How Some Venture Capitalists Try To Rob You Blind
01 Sep 2011 | Category: venture-capital | Author: admin
Probably the single best way to finance buying a business is with investors.
Not banks.
Not family.
And definitely not loans from other non-banking organizations.
However, I recently heard something that made me think twice about exactly what kind of investor financing is best.
You see, while it's true investor financing means you don't have to pay any interest (after all, they are investing money, not loaning it), not all investors are made of the same stuff.
In this case, I learned about a dirty little trick many of the more "unscrupulous" venture capital firms will play on people. And that is to sort of "string you along" when you ask for money.
In other words, they will keep saying you will get the money you need next month or next week or whenever.
But in reality, they have no intention of giving you anything until the last possible minute.
Why?
Because, as any con man knows, when it comes to giving someone money, the longer they wait to give it to you...the more desperate you'll be.
And the more desperate you are, the more they can ask from you in return.
In the case of venture capital firms, it will usually be getting more stock (and thus, control of your company) for their money.
It's a terrible thing for them to do. But many venture capital companies do it and so, you should be careful if you use one.
But really, this shouldn't be a problem for 99% of people who buy a business.
Because if you are buying a smaller business, venture capitalists generally won't bother with you anyway (that's where "angel investors" come in to play).
And if you are buying a larger business (worth, say, $5, $10, $15 million or more) there are plenty of private investors -- with more money than they can spend -- who will give you whatever financing you need if what you are doing makes sense to them.
Anyway, keep this article in mind when thinking about how to finance a business you want to buy, especially if you don't want to use a bank or other creditor.
Raising Money for Treasure Hunting
15 Jul 2011 | Category: venture-capital | Author: admin
The world of treasure hunting and gold can posses people. It has me and many other people. But the fact remains that treasure hunting can be funded and successful if they step back from the enthusiasm of the project, and operate on a rational level.
Treasure Hunting is a business as well as a passion. If you can be grounded on the numbers and the research, your enthusiasm will sell the project.
Anyway this guy and another guy were trying to raise money in $20-$100 per person. I simply could not understand why the were trying to raise such a small amount of money from like 500 people. It just seemed like a waist of time when they could have asked for $2-$5,000 from each person. I would not have invested and money with these 2 people because they are lost in a dream and not organized.
They had no plans and there research was weak. They also had no idea on how much is needed for treasure recovery or even how much money they needed at all. They had no planning so there is little to no chance of them being successful.
Just because you think you know where a treasure is does not mean you have any idea on how to pinpoint and recover it. That takes money...Lots of it.
For an underwater pin pointing and recovery takes time and money. The fact is they were looking for about $6,000 total from 500 people. There is no way this is enough money for their projects. Also getting 20 bucks from 500 people is going to be a huge problem.
It would be so much easier to find 5 people who want to invest $2,000. They would have fewer people to deal with and $10,000, that is 4 thousand dollars more than they would have got at $20 from 500 people.
They are disorganized and trying to get money from the wrong people. There are people who have thousands of dollars lying around just looking for the right way to invest it. They can be sold the dream if your numbers and organization is sound.
I just do not understand some people.
Identifying the Right Venture Capital Firm Partner
28 May 2011 | Category: venture-capital | Author: admin
Venture capital firms are comprised of individual partners. These partners make investment decisions and typically take a seat on each portfolio company's Board. Partners tend to invest in what they know, so finding a partner that has past work experience in your industry is very helpful. This relevant experience allows them to more fully understand your venture's value proposition and gives them confidence that they can add value, thus encouraging them to invest.
Fortunately, most venture capital firm websites list their partners with great pride. Each partner typically has a bio that includes their educational credentials, business accomplishments and investments that they have made. In identifying the right venture capital partner to contact for your company, try to find the partner that, from their background, will truly grasp the opportunity and can really add value.
Once you have identified the most appropriate venture capital partner, it is important to figure out how to contact them. As partners are often inundated with business plans, having a personal connection and/or introduction is often the difference between getting heard and not getting heard. For instance, if you attended the same university or worked at a company that they did, call or email them and use this as the introduction. If not, it is important to network. Call people that may have been associated with the partner and ask for an introduction.
