Securing venture capital money these days, and especially in this economy, is tougher than ever. However, there are ways to look for it more successfully than just randomly picking a venture capital firm in the dark. One of the best ways to get potential venture capital money is to research the firms and find out exactly what kind of industries they prefer to invest in. Some like start up companies, while others prefer acquisitions or buyouts. Below the article explains what different companies are looking for and how one can target them.
There are many kinds of venture capitalists who invest in different types of opportunities. Some venture capitalists prefer to provide only seed capital; others prefer investing in mature companies looking for expansion capital. Some venture capitalists might only invest in specific industries and locales.
Here’s a quick primer on those factors that might influence a venture capital firm’s funding decision. Finding out what a specific venture capital firm is looking for can help narrow your capital search and put your business plan in front of the most appropriate investors.
Industry: Many venture capitalists specialize in a narrow set of industries. Some specialize in semiconductors, others in health care devices, biotech, or Internet services. Still others invest in “low-tech” businesses. Determining what industries a venture capital firm invests in will disclose whether or not it will consider funding your venture and show you where it has placed its bets in the past.
Geography: Just because some venture capitalists are located in Silicon Valley doesn’t mean they only invest in Silicon Valley companies. Some venture capital firms like to invest only in companies that are located near them, while others have a national or global scope.
Stage of development: While some firms like to invest early in the infancy of a start-up, others prefer to invest in later stages of development. Here are some key stages of development that venture capital firms consider:
Early Stage Financing
Seed financing is the initial investment required to prove a concept (e.g., to build a prototype or conduct market research) and qualify for start-up financing.
Start-up financing is what is typically required to build a management team and bring a product (or service) to market.
First-stage financing is often sought when start-up financing is depleted and a young company needs to expand its production, marketing, and/or sales capabilities to “ramp up.”
Second-stage financing is used by companies that are shipping products (or delivering services) and growing but need additional sources of funds to fund working capital requirements and grow faster than internally generated cash flow will allow.
Mezzanine financing is typically used to fund substantial growth and/or expansion of companies that are already up and running and are often at or beyond break-even volumes. Capital to fund a plant expansion or to move into a new geographic market is often categorized into this class of funding.
Bridge financing is sometimes needed when a company is about to go public within the following year. Bridge financing, as the name implies, is used to get the company to the IPO. Usually, the bridge financing is short term and is paid off with proceeds from the public offering.
This type of financing is used to fund the acquisitions or buyouts of existing businesses that are up and running. Many times these are mature businesses that are funded with a large component of debt and a small level of equity capital (leveraged buyouts). The K.K.R. acquisition of RJR/Nabisco was one of the more famous (and largest) examples of this type of transaction.
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Every entrepreneur has that one great idea that they need funding to achieve. A common approach to a new business is to search out venture capital firms and raise VC to fund your new business. However, this isn’t always a strategy that pays off as it is difficult to obtain the money from venture capitalists. Sure, there are the occasional mega-success stories, but those are few and far between. The article below illustrates this idea and also provides viable alternatives to fund your start up business, which then in turn can look to venture capital as an additional source for money to further expand once the business is up and running.
I do not mean to discourage you entrepreneurs in your quest to launch the next Big Thing. Many of you look at your path as write a compelling business plan, make a few presentations to the well-known venture firms, get $3 million for 5% of your company pre revenue, and launch.
Product development progresses without a hitch, you hit all of your milestones, you get a second round at an even more favorable valuation, and you land the big high-profile account. Two years later, you do an IPO with a market cap of $350 million. Fast forward another two years and you are the subject of a bidding war between Microsoft, Google, and Interactive Corp. You finally agree to a buy-out at $3 billion. Life is good.
Wow, that was easy. Unfortunately that is one in 10 million. I was listening to CNBC this morning and they were reporting on a new test developed by a Stanford PHD that would identify people two to six years in advance of developing Alzheimer’s Disease.
This is an ideal venture play – huge potential market, company founder with great credibility, and a great way to reduce future health care costs. On the surface this would seem like the sure fire bet for the venture guys, but the CNBC reporter said they were having trouble raising venture capital. What a shock.
If this company is having trouble, think about the battle you face. Because no one has a crystal ball, seven out of ten venture investments totally fail.
With that backdrop, venture capital investors look to achieve a thirty times return on their investment in three years. Many potentially successful companies fail to achieve the promise of their great idea because they get caught up in the venture trap. They are passionate about their idea and believe that it will become the next big success story.
