“Venture Capital for Dummies Cheat Sheet - For Dummies”

8/11/2019 Venture Capital for Dummies Cheat Sheet - For Dummies

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Cheat Sheet

Venture Capital For DummiesFrom Venture Capital For Dummies by Nicole Gravagna, Peter K. Adams

Navigating the world of venture capital as you seek to raise funds for your business can be scary and

confusing because of the high stakes. After you identify whether venture capital is a good choice of

funding for your company, you can begin to seek out investors. When seeking venture capital, you

need to know who the venture investors are and where to find them. You also need to take certain

steps to prepare yourself and your company for the scrutiny youll experience as potential investors

strive to learn more about your company as they decide whether it is a good candidate for venture

capital.

Determining Whether Your Company Is a Venture

CompanyIts very important to figure out the type of company youre building a

venture company or a lifestyle business so that you can decide whether

you should consider venture capital in your business growth strategies.

Sometimes, determining which category you fall into is hard. Even though

lifestyle businesses can make annual revenues into the millions, other things,

like the type of business and/or the rate of growth, make them unsuitable for

venture capital investment. The rate of growth and the ultimate size of the
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company are good indicators that can help you decide.

Characteristics of Venture

Companies

Characteristics of

Lifestyle Businesses

Areain

which

you do

business

National or global Local or regional

Growth

rate

Very fast (you plan to grow from a

brand new company into a nationwide

corporation in only a few years)

Slow (you plan to

open only one new

location of your

business each year,

for example)

Nature

of

business

Generally game changing businesses

based on new technologies

Businesses that sell

or deliver traditional or

conventional products

or services

Makes

money

for

Investors, founders, and owners Founders and owners

Future

plans

To be sold to another company or to

go public, with founders leaving the

business or assuming different roles,

based on need and qualifications

To be kept in the

family for generations

or to be sold when the

founder/owner retires


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Alternatives to Venture Capital Funding

Venture capital is a unique way of getting funding for your company. Because

venture investors look for companies that are growing very quickly and can

make several times the initial investment for the investors, venture capital isnt

right for every company. Fortunately, growing businesses have plenty of otherways to find funding. Here are just a few of the other ways you can get capital:

Debt: Many different kinds of debt are available for growing businesses:

business loans, government-backed Small Business Administration (SBA)

loans, and factoring loans that are backed by accounts receivable (in these

loans, you sell the businesss accounts receivable to a third party at a

discount).

Friends and family: Your friends and family are watching you create andgrow your business. Chances are they are proud of you and want you to

succeed. If they have the means, they may be interested in financially

supporting your venture.

Angel investors:Angel investors are like venture capitalists in that they

invest in early-stage companies to get a large return on investment. Unlike

venture capitalists, who fund businesses by using other peoples invested

money, angels work with their own money. As a result, angels have a lot

more freedom to invest in non-standard ventures.

Crowdfunding: Crowdfunding is a great way to pre-sell your product before

its ready to ship to customers. For businesses, crowdfunding doubles as a

way to get paid to market your new company or product.

Growing organically: When you grow your company organically, you take

out only what you need to survive and put the rest of your profits back into

the company as an investment. The bigger you can grow your company, the

more money it will return to you in the future.


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Preparing to Seek Venture Capital

Investors want to put their money in companies that will succeed. To select

such companies, an investor has the difficult task of predicting which

companies will flourish and which will fail. Investors like to see companies with

lowered risks. A business can lower the risk to success over time by

developing the business strategically and creating powerful relationships with

individuals and other businesses.

To make your business most attractive to investors, you must show that

you've hit milestones and lowered the risks that are inherent to start-up

companies. You don't need to have profits or even revenue yet. You just needto show venture capital investors that you are on your way.

Key tasks to building the business

Every business faces the risk that it will fail. Successful venture companies

are founded, grown, and sold to another business, or they go public in an

initial public offering (IPO). Between the day the business is founded and the

day it is sold, a business faces several major risks that stand in the way of

success. These risks are different for all businesses, but here are someexamples:

Creating a product that is unique and that is (or will be) in high

demand:A venture company must sell a product that solves a major

problem for a lot of people or businesses. If your product is commonplace or

needed only by a handful of people, you will have a great deal of difficulty

connecting with venture capital.

Fulfilling all legal, tax, and government regulations required to sell the


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product: Venture capitalists are professional investors. They will not work

with companies that have failed to build the business legally or without

meeting all formal government requirements.

Selling the product for a profit:A popular product isn't valuable unless it

can be sold for more than it costs to make. Making products profitable can

be especially tricky in cases where manufacturing or materials are very

expensive.

Hiring a management team that can grow the business: The team is

probably the most important asset for a start-up company. A great team can

change the product, redesign the marketing plan, and make new

relationships with strategic partners. A great team can overcome most

challenges to the business.

