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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | AUGUST 31, 2000 SMART ANSWERS A Short Course on Raising Capital Tips on getting started on the road to venture funding
Q: Can you give me information and resources on the steps involved in getting VC, interim, and eventual IPO financing, including how to deal with investment bankers? --Asad I. Khan, Clackamas, Oregon A: Venture-capital firms generally invest between $5 million and $20 million in emerging companies. Since their investments are considered high-risk, they look for hefty rates of return over a relatively short time frame. VCs usually don't provide seed money, which comes instead from company insiders or so-called angel funds. Investment bankers traditionally look at successful and relatively mature companies that are pulling in $100 million annually and preparing for an initial public offering. The venture-capital process generally begins with a company's introduction to a venture capitalist. You can find VC directories in print and on the Web (check out the Venture Capital Resource Library, www.vfinance.com), but simply cold-calling a VC is a long-shot, since they're bombarded with unsolicited inquiries, very few of which become investments. Introductions to VCs through referral sources they respect improve the odds of securing financing. The best source to make such an introduction is a big-name individual from your industry, someone who believes in you and your business model. Attorneys from well-known law firms, accountants, angel investors, and bankers are all considered "legitimate" referral sources. DUE DILIGENCE. Once an introduction takes place, the VC firm will want to look over your business plan, and you may get a chance to pitch your company at a face-to-face meeting. If the investors like what they hear at that meeting, you will probably have several additional meetings and the VC firm may begin due diligence -- analyzing your company's business prospects, management team, industry, and financial forecasts. Since the return on investment is critical, venture capitalists invest with certain criteria in mind. Many funds invest between $4 million to $8 million in any one venture over a three- to five-year period and look for companies with market potential of $75 million to $200 million, says John B. Vinturella, an New Orleans-based entrepreneurial consultant and author of The Entrepreneur's Fieldbook, (Prentice Hall, 1999). "Investors usually look for an annual return of 45% to 60% over three to five years," Vinturella says. "For riskier startups, they lean toward 60%. For later-stage investments, 45% is not unusual." While those return rates might seem excessive, entrepreneurs must keep in mind that VC firms are basically making unsecured loans, he says. "Experience has shown that even ventures deemed promising enough to get outside funding only succeed about 20% of the time," Vinturella says. "Thus the expected rate of return is only 20% of 60%, or about 12%, which is a very reasonable expectation." After funding negotiations close, venture capitalists are likely to become involved as advisers to management, usually as members of the company's board of directors. ONLINE LIBRARY. Additional resources and funding directories abound on the Internet and in business books and industry publications. For starters, try PricewaterhouseCoopers' quarterly survey of equity investment at www.pwcmoneytree.com, the National Venture Capital Assn. at www.nvca.org, Commercial Finance Online at www.cfol.com, The Capital Network at www.thecapitalnetwork.com, and Garage.com at www.garage.com. Many guides are also available on the topic, most of which include background on the funding process, advice on how to go about securing investment financing, and directories of VC firms, including short descriptions of their primary investment interests. The Entrepreneur's Handbook for Raising Capital, (Mentus Inc., San Diego) is a good resource and includes a West Coast Venture Capital Directory listing more than 200 VC firms. It's available for $50, plus $9.95 shipping and handling. Send a request to Mentus by e-mail at: kims@mentusonline.com or by fax to 858 455-6872. Have a question about running your business? Ask our small-business experts. Send us anail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.  By Karen E. Klein  | | |
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