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How To Get Your Share Of Venture Capital Financing

Wall Street is flourishing at unheard-of levels and is creating record amounts of wealth for many investors. Because so much cash is in the market, there has never been a better time for entrepreneurs to begin that long-dreamed-of business venture or take that next major step in growing the business.

Most entrepreneurs cannot finance growth alone--they need outside sources of capital to get their ideas or growth strategy off the ground. Finding the right sources is a top priority, followed by favorably negotiating financing terms and structuring future monetary rewards. While these steps can be lengthy and complicated, they are critically important because failure to execute them correctly could rob you of the payoffs you have worked so hard to achieve.

Investors tend to have a major advantage because they have the funds--and you don't. More sophisticated investors, such as venture capitalists and wealthy individuals (nicknamed "angels"), also have a wealth of experience from many previous equity placements.

Level the playing field with an edge of your own--a team of professional advisors who can understand your operational and financial goals, provide the knowledgeable guidance, handle complex negotiations with investors and successfully complete the transaction.

Follow these points:

  • Start Early. It always takes longer than you think to raise funds. To keep your leverage strong, do not wait until you start running out of cash before seeking investors.
  • Use Your Network. To get the attention of investors who are inundated with proposals, seek referrals from your network of contacts who already know investors and can credibly say, "You ought to take a look at this company."
  • Create a Realistic Business Plan. Develop a business plan that is well organized and believable, especially in financial projections and underlying assumptions. Use your advisors to balance your enthusiasm and optimism from the perspective of an investor who will immediately identify weaknesses. Your executive summary has to get the reader's attention.
  • Know How to Present Your Company. Verbal communication skills are a must for any entrepreneur who meets with investors and has to talk about the company in an effective way.
  • Understand Your Weaknesses. Investors will be sure to flyspeck the strengths and weaknesses of your management team. Investors will want to be assured that you are not a control freak and are willing to build a team with others.
  • Keep Your House in Order. Investors will perform extensive "due diligence" by scrutinizing the smallest details of your financial and operational data. Before this occurs, identify and correct any problems you find. Be organized.
  • Be Responsive. Investors do not have the patience to tolerate delays on your end. They often will cause delays because of busy schedules or as a negotiating tactic. Be very responsive--and keep your cool.
  • Don't Be Intimidated by Financial/Legal Terms. There is a thicket of financial and legal terms in financing paperwork. In addition to the "price" of the money, you need to know the difference between the terms of common or preferred stock. Also know how "liquidation" provisions may determine future proceeds if you plan someday to sell the company, and to how much cash you may be entitled.
  • Understand "Antidilution" Provisions. Provisions of this sort can change pricing if you raise more money at a price-per-share lower than that paid by investors. Pay attention to whether the investor gains rights to select board members or veto major operational and financial decisions. Wait to see all the important financial and legal terms in writing before responding to a proposal. Use your team of professional advisors--accountants and lawyers--to help you "level the playing field" at this critical stage.
  • Use Discernment When Choosing. Do not reveal that you desperately need funds or that the investor is the only "game in town," or it will be used against you. Overcome this obstacle by developing alternative funding sources, creating the impression that your company is desirable, and negotiating one proposal against another.
  • Check Quality. Do not respond to a proposal based solely on price. What often sets apart higher-quality investors is the added value they bring through a longer-term business relationship. Investigate where investors have made other infusions of capital, and talk to your counterparts to gain a better understanding of issues "down the road."
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