Finding and meeting investorsWhen your company is ready, you can begin to connect with investors.

Venture capital investors can be hard to find. When you are ready, look for

them in the following places:

Talk with your service providers. Bankers, lawyers, and accountants can

often connect their clients with local venture capital firms.

Network and attend pitch events. Pitch events are formalized

conferences designed to connect founders with investors.

Tap into the resources of business incubators(groups that

concentrate resources in one place and often provide discounted

services and free advice to young businesses) and mentors who have

raised capital in the past. These groups will be able to point you to the

right investors for your company. To find business incubators, go to the

National Business Incubator Association at http://www.nbia.org/.

Reach out to venture capitalists through their websites. To find more
http://www.nbia.org/


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about venture capitalists online, visit the National Venture Capital

Association at http://www.nvca.org. Remember, venture capitalists need

you just as much as you need them.

Crafting a Venture Capital Agreement That BenefitsEntrepreneurs and Investors

A venture capital investment is a partnership between an investor and a

growing company. To create a productive relationship that supports a rapidly

growing company, the partnership has to be good for both the entrepreneur

and the venture capitalist. To ensure that the agreement is fair and promotes

the interests of both parties, pay particular attention to the term sheet and toyour company's valuation.

Term sheets

A term sheet is a legal document that outlines the agreements made between

the investors and the company founders. When both sides agree on the terms

in a term sheet, the deal can close, and the investors effectively purchase

stock in the company. The term sheet contains multiple terms, but the most

negotiated are these:The type of investment (stock or convertible debt): Convertible debt is a

hybrid type of investment. The agreement begins as debt and then converts

to a purchase of stock if the money is not paid back. Generally, both sides

assume that the debt will convert to stock at an agreed-upon time. A regular

stock purchase is a transaction in which an investor purchases a number of

shares in a company for a predefined price.

The price of the stock, which is defined by the valuation of the
http://www.nvca.org/


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company. Determining the price of stock for a start-up company is not a

simple task. Many ways exist to determine a company's value. No matter

how much a founder calculates his or her company's valuation, the true

price of stock is the price that an investor is actually willing to pay.

Liquidation preferences for investors: Investment agreements are not all

created equal. One of the biggest factors that affect an investor's final

payout when your company sells is the liquidation preference. The

liquidation preference describes who gets paid first when the company is

sold. Liquidation can also occur when the company is dying, and assets are

sold to cut losses. People holding preferred stock typically get their invested

money back before everyone else.

Definitions for who controls the company: Investors can be given voting

rights so that they make executive decisions for the company as a group.Also, investors can sit on the board and have a major impact on decision

making. Determine up front how much power you want your investors to

have.

Valuation

The price of your company's stock is defined by the valuation of the company

and the number of stock shares that make up the company.

Risk is a key determiner of your ultimate valuation. The value of yourcompany is low when you first start up, because you face many future

milestones that have yet to be accomplished. Over time, you decrease your

risk by accomplishing these milestones. As you do so, the value of your

company grows a situation that is reflected in the cost of your company

shares. Investors will have to put more dollars into the company to buy the

same number of shares.

Because no perfect formula exists to determine the valuation of an


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early-stage (pre-revenue) company, expect to spend time

negotiating with investors to make sure everyone is on the same

page about valuation and risk (both the risks your company faces

and those it has already overcome) when investments are made.

Pitching Your Deal to Venture Capital Investors

Talking with venture capital investors about your company is different than

having a discussion with potential clients or customers. Investors want to

know how you will make money for your company and subsequently for them.

To impress these investors, be prepared with sophisticated materials that

communicate your company, product, and plans for the future. In short, youhave to get across that you are the founder that investors want to work with

for the next three to seven years. Your task is to show that your team is

capable of driving your company to success through integrity, hard work, and

adaptability. You do that by creating a pitch deck.

The pitch deck is the visual slide presentation that acts as a

backdrop to your oral presentation. When you are presenting your

deal in person, the pitch deck should be clean and nearly wordless.

After all, the images (typically infographics) serve to reinforce your

oral presentation. However, you may not present your deal in

person. In that case, a pitch deck can also be a PowerPoint file that

you e-mail to investors. For this pitch deck, the slides must be self

explanatory. (Yes, plan on creating more than one deck!)

All investor pitch decks for early-stage companies should include information

about these topics:

Company overview and the problem your product or service solves


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Your business model

Your target market and marketing strategy

The risks and barriers to entry your company must overcome

The size of your industry and your company's growth potential

Your team

Your exit strategy

Your valuation story

The ask, when you ask for investment from those in the audience

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“Venture Capital for Dummies Cheat Sheet - For Dummies”