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SMART ANSWERS
By Karen E. Klein

9.9.99  
The Life Cycle of a Venture-Funded Company
When to fund yourself, how much equity to give up, and other tips for the startup

Q: I would like to start a pan-European service online. I have a team of people who will be partners in the firm, and we plan to go through the various stages of financing, starting with angel investors and then going to venture capitalists. Is there any way to calculate what portion of the equity these categories of investors should get? Is there a source of information that would be of help to me? --N.P., London

A: Unfortunately, there are no exact formulas for calculating private equity investment deals, and the conditions in Europe are different from those in the U.S., where venture capital is more available. Here are some general guidelines for U.S. startups that may be helpful.

First, get an investment banker to act as an intermediary in the negotiations. "Get someone who specializes in putting these deals together. Most entrepreneurs will do this once or twice or three times in their careers. They need someone who's familiar with the process and who's on the side of the deal," says Burt Alimansky, managing director of the New York City-based Alimansky Capital Group Inc. and founder of the New York Venture Group, a forum for venture investors and young companies.

Your best bet is to rely on your own bank accounts, friends, and family for the first three to six months, when you have little more than a concept to sell. "This capital is not hard to raise. It doesn't bring control provisions. It's generally in small amounts. And it allows the founders to keep more of the company themselves, while giving their friends and family a chance to place money in a venture that doesn't require them to be professional investors," says Chip Austin, co-founder and managing partner of i-Hatch Ventures, www.i-hatch.com, which provides seed capital and advice to Internet ventures.

The seed capital -- for which you may have to give up as much as 20% -- should fund your next mission -- to increase your company's valuation 5 to 10 times before the next round of funding. "Bring on your team full-time if they're not already there. Put together a formal business plan. Line up a variety of suppliers, producers, and distributors, and put a prototype or a live beta test of the service together -- or at least mock up a Web site," Austin says. He also suggests that you try to get a Web site developer to take its fee in equity to stretch your cash.

In the first formal round of funding, you should seek professional angel investors or venture-capital firms that specialize in early-stage companies to raise between $1 million and $5 million. In a best-case scenario, these investors will take between 20% and 33% of the company. That will reduce the founders' share from around 80% to as little as 47%. (With less than 50%, the founders no longer control the company.) With this second infusion of capital, you'll formally launch your service and flesh out your staff.

When your company's valuation reaches $20 million to $30 million, it's time for another round of funding. VCs will probably take another 18% to 25% of your equity at this point. Lori King, CEO of nvst.com, an online private equity network, notes that an employee stock ownership plan will probably take another 10% of the company. "Typically, there might be one more round of capital raised before a company would go public -- perhaps raising $10 million on a $40 million to $50 million valuation. Depending on how much funding is needed, in the best scenario, the founders will still hold a respectable 20% to 25% of the public company," King says.

The entire funding cycle used to take a minimum of five years, but for Internet companies, it now takes between 24 and 36 months, experts say. The process will likely be slower and the valuations less lofty for a company based in Britain, says i-Hatch's Austin. "The U.K. and Germany are the two best countries in Europe in terms of venture capital, but there are definite geographic disparities." He recommends that you search out local investors for your early funding rounds, even E-mailing the CEOs of successful Internet ventures in Europe to ask them for advice. There are emerging venture capitalists in Europe, including Apax Partners & Co., www.apax.com, and Viventures, www.viventures.com.

Additional resources can be found at King's site, www.nvst.com, which boasts a network of angel investors and 16,000 Web pages devoted to private equity networking, including a venture-capital resources library and the online edition of the European Venture Capital Journal. VentureOne, www.ventureone.com, offers resources and a database of venture capitalists and venture-backed companies. Specific help in locating European venture capitalists can be found at the Web sites of the European Venture Capital Assn., www.evca.com; the European Association of Securities Dealers, www.easd.com; and a networking group called Europe Unlimited, at www.e-unlimited.com.


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