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Did you know, that there is more money looking for
"a good deal" than there are "good deals" looking for money?
Venture Planning Associates, a business planning and venture capital
consulting business in Honolulu, was founded in 1989. VPA specializes in
assisting entrepreneurs and start up companies with financing and assisting them
in becoming profitable enterprises. Many entrepreneurs would receive more
serious consideration from investors and financial angels if they would realize
that they are selling a financial package to the financial marketplace, rather
than their product or service to a consumer.
The goal of every
business plan should be to address
upside potential, downside risk, management, potential dilution, and liquidity
issues. Investors are constantly comparing one investment against another
and
ranking them in numerous categories.
To properly evaluate your own project, VPA
recommends that entrepreneurs put themselves in the place of investors, who want
to know the answers to these seven simple questions:
-
Learn to sell, "Face-to-Face", "One-on-One".
Not just your product or service, but your entire business vision.
-
Buy an HP 19B or equivalent financial calculator and
become proficient in all aspects of finance for startup companies.
Weakness in the financial area will drastically reduce your chances of funding.
-
Surround yourself with a quality team. Build
your network in sales, finance, and management.
-
Take a public speaking course and learn to give
tight presentations to tough audiences. Try Toastmasters, Rotary, or
Junior Achievement, Sales and Marketing Executives, etc.
-
Learn how to do the
due diligence on those "too good
to be true money sources".
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Attend investor oriented meetings such as the MIT
Enterprise Forum,
http://web.mit.edu/entforum/www/ a local
Venture Capital Association meeting or the industry meetings for your business
type. Here are a few suggested websites:
http://www.nvca.org/ ,
http://www.venturesource.com/active/vslogin
, http://www.evca.com/,
and
http://www.vfinance.com/
-
Angel investor groups are more difficult to find,
however, here is a good place to start.
http://www.tcvn.org/
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Or find a local
business incubator
to assist you with your startup.
http://www.nbia.org/,
http://www.iincubator.org/,
http://strategis.ic.gc.ca/SSG/tf00118e.html, and
http://www.pacificincubation.org.
Rates of Return and Investment Periods
Each stage has its own set of funding criteria and
its own group of individuals who work in that field. The earlier the financing
stage, the greater the risk, the greater expected return, and the greater
percentage private investors and venture capitalists will request. Sometimes the
investor will require control of up to 80% of the company.
Entrepreneurs, however, are usually given the
opportunity to earn back controlling interest if certain
milestones and performance standards are met. Also, the earlier the stage,
the more difficulty will be encountered in raising the initial capital. It may
take six months to a year to locate the proper partner for your business.
General guidelines for venture capital investment
returns are:
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Start ups, 10-12 times return in 5-7 years.
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Existing early stage companies, 5-7 times investment
in 4-5 years.
|
Cash Returns, Investment Periods, and Rates
of Return |
|
Return |
Investment Period |
|
2 yrs |
3 yrs |
4 yrs |
5 yrs |
6 yrs |
7 yrs |
8 yrs |
|
2 x |
41.4% |
26.0% |
18.9% |
14.9% |
12.2% |
10.4% |
9.1% |
|
3 x |
73.2% |
44.2% |
31.6% |
24.6% |
20.1% |
17.0% |
14.7% |
|
4 x |
100.0% |
58.7% |
41.4% |
32.0% |
26.0% |
21.9% |
18.9% |
|
5 x |
123.6% |
71.0% |
49.5% |
38.0% |
30.8% |
25.8% |
22.3% |
|
6 x |
144.9% |
81.7% |
56.5% |
43.1% |
34.8% |
29.2% |
25.1% |
|
7 x |
164.6% |
91.3% |
62.7% |
47.6% |
38.3% |
32.0% |
27.5% |
|
8 x |
182.9% |
100.0% |
68.2% |
51.6% |
41.4% |
34.6% |
29.7% |
|
9 x |
200.0% |
108.0% |
73.2% |
55.2% |
44.2% |
36.9% |
31.6% |
|
10 x |
216.2% |
115.4% |
77.8% |
58.5% |
46.8% |
38.9% |
33.4% |
|
11 x |
231.7% |
122.4% |
82.1% |
61.5% |
49.1% |
40.9% |
35.0% |
|
12 x |
246.4% |
128.9% |
86.1% |
64.4% |
51.3% |
42.6% |
36.4% |
|
Why are expected returns so high?
Quite simply because of all the non-performing
investments, or losses and the lack of liquidity and the availability of other
opportunities. The compounded Venture Capital Return Rate over many years
is approximately 17.8%. In order for a Venture Fund to be profitable, it
must assume at least 50% of its investments will at best make only a small
profit. Approximately 25% of the investments will be sold or liquidated.
Of the remaining 25%, about half will go public and generate compounded returns
exceeding 60-120%. For a portfolio of 20 companies, only one will be a
"rocket" or "home run" and provide the 10 - 100 times Return on Investment that
everyone is looking for.
Valuations
and
due diligence should be made by both parties in
order to accurately determine the amount and
type of debt and
equity
that will optimize the investment for both the entrepreneur and the investor.
Follow-on stages of financing should also be considered. The importance of the
cost of capital and the eventual amount of equity dilution to you and your
initial shareholders cannot be overstated.
Besides Venture Capital, there are
more than 30 methods of funding your business that do not require venture
capital to finance your operations.
Venture Planning Associates will research both public and private sources of
capital and debt financing in the U.S. and Asia for your venture. Depending on
the size and type of project, a listing of at least 20 sources will be provided.
Assistance from Venture Planning Associates is available for presentations and
negotiations after you have received further information requests.
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