that extra special business idea which can make them bucket-loads of money in quick time. While there are thousands of firms, your search for one can be simplified by using a directory.
Venture capital firms invest in (usually) technology intensive firms with a breakthrough idea that has the potential to return three to five times their investment in about five years. Venture capitalists will invest relatively large sums of money, in the region of a few million dollars, for a stake and a very definite say in the running of the target company. They will bring along their money as well as their expertise, and in return will expect the business to spurt, after which they’ll go out as quickly as they came! Since their expectations are so high, venture capitalists will only back a team that displays strong capabilities and vision. That’s the first lesson on how to raise venture capital – you have to knock their socks off before you can get them to part with their money.
Our next tip on how to raise venture capital is basically horse sense and that is, to be absolutely prepared. We’re sure that you’ve figured out by now that a venture capitalist is not your friendly neighborhood banker-type of person. He will ask you all kinds of uncomfortable and incisive questions, for which you’d better have a good answer. Keep your business plan ready, and know it better than the back of your hand. It’s worthwhile consulting an expert advisor such as Venture Planning Associates who specialize in assisting entrepreneurs in need of funding.
One thing to bear in mind is that the investors’ interest lies in the growth potential of your business, and the returns it can hope to generate. Remember, they don’t care about earning an interest on their investment; they’re after much bigger stuff, which is the valuation of your business a few years down the line. In other words, they will look for opportunities to sell their stake or the business altogether, at an enormous premium. So, be prepared to tell them how they can get out as well!
But passing that test is not enough! You will have to convince the investors of your unshakeable commitment to the project. Ironically, if you ask fellow entrepreneurs how to raise venture capital successfully, they’ll probably advise you to invest some of your own money first. This is because venture capitalists will measure your commitment not only by the hours of work you’re eager to put in, but also by the dollars that you’re willing to invest, or the (voluntary!) pay cut you suggest. So, be prepared to put your money where your mouth is.
And finally, here’s our most important advice on how to raise venture capital, and that is to be persevering. Be prepared to fight it out, to wait and also have doors slammed in your face. If your idea is sound and the proposition irresistible, you can be sure that you’ll land the funding. Just don’t expect it to be a piece of cake!
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