Venture Financing Funnel
Venture Financing: Key Documents To Be Prepared by
When it comes to finding an investor for your venture why should 'FAIR
SHARE' be an issue?
Problems arise when
entrepreneurs, experts in their field,
find themselves in unfamiliar territory, and easily intimidated by the financial
'expert' controlling the funding, and the financial future of the deal. Some
deals fail to get off the ground because the investor wants an UNFAIR RETURN.
Others never see the light of day because the
is unwilling to part with an appropriate share in EXCHANGE for INVESTMENT
NEGOTIATION dictates that both parties walk away from the table as winners.
How do you protect your interests and ensure that the deal you strike is fair
for all concerned? The best way is to do your homework. Know as much or more
about the true VALUE of YOUR DEAL as your PROSPECTIVE INVESTOR. By preparing a
business plan that addresses
everything an investor wants to know, you become an expert in his field.
In the process, you will learn for
yourself the fair asking price, as well as the best and worst case scenarios. At
this stage, you are
selling a FINANCIAL PACKAGE, not your product or service. It must be
competitive in the marketplace in the areas of risk, return, liquidity and
Here are the basics:
Develop Comprehensive Financial Data
Determine the funds required and their use, by back
requirement of your business plan.
Decide on an EXIT STRATEGY for the investor and
Each requires different CASH MANAGEMENT
STRATEGIES. Include a comprehensive pre and post investment VALUATION
ANALYSIS for your business plan and exit strategy.
Business Valuation Study
One of the most frequently used
methods to evaluate risk and reward scenarios is the FIRST CHICAGO METHOD, which
requires developing THREE FINANCIAL PLANS and assigning probabilities to the
outcome of the plan.
1. Your plan is successful and goes
public or gets acquired.
2. Your business is moderately
successful (15% after taxes).
3. The business fails, and is
Assign a realistic probability to
each scenario, and calculate a COMPOSITE VALUE. Then calculate the AMOUNT of
STOCK to be offered based for a required rate of return (e.g. 40%).
Back-calculate how much of the business to sell.
This is the document outlining in
further detail the timetable of required equity and debt financing, and the
payback, or liquidation, of the investor's position under various scenarios.
This is where the 'DEAL' is structured
to MAKE YOUR BUSINESS ATTRACTIVE to INVESTORS.
By being prepared, not only will you
know what is fair, you will have the confidence to stand up to those who would
gladly demand, and get, more than you should give them in order to be
successful. An important aspect of all fund raising is to consider the effects
of DILUTION and RATES of RETURN for MULTIPLE ROUNDS of FUNDING.