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Venture Capital Process
Successful venture capital funding is a process of reducing perceived risk to the lowest possible level. The funding source has fiduciary responsibility to its investors. This requires a thorough " due diligence review " of all aspects of your business.
Venture capital sources will often require you to justify every assumption made for a projection five years into the future.
Your business plan must show the investment parameters requested, as well as a plan to liquidate the investor's position (the exit strategy ) at a later date by either a payback formula, initial public stock offering (IPO), or plans for a merger/buyout by a major company.
In the U.S., there are currently more than 6700 venture pools , private firms, SBIC's and corporate investors, with over $200 Billion under management. With the globalization of the economy, there is easily five times that much venture capital available from worldwide sources.
Even so, more than 80% of all start up companies are funded through informal sources such as friends, associates, and private "Angel" investors .
Seven Levels of Research and Planning for Every Startup:
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Feasibility studies to determine whether a given venture should be attempted.
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The preparation of the business plan for the first round, and subsequent rounds of investment and operations.
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Determining optimum debt and equity ratios , and developing a financial plan.
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The development of an operational plan to get the project up and running.
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Development of prospective funding sources for both debt and equity.
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Preparation of project evaluations for both pre- and post-investment analysis.
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Planning investor and owner exit strategies through mergers , acquisitions, IPO's, LBO's, or ESOP's.
Venture Capital Stages
Early Stage Financing: $25,000- $250,000
Seed Capital : Primarily for product development and market research.
Start up Capital : Company has complete business plan, initial marketing begins.
Company is ready for business , but no commercial sales yet.
Expansion Financing: $500,000 - $5,000,000
First Stage : Funds for full scale manufacturing and sales.
Second Stage : Essential working capital for growing receivables, inventories, and payables. Company may not yet be profitable .
Third Stage (Also known as "Mezzanine Financing): Funds for major expansion, new products. Company near break-even .
Fourth Stage (Known as " Bridge Financing" ): Financing for a company expected to go public in the next six months. Repaid with proceeds of the IPO, and used to restructure previous equity positions.
Acquisition/Buyout Financing: $3,000,000 - $20,000,000
Acquisition : Funds provided to finance the acquisition of another company. Also high interest "Junk" Bonds may be used, or substantial debt from banks.
Leveraged Buyout (LBO): Funds provided to enable a management group to acquire a product line or business from a public or private company. Revitalized management may have as little as 1% of their own money invested.
To Learn More about you can acquire a business with unique funding techniques and understand the financial techniques used by the pros, see our special reports.
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"When we received first round funding ($5 million) the VC firm asked us to show them how our financial models were created. They wanted to use OUR TEMPLATE (which we developed from the 7 Venture Capital Reports) to help them evaluate alternative scenarios for their portfolio companies!" Michael .Lay, CFO, e-Commerce Internet Company
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