Getting the partner's attention is the first key hurdle in raising venture capital. The second hurdle is getting them to believe in the opportunity, and finally, giving them the enthusiasm and information needed to convince other partners in their firm that investing in your venture represents a sound investment.
Venture Capital Negotiating Issues
10 Apr 2011 | Category: venture-capital | Author: admin
When companies enter into negotiations with venture capital firms, there are several issues which need to be defined and agreed upon. This article describes the key issues.
Valuation. Valuation is the most prominent negotiating issues. Valuation is the price of the company in which the venture capitalist invests. Valuation determines what percent of the company the investor is buying for their capital.
Timing of the Investment. Many investors will commit a large amount of capital, but will contribute that capital to the companies in installments. Often, these installments are only made when pre-designated milestones are met.
Vesting of Founders' Stock. Like capital, investors often prefer that stock is given to company founders and key employees in installments. This is known as vesting.
Modifying the Management Team. Some investors insist that additional or substitute management employees be hired subsequent to their investment. This gives investors additional security that the company will execute on its business model. An important issue to negotiate with regards to modifying the management team is the amount of stock or options that will be issued to new management team members, as this will dilute the holdings of the founders.
Employment Agreements with Key Founders. Venture capitalists typically do not want companies to have employment agreements that limit the circumstances under which employees can be fired and/or set compensation and benefits levels that are too high. Other key employment agreement issues to be negotiated with venture capitalists include restrictions on post-employment activities and employee severance payments on termination.
Company Proprietary Rights. If the company has an important product with intellectual property (IP), investors will want to ensure that the company, and not a company employee, owns the IP. In addition, investors will want to ensure that new inventions be assigned to the company. To this end, investors may negotiate that all employees must sign Confidentiality and Inventions Assignment Agreements.
Exit Strategy. Investors are very focused on how they will "cash out" of their investment. In this regard, they will negotiate regarding registration rights (both demand and piggyback); rights to participate in any sale of stock by the founders (co-sale rights); and possibly a right to force the company to redeem their stock under certain conditions.
Lock-Up Rights. Venture capitalists may require a lock-up period at the term sheet stage. The "lock-up period" is typically a 30-60 day period where the investors have the exclusive right, but not the obligation, to make the investment. Investors typically conduct due diligence during this time without fear that other investors will pre-empt their opportunity to invest in the company.
Each of these issues are critical when raising venture capital, since the outcome can significantly impact the success of the venture and the wealth potential of the company founders and management team. Because venture capitalists are very knowledgeable regarding these issues, and have great skill in negotiating on them, companies who are raising venture capital should seek advisors who also have this experience and expertise.
Going Public - Is it The Best Option For You?
21 Feb 2011 | Category: venture-capital | Author: admin
Know what an IPO is? An initial public offering (IPO) is basically a company's first sale of stock to the public, which is why it's also called "going public." Usually - but not always, an IPO involves the stock from a young and not-too-well-known company. The most compelling reason to go public is to raise cash for operating capital. But there are strings attached...
After the demise of the dotcoms, the scandals of Enron, WorldCom, Tyco, and Global Crossing, the landscape for IPOs has changed. Taking a company public is no longer an automatic decision - even for those companies who are good candidates. Oh, there are lots of reasons to go public - access to capital, increased liquidity, employee compensation, publicity, and prestige. But before you jump on the "public" bandwagon, make sure you've considered the following points.
Have a golden parachute handy?
Anytime you take on a money partner, you risk losing control of your company, and maybe even the company. Jim Clark, before his huge success with Netscape, was essentially forced out of his first venture, Silicon Graphics, by the venture capitalists he initially partnered with to get started.
Some entrepreneurs chafe at the constraints of being a public company. Richard Branson of Virgin is a good example. After taking his company public, Branson discovered he really did not like sharing profits and working with outside directors of the company. Branson and his management team eventually executed a management buyout to take the company private again.