They tend to be very optimistic which is essential for one that takes the kind of risks that a start-up requires. Their biggest flaw is that they focus way too much of their efforts on the venture dance. Endless meetings and presentations followed by delays and more presentations to other members of the same venture teams.
There are other alternatives. How about a strategic alliance with a bigger company in your industry? What about a licensing deal with a big player? Can a value added reseller play a role for you? What about an outsourced sales effort? Should you sell your company?
If you do have a great idea and are meeting an important market need, it is likely that there are other companies out there that have the same or very similar solutions. In today’s business environment that translates into a very limited window of opportunity to achieve scale. You are on the clock to achieve scale before your funds run out or before a well funded competitor simply captures your market.
Venture is very glamorous, but do not be myopic in your approach to cashing out on your big idea. There are several very important alternatives including building a solid, profitable small company under the radar and then raising venture to achieve scale and take it to the next level…
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Getting started as a venture capitalist is a risky but rewarding activity. Knowing the ins and outs of the company a venture capitalist might invest in is always of prime importance because this determines whether the risky investment will flop or pay off with above average results. Knowing exactly what venture capitalism is and what it means to be a venture capitalist is just as important. Research is required to become knowledgeable of exactly what to expect, especially since the majority of projects one invests in will fail, however, once that specific company is found that does succeed with a venture capitalist’s help the payoff can easily make up for previous lost investments. The article below is a good start on the road to determining if venture capitalism is for you and how to begin.
by: Low Jeremy
Venture capitalism is a system wherein a venture capitalist invests money in small and fledgling companies to finance its start up or restructuring with the hopes of greater yield in the years to come. Instead of providing a loan, venture capitalists exchange their investments for a stake in the company often in the form of shares, which they will later unload.
Often, venture capitalists target companies with innovative products and services, which they feel have the potential to become successful brands in the years to come. Other times, people with ideas for products and services seek venture capitalists with the hope of being provided with start-up funds. These are the people who are just starting in the industry and therefore have no access to other forms of traditional financing like those provided by banks and financial institutions.
Often, they will provide the company with about three to seven years’ support. Venture capitalism may seem really fruitful when it comes to generating profits but not all investments that venture capitalists go into pay off.
In fact, most of the companies that they invest on will probably fail to return their investments. Remember that investing in new or troubled business is pretty risky. According to statistics, about 20 to 90 percent fail. They, however, recoup their losses with the companies that do go well. The return of their investments can reach from 300 to about a thousand times over.
Oftentimes, venture capitalists do not only provide money for the company but also managerial and strategic advice. They will often help the company stand on their own feet when they are just starting. Venture capitalists can also help in terms of providing contacts and in opening doors of opportunities.
If you are looking for a venture capitalist, make sure that you have researched the person or the company thoroughly. This is because there are venture capitalists that are more into providing seed money for companies that are starting up. Others concentrate on investing funds for restructuring and expansion.
Those with high growth potentials are good investments for these venture capitalists especially those in fields that are rapidly expanding like Information Technology, Bio-Technology and the Life Sciences. There are some that specialize in buyouts, turnarounds and recapitalizations.
It is important that you choose the right venture capitalist on your project. Do your homework and find out whatever you can about the venture capitalist that you are targeting. Otherwise, you will only be wasting your time and will just be turned down by these people.
A company is formed after someone is able to invent something. Take for example Henry Ford who was able to invent the first vehicle using an engine instead of it being drawn by a horse. This classic example is just one of many. The only difference is during that time; Henry had the funds available so there was no need to borrow from the bank.
But these days, those who want to start something have to borrow money. A student who wants to continue further studies on a project has to be a given a grant from the school. In the world of business, the entrepreneur can go to a bank or get someone to work with as an investor and as a partner.
This partnership is better known as venture capitalism. The cycle looks for simple as an entrepreneur will prepare the details and then submit the proposal to an investor. If after rounds of meetings, everything is sound and both parties have agreed on the details, then the funds are released and the business can begin.
But the venture capital cycle is not just for startups. The same thing can also be done to help expand an existing business. The same details are prepared by the person with the hopes that the creditor will approve the request.
The time it takes to do the research to the moment the business becomes a reality takes months. This is because the entrepreneur will have to do the research first. This means checking on the feasibility of the business given the location and the market, the cost of the machines, sales projections and of course the return of investment.
