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Bill McCready
The Language of Venture Capital
When seeking financing for your venture, it's easier to gain the
confidence of potential investors if you speak, or at least
understand, their language. For instance, entrepreneurs are
sometimes surprised to learn that "Venture Capital" is not a
catchall phrase meaning "funding". In fact, it's a specific type
of funding with definite terms and guidelines.
The following is a sampler of terms you may come across as you
go through the funding process.
Venture Capital
+ The process by which investors fund early stage, more risk
oriented ventures.
+ Differs substantially from "traditional" financing in the
following ways:
+ Funding provided to new or existing firms with potential for
above-average growth.
+ Often provided to startup and other emerging enterprises
because they lack the collateral, track record, or earnings
required to get a loan.
+ The investment, typically requiring a high potential of
return, is structured so that it can be liquidated within a
three to seven year period.
+ Then an initial public offering may take place, or the
business merged or sold, or other sources of capital found.
+ Entrepreneur typically relinquishes some level of ownership
and control of the business.
+ Venture capitalists typically expect a 20-50% annual return
on their investment at the time they are bought out.
+ Typical investments range from between $500,000 and $5
million.
+ Management experience is a major consideration in evaluating
financing prospects.
Stages of Development of a Business
+ Seed Capital. Source of funding for the early stages of a
start up venture where the product, process, or service is in
its conceptual or developmental phase.
+ Start Up. From founding the business to the beginning of
operations and the generation of revenue.
+ First Stage. Initial growth phase, funded by the initial
capitalization. Management and operations are in place, and
markets initially identified are being penetrated using
available resources.
+ Second Stage. The business seeks to expand its product line,
expand its facilities, identify and penetrate new markets, and
continue the growth phase.
+ Third Stage. The business has established itself in its
target markets.
+ Mezzanine Financing. Financing provided, usually by private
investors or venture capital firms, prior to a company going
public, or initiating its next stage of financing.
+ Private Placement. An offering of debt, equity or limited
partnership interests to a small number of investors (generally
35 or fewer) on a "private" basis. Exempt from the registration
requirements of the securities laws.
+ Dilution. Either the percentage reduction of ownership in a
company resulting from the sale of additional shares of stock,
or in the difference between the price paid by investors in
either a private-placement or public financing.
+ Due Diligence. The process of investigation by venture
capital firms and other investors of a company, its business,
and financial plans, prior to proceeding with an investment.
+ Feasibility Study. A study that evaluates a proposed
venture's potential for success.
+ Equity Stake. An equity ownership position that is provided
to a funding source as compensation, or additional compensation,
for providing management consulting, financing or miscellaneous
services.
+ Sweat Equity. The value assigned to the entrepreneur's
contribution or investment of time and effort in the venture.
Find a Champion
If you have not raised money for a venture before, you will find
this a very interesting experience. People who love your idea,
will run to the exits when you ask them for money.
Find an experienced money raiser or gatekeeper for your
business. Have your management team interview at least 5
candidates, and do your due diligence. You want someone with
direct connections in the field of your business that has
successfully raised money in the past for your type of company.
While the money sources will want to hear directly from your
team, the use of a properly selected gatekeeper will help you
with introductions and champion your cause. Choosing the wrong
gatekeeper can delay receiving funds or even totally wipe out
your deal.
Realize that fund raising is a never ending process as your
company grows, and the end of one round of funding is just the
beginning of the next round.
Good Luck and Happy Hunting! You can expect to invest at least
six months in finding your first round of funding and three to
six months for your next round.
Venture Planning Associates, Inc., http://www.ventureplan.com
Tel. 858.457.3434 / efax 425-955-7531
capital@ventureplan.com
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