Venture Capital Tips
The most important of my Venture Capital Tips is to have a solid and effective Business Plan, if you are a start-up or development stage company.
Of course, just a good business plan is not going to get you funding. But once you have their attention, then comes time to put on your game face and negotiate. Show confidence and expertise in your field.
If you look desperate and don't at least try to negotiate with them, they will smell blood. After all, they aren't called vulture capitalists for nothing.
Here are some things to keep in mind when talking with Venture Capital Firms for funding:
1. Talk with and meet with as many Venture Capital Firms and Hedge Funds as possible, because you don't know which one's will show interest and possibly fund your company. Some have become very specialized in Reverse Merger Funding. In other words, keep as many irons in the fire as possible. Also, if you are lucky enough to have more than one Venture Capital Company interested in funding, you can choose the one that offers you better terms.
2. Find out if they have funded any companies that are competitors of yours or if they are currently considering funding a company that could be considered a competitor. Ask them to sign a non-circumvention and non-disclosure agreement. Although it is always hard to know if they honor it, most firms do. This way they will think twice about disclosing information received from you if they fund a competitor six months after reviewing your business plan. If you feel they do have too close a connection with your competitors then you might be wise to drop them as a possible funder.
3. Try to set the guidelines early on so there are no last minute surprises. This is one of my most important venture capital tips. Agree on the equity percentage they will take of your company. Find out if they want board representation and if they require anti-dilution provisions. It is best to find out this information sooner rather than later. The questions you ask during the fund raising process will show your thoroughness and attention to detail. Also, how you negotiate with potential investors reveals to them how savvy and knowledgeable your management team is overall. Negotiate like a lion not a lamb. Just be careful not to kill the deal with a potential investor that is offering fairly reasonable terms.
4. Push the venture capital firm for a term sheet in which they agree to subsequent rounds of financing based upon milestones of gross or net profits. It gives you a built in funding source if your meet certain goals. It's great to have funding lined up for your second round so you don't have to go through this painful exercies again. I am notorious for pushing deals to the term sheet stage as soon as possible. Until you get to the term sheet stage, its all just talk. Even if you do have a term sheet though, there is still no gaurantee that you will get funded. Revisions and adjustments can be made so everyone is on the same page. At least with a term sheet the deal terms take shape and you are moving the venture capital investor toward your goal of raising capital. It lessens the chances for misunderstandings and gives everyone a clearer picture of what each party is looking for from the other. This is also one of my most important venture capital tips.
5. Time to call in legal counsel. At this stage you have one or more interested investors, and you have a term sheet. Either before or immediately after you get the term sheet obtain competent legal advice. The money you spend on legal counsel to help you with the deal terms and understanding all the implications is money well spent. It will acutually save you money and/or equity in your company. Just make sure counsel knows what "clawbacks" and "super preferreds" are, otherwise they won't be that helpful.
6. Always ask for a "Clawback". A clawback allows you to buy back shares from the investor at a minimal price if you achieve a certain milestone. For instance, if you reach $8,000,000 in gross revenues in the second year after funding, then your company may repurchase 10% of the shares from the private equity firm for $.10 per share. Be proactive in negotiating terms with the venture capitalists.
7. Can they also be a Strategic Partner or introduce you to potential Strategic Partners? In addition to being a funding source, are they also a strategic partner that may be able to help you with sales through either another company they have funded or through an overseas contact. Most Venture Capital Firms have great contacts and connections. Look at them as a funding source as well as a networking source. Maybe they can help you with advertising, marketing, manufacturing or internet sales. Learn from each potential investor you meet or talk with and you can pick up quite a few of your own venture capital tips.
I guess what I have been trying to say here is you have to be actively engaged in the money raising process. Investors like to see a management group with "fire in their belly". Be persistent and aggressive not only in your search for venture capital but also when it comes to negotiating financing terms.
Of course, just a good business plan is not going to get you funding. But once you have their attention, then comes time to put on your game face and negotiate. Show confidence and expertise in your field.
If you look desperate and don't at least try to negotiate with them, they will smell blood. After all, they aren't called vulture capitalists for nothing.
Here are some things to keep in mind when talking with Venture Capital Firms for funding:
1. Talk with and meet with as many Venture Capital Firms and Hedge Funds as possible, because you don't know which one's will show interest and possibly fund your company. Some have become very specialized in Reverse Merger Funding. In other words, keep as many irons in the fire as possible. Also, if you are lucky enough to have more than one Venture Capital Company interested in funding, you can choose the one that offers you better terms.
2. Find out if they have funded any companies that are competitors of yours or if they are currently considering funding a company that could be considered a competitor. Ask them to sign a non-circumvention and non-disclosure agreement. Although it is always hard to know if they honor it, most firms do. This way they will think twice about disclosing information received from you if they fund a competitor six months after reviewing your business plan. If you feel they do have too close a connection with your competitors then you might be wise to drop them as a possible funder.
3. Try to set the guidelines early on so there are no last minute surprises. This is one of my most important venture capital tips. Agree on the equity percentage they will take of your company. Find out if they want board representation and if they require anti-dilution provisions. It is best to find out this information sooner rather than later. The questions you ask during the fund raising process will show your thoroughness and attention to detail. Also, how you negotiate with potential investors reveals to them how savvy and knowledgeable your management team is overall. Negotiate like a lion not a lamb. Just be careful not to kill the deal with a potential investor that is offering fairly reasonable terms.
4. Push the venture capital firm for a term sheet in which they agree to subsequent rounds of financing based upon milestones of gross or net profits. It gives you a built in funding source if your meet certain goals. It's great to have funding lined up for your second round so you don't have to go through this painful exercies again. I am notorious for pushing deals to the term sheet stage as soon as possible. Until you get to the term sheet stage, its all just talk. Even if you do have a term sheet though, there is still no gaurantee that you will get funded. Revisions and adjustments can be made so everyone is on the same page. At least with a term sheet the deal terms take shape and you are moving the venture capital investor toward your goal of raising capital. It lessens the chances for misunderstandings and gives everyone a clearer picture of what each party is looking for from the other. This is also one of my most important venture capital tips.
5. Time to call in legal counsel. At this stage you have one or more interested investors, and you have a term sheet. Either before or immediately after you get the term sheet obtain competent legal advice. The money you spend on legal counsel to help you with the deal terms and understanding all the implications is money well spent. It will acutually save you money and/or equity in your company. Just make sure counsel knows what "clawbacks" and "super preferreds" are, otherwise they won't be that helpful.
6. Always ask for a "Clawback". A clawback allows you to buy back shares from the investor at a minimal price if you achieve a certain milestone. For instance, if you reach $8,000,000 in gross revenues in the second year after funding, then your company may repurchase 10% of the shares from the private equity firm for $.10 per share. Be proactive in negotiating terms with the venture capitalists.
7. Can they also be a Strategic Partner or introduce you to potential Strategic Partners? In addition to being a funding source, are they also a strategic partner that may be able to help you with sales through either another company they have funded or through an overseas contact. Most Venture Capital Firms have great contacts and connections. Look at them as a funding source as well as a networking source. Maybe they can help you with advertising, marketing, manufacturing or internet sales. Learn from each potential investor you meet or talk with and you can pick up quite a few of your own venture capital tips.
I guess what I have been trying to say here is you have to be actively engaged in the money raising process. Investors like to see a management group with "fire in their belly". Be persistent and aggressive not only in your search for venture capital but also when it comes to negotiating financing terms.
