Venture Financing

Step-by-step Guide

 
Preparing Your Venture Proposal
 

Meir Liraz
CEO, BizMove

 

How To Meet the Criteria of Initial Screening of Venture Proposals by Prospective Investors

 

 

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Elements of a Venture Proposal

Executive Summary of the What and Why of the Project

Purpose and Objectives

Proposed Financing: You must state the amount of money you will need from the beginning to the maturity of the project proposed, how the proceeds will be used, how you plan to structure the financing, and why the amount designated is required.

 

 

Marketing: Describe the market segment you've got or plan to get, the competition, the characteristics of the market, and your plans (with costs) for getting or holding the market segment you're aiming at.

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History of the Firm: Summarize the significant financial and organizational milestones,

Description of employees and employee relations, explanations of banking relationships, recounting of major services or products your firm has offered during its existence, and the like.

Description of the Product or Service: Include a full description of the product (process) or service offered by the firm and the costs associated with it in detail.

 

 

Financial Statements: Include statements for both the past few years and pro forma projections (balance sheets, income statements, and cash flows) for the next three to five years, showing the effect anticipated if the project is undertaken and if the financing is secured. (This should include an analysis of key variables affecting financial performance, showing what could happen if the projected level of revenue is not attained.)

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Revenue Model

Capitalization: Provide a list of shareholders, how much is invested to date, and in what form (equity/debt).

Biographical Sketches: Describe the work histories and qualifications of key owners and employees.

Principal Suppliers and Customers, Problems Anticipated and Other Pertinent Information

Provide a candid discussion of any contingent liabilities, pending litigation, tax or patent difficulties, and any other contingencies that might affect the project you're proposing.

List the names, addresses and the telephone numbers of suppliers and customers; they will be contacted to verify your statement about payments (suppliers) and products (customers).

Provisions of the Investment Proposal.

 

 

The Size of Your Venture Proposal

Most venture capital firms are interested in investment projects requiring an investment of $250,000 to $1,500,000. Projects requiring under $250,000 are of limited interest because of the high cost of investigation and administration; however, some venture capital firms will consider smaller proposals if the investment is intriguing enough.

Passing the First Gate

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Venture Financing: Key Documents to be prepared

The typical venture capital firm receives over 400 proposals a year. Probably 90% of these will be rejected quickly because they don't fit the established geographical, technical or market area policies of the firm or because they have been poorly prepared.

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Startup Business Plan

The remaining 10% are carefully investigated. These investigations are expensive. Firms may hire consultants to evaluate the product, particularly when it is the result of innovation or is technologically complex. The market size and competitive position of the company are analyzed by contacts with present and potential customers, suppliers, and others. Production costs are reviewed. The financial condition of the company is confirmed by an auditor. The legal form and registration of the business are checked. Most importantly, the character and competence of the management are evaluated by the venture capital firm, normally via a thorough background check.

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These preliminary investigations may cost a venture firm between $2,000 and $3,000 per company investigated. They result in perhaps ten to fifteen proposals of interest. Then, second investigations, more thorough and more expensive than the first, reduce the number of proposals under consideration to only three or four. Eventually, the firm invests in one or two of these.

Evaluating Your Track Record and Potential

Most venture capital firms' investment interest is limited to projects proposed by companies with some operating history, even though they may not yet have shown a profit. Companies that can expand into a new product line or a new market with additional funds are particularly interesting.

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The venture capital firm can provide funds to enable such companies to grow in a spurt rather than gradually as they would on retained earnings.

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Companies that are just starting or that have serious financial difficulties may interest some venture capitalists, if the potential for significant gain over the long run can be identified and assessed. If the venture firm has already extended its portfolio to a large risk concentration, they may be reluctant to invest in these areas because of increased risk of loss.

Although most venture capital firms will not consider a great many proposals from start-up companies, there are a small number of venture firms that will do "start-up" financing. The small firm that has a well thought-out plan and can demonstrate that its management group has an outstanding record (even if it is with other companies) has a decided edge in acquiring this kind of seed capital.

Evaluating Your Management Team

 

 

 

Most venture capital firms concentrate primarily on the competence and character of the Management. They feel that even mediocre products can be successfully manufactured, promoted, and distributed by an experienced, energetic management group.

They look for a group that is able to work together easily and productively, especially under conditions of stress from temporary reversals and competition problems. Obviously, analysis of managerial skill is difficult. A partner or senior executive of a venture capital firm normally spends at least a week at the offices of a company being considered, talking with and observing the management to estimate their competence and character.

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Venture capital firms usually require that the company under consideration have a complete management group. Each of the important functional areas product design, marketing, production, finance, and control - must be under the direction of a trained, experienced member of the group. Responsibilities must be clearly assigned. And, in addition to a thorough understanding of the industry, each member of the management team must be firmly committed to the company and its future.

Evaluating Your Competitive Advantage

Next in importance to the excellence of the management group, most venture capital firms seek a distinctive element in the strategy or product/market/process position of the company. This distinctive element may be a new feature of the product or process or a particular skill or technical competence of the management. But it must exist. It must provide a Sustainable Competitive Advantage Download PowerPoint presentation, pdf e-book.

   

 

 

 

What happens when, after the exhaustive investigation and analysis, the venture capital firms decides to invest in a company? Most venture firms prepare an equity financing proposal that details the amount of money to be provided, the percentage of common stock to be surrendered in exchange for these funds, the interim financing method to be used and the protective covenants to be included.

This proposal will be discussed with the management of the company. The final financing agreement will be negotiated and generally represents a compromise between the management of the company and the partners or senior executives of the venture capital firm. The important elements of this compromise are: ownership, control, annual charges, and final objectives.