When this is ready, the proposal is sent out to a list of prospective partners. Some people will respond quickly while there are those who don’t. This is because of the other proposals given by other entrepreneurs. There is usually a meeting that will happen if the documents submitted are promising. This will give the investor an idea of who the entrepreneur is. Some investors feel a good vibe and take it from there while those who don’t will turn down the proposal.
An effective way to make a good impression will be by answering each question instead of stuttering there which does no help at all. It won’t take long anymore after that to hear a response from the investor. The answer is either a yes or a no which could make the entrepreneur happy or strive harder.
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Below is an interview with famed venture capital pioneer Bill Draper. This is an opportunity to get into the mindset of one of the most successful west coast investors. Draper talks about what it means to invest in a company as well as what to look for, and finally what mistakes you can avoid by following his advice. Keep reading to get inside the head of a successful venture capitalist and learn a thing or two that can help your own investment strategies.
By Leigh Buchanan
Bill Draper of venture capital firm Draper Richards offers advice to entrepreneurs on raising capital.
The Draper family is to Silicon Valley venture capital what the Gallos are to California wine. The three-generation dynasty began in 1959, when William H. Draper Jr., a retired U.S. Army general, created Draper, Gaither & Anderson—the first VC firm west of theMississippi. The family’s youngest investor is the general’s grandson, Tim Draper, co-founder of the prominent early-stage investment firm Draper Fisher Jurvetson. Connecting those two formidable players is William H. (Bill) Draper III, the general’s son and Tim’s father. Bill Draper helped shape the modern VC industry, most notably at Sutter Hill Ventures and at Draper Richards, where he is a general partner. He has invested in companies such as Skype, Hotmail, and OpenTable. In January, Palgrave Macmillan will publish his memoir,The Startup Game: Inside the Partnership Between Venture Capitalists and Entrepreneurs. Editor-at-large Leigh Buchanan talked with Draper, 82, about the VC industry and what it takes to succeed as an entrepreneur—no matter where your money comes from.
What was it like launching a VC firm at a time when most people didn’t even know what venture capital was?
Actually, people in the East did know about venture capital through the Whitney family in New York andAmerican Research and Development in Boston. But no one out here had heard the term. In 1962, when my partner, [Franklin] “Pitch” Johnson, and I started our first company, Draper & Johnson, we got no action. We would sit around waiting for the phone to ring. It didn’t, so we drove out into the fruit orchards—remember, it wasn’t Silicon Valley back then. We’d look for companies with names that sounded like they might have something to do with technology or at least like they weren’t warehouses for prunes. When we saw a promising sign, we’d knock on the door and ask the receptionist, “Is the president in?” A man would come out—usually our age, early 30s. And he’d ask, “What do you do?” We’d say, “We’re in the venture capital business. We buy a minority interest in a private company and help it grow.” Then we’d ask, “What do you do?” And he’d talk about his business—they loved to talk about their businesses. We had a lot of fun and wasted a lot of hours that way. But once in a while, we got someone interested in expansion who hit our hot button. Then, as the banking community in San Francisco learned about us, we became the go-to guys for small, growing companies that might one day have a public offering.
With which entrepreneurs have you had the best working relationships?
One of the most passionate and energetic entrepreneurs I know is Jonathan Bush, whom I met in New Hampshire when he was 18 years old and out campaigning for his uncle, George H.W. Bush. Jonathan was everywhere—knocking on doors, working phone banks, driving around on a truck with a megaphone. He really inspired people.
Later, he connected with me when he wanted to start Athenahealth, which offers billing, electronic records, and other services for medical providers. We supported him, and I also got the Rockefellers to invest, as well as my son’s firm. Athenahealth became a fine, rapidly growing company and had a very successful IPO a few years ago, in which we got back 10 times our investment.
I also became close to Dave Bossen, founder of Measurex, which made computer controls for the paper industry. Dave is that rare entrepreneur who is equally competent starting a company from dead scratch as he is running it all the way up to the New York Stock Exchange and beyond. [Honeywell acquired Measurex in 1997.]
Draper & Johnson was the first firm you started. What did that experience teach you about entrepreneurship?
First, that you need other people. Starting with the money. I had $25,000 and a $20,000 mortgage on a $40,000 house. I needed $75,000 and a partner with another $75,000, because the SBIC [Small Business Investment Company—a private-public partnership] would leverage that money three to one. So I teamed up with Pitch. And luckily, I had a father and Pitch had a father-in-law who loaned us what we needed.
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