Having worked with many venture capitalists, I can tell you they want to invest and generate returns for their shareholders and they want to keep replicating this model i.e. invest then exit and do it over and over again.
So, where is the road block?
I do not believe there is any road block to the venture capitalists; they generally all have websites and can be found with a simple Google search. The truth is most entrepreneurs are too early and completely out of touch with the investment criteria for a venture capital fund; it is as simple as that and the reason why so many entrepreneurs are not successful raising money.
In traditional terms, you need to crawl before you can walk and spend a lot of time understanding the investment criteria and risk profiles of different types of investors e.g. family, friends, angels, corporates and venture capitalists.
Did you get that hint… there is a cycle in everything we do in life and this includes capital raising cycle…
If you are in a road block situation; then it is highly likely you are heading down a one-way street in the wrong direction.
Start with family and friends as your first round of capital; because they know you and will most likely invest for this reason alone and if they have available cash. Also, if you spend their money wisely and achieve a few milestones; then there is a good chance to attract an angel investor or two. Angels are also typically connected to other angel and corporate investors; so it is in their best interest once the angel has capped his/her investment in your business; the angel will seek to invite others and so the line of investment continues… it is after this point and a few rounds of capital the venture capitalists will have an interest in your business because by this time your business should be what we call “investment ready”.
Being “investment ready” means a lot more than having an awesome business plan and being able to tick the boxes during the due diligence process; there are so many parts and too many to list here and it will be different for each type of investor and sometimes even when you do meet the criteria; the answer can still be no!
No, for many reasons such as market demographic may not right for the venture capitalist, or the angel wants more equity then what is on offer and sometimes the deal breaker can come down to relationship, values and culture fit. The biggest deal breaker I see too often is the entrepreneur is not realistic and has control issues. So, here is a quick test for the entrepreneur… if you answer “yes” to the next question then most likely you will not raise capital.
Do you want to own more than 51% of the company and be the CEO?
A great book I always recommend to entrepreneurs is Enterprise & Venture Capitalist by Christopher Golis and it will take you through the cycle of raising money and is full of helpful information about getting your business investment ready. You will also learn about the California Model and why owning more than 51% in your company is a really bad strategy.
A start-up company I am currently working with has adopted many of the principles mentioned in Golis book and when they went to market to raise $275,000 about twelve months ago they successfully raised $400,000 which is well over their target and needless to say they have kicked some major milestones and now ripe for more sophisticated investors; maybe too early for the venture capitalists but at least they are heading in the right direction.
So, where do you start?
Well, writing a business plan with an investment offering is important and it does not need to be the perfect plan before you start shopping it around town. My recommendation is always seek assistance of a “trusted advisor” be it your accountant or lawyer. You want someone who understands corporate finance and what’s involved when issuing shares in a private company to investors. Also, you need to check what securities laws need to be considered when it comes to raising capital; do you need a prospectus or can you rely on any provisions or exemptions in the laws when raising money form the public. In Australia, entrepreneurs can utilise ASIC Class Order 02 / 273 to raise money without a prospectus.
Best of luck with your fund raising strategy and remember these important elements:
- Pick up a copy of Christopher Golis book… best advice you will get for about $60
- Understand the investment criteria and risk profile of different types of investors.
- Resolve your control issues… do you want to own 51% or more of a company worth very little OR do you want to own a small percentage of a company worth many millions.
- Is your company investment ready and this will vary depending on the phase of your business e.g. seed, start-up, early stage, expansion, merger, reconstruction, etc.
- Engage your trusted advisor when developing your business plan and seek their professional guidance along the way.
- What laws do you need to consider as a private company when seeking capital from investors.
- Do you have an exit strategy to return funds to investors at a higher price and if share buy-back is your only strategy; then maybe you need to re-visit your control issues again and ask yourself how you intend to facilitate the share buy-back.
- What venture capitalists typically want is a well developed exit strategy and it takes the investment of family, friends, angels and corporates to get you there.
Want to learn more about capital raising without a prospects… download the free PDF copy of APCX Standards from the Australian Private Companies Exchange®.