Research any anti-takeover measures available and build them into your IPO, if possible. Remember, though, investors won't be willing to pay top dollar for a company where the management can't ever be replaced.
Sexy enough?
Your company must have an "investor appeal." This means that your industry, services, or products are extremely popular with consumers, and therefore, very attractive to investors. If your product or service isn't "sexy," going public is not for you because brokerage firms probably won't even talk to you and a privately sponsored IPO -which is an option - is really not for the weak at heart.
Do you know your "why"?
A business needs a reason to go public, for investment in future growth. If it currently is cash rich and has no intention of explosive growth that requires more capital, there is very little benefit either for the owners, or future shareholders. Also, unlike in the heady days of dot-com-ville, you have to justify the infusion of cash; don't expect anyone to look favorably on corporate fitness centers and fancy desks!
Are you comfortable with "sharing" - profits and information?
In exchange for the infusion of cash which is generated from an IPO, you agree to give up a portion of your profits which are returned to the investors. Essentially, you're sharing the rewards with your partners, as they come in and assume some of the risks for you.
Some companies resist going public because of the loss of confidentiality for company operations, policies, and profitability. This is especially important for companies who depend on proprietary technology to create its goods or services.
Do you have a good business plan?
Part of the IPO process is completing the disclosure document, which is very important in convincing investors of the viability of your IPO. Without a well-defined business plan in place, you may find it difficult to fully answer the disclosure document questions, and investors may find your offering less attractive. The business plan you'll need can run from 25 to hundreds of pages, and can cost $5,000 - $20,000 to produce.
How much more reporting are you willing to do?
Public companies are often put under a microscope by investors, customers, competitors, regulators, etc. There's also a tremendous push these days for greater transparency with financials. The public market is demanding not just the numbers, but how those numbers are derived. As the head of a public company, you will be required to file reports with the SEC, any exchange you list on, and comply with any applicable state securities law. All these reports cost money to produce and also provide information to your competitors.
Are you a lone wolf?
If you are successful with your IPO offering, someone else will own a share of your business - and they may want a say in how things are run. You will be subject to their ideas, opinions and demands on how you should run your company. If you are not willing to share control with your new partners, or if you don't trust their decisions, this loss of control is the deal breaker for you. And if your business relies heavily on the ability of one or more key personnel, realize that going public can put huge restrictions on these people.
Got an extra million lying around?
An IPO costs money! A typical firm may easily spend $750k on direct expenses related to an IPO. And that doesn't even consider the indirect costs of management time being spent on IPO, disruption of business while preparing the IPO, etc. You'll also need a good outside team - IPO consultants, accountants, attorneys, underwriters and PR specialists - none of whom work for free, of course!
What if you don't have free time to begin with?
Most people are surprised at the amount of time it takes - outside your normal business operations - to prepare your offering. During this time-intensive process, your role of actually managing the company may suffer. You'll be meeting with, and giving presentations to, potential investors. And the toll on your personal life can be significant - preparing to go public will eat into your time for family and friends. Yes, it's only short-term, but it may be as long as one year, and you do need to be prepared for long, sometimes grueling, 13 to 15-hour days.
Is your management style conducive to shepherding employees through the changes?
Many business owners report that the process of going public changes the internal dynamics of a company. It's important to maintain open lines of communications among your staff during this time. Once you've gone public, don't let the staff feel they need to worry about day-to-day fluctuations in stock price, distracting them from their jobs. And sometimes, employee benefits programs are modified after an IPO, which can also make employees nervous.
If your current management style is very close-to-the-vest and you usually only share information on a strict "need-to-know" basis, the productivity of your employees post-IPO may suffer severely. A more open management style is more conducive to successful post-IPO operations.
[A special thanks to these experts who helped me compile this list: Willie Crawford, Andy Beard, Dien Rice, Ankesh Kothari, Richard Dennis, Stephan Iscoe, Jeff Burnham, Members of The Seeds of Wisdom Business Forum, and The Willie Crawford Forum. M.M.]
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