RAISING VENTURE CAPITAL
Equipment. The supply of products increases as demand for them decrease, and prices decline. As a result, a company can take advantage of lower prices to purchase equipment.
Inventories and Technology. Those not prepared for a recession, and those with recession-sensitive livelihoods are forced to file for bankruptcy protection or liquidate inventories. This further increase available supply and further lowers prices. Liquidations provide opportunities in the form of inventories, turn-key operations and technology that would not normally be available. A company may be able to acquire an entire manufacturing operation at a fraction of the price of a new one. It may also be able to save time and money by acquiring technology it would otherwise have to develop.
Labor. As companies are forced to cut back highly talented employees flood the labor market. Your company's problem may not be how much it costs to hire the best employees, but how to select the few you need from among the many who are available.
Space. The market for commercial rental space becomes congested as landlords and tenants find themselves with too much space on their hands. Landlords and tenants compete with each other to lease or sublease space. With inventory high and demand low, rates drip. Your company should be able to find the space it needs on great terms.
Service Providers. Accountant, bankers, lawyers, recruiters and many other service providers increase their efforts to keep their clients happy. These service providers must find ways to add value to your enterprise. They must be able to offer you high-quality service, business expertise, access to financing sources and efficiency. Ask your service providers to help you and make sure they do it efficiently. Share with them your goals and plans and expect them to introduce you to potential investors and to find opportunities for you. You accountants, bankers and lawyers should be part of your team even beyond the services they traditionally provide.
Money. We have already seen the Federal Reserve Board lower interest rates substantially, and banks have followed suit. While the intent is to increase borrowing (and therefore spending), this action also has the effect of encouraging investors to invest in stocks rather than more conservative and lower-paying instruments. An entrepreneur with a well-conceived business plan and a good idea should be able to attract investors.
Obtaining Financing for Your Company. Whether your company is a startup seeking "seed" capital or a stable emerging company seeking operating or growth capital, it will probably need outside financing to take advantage of the opportunities available to it. You have several financing options. In addition to traditional secured, asset-based lending that one normally associates with lending institutions like banks and insurance companies, there are less-conventional alternatives such as corporate partnering, licensing and franchising, and merchant banks. Another option is venture capital. Venture capital is not a panacea, but for the right company it may be the difference between success and failure.
Is Your company a Candidate for Venture Capital? Venture capitalists generally look to the same factors when analyzing a potential investment. The weight a particular venture capitalist gives one factor compared to another varies with his or her experience and area of interest. Generally, the list of factors is the following:
The Product. Is the technology, marketing concept or product application new? Is the market rapidly growing and part of an emerging industry? What barriers to entry exist that will give this product a head start (and therefore greater profits) over the competition? If the idea or product is a good one, but anyone with $100 can enter the market, the idea is not likely to receive venture financing. The investment will be more attractive if competitors will need a long time or a lot of money to catch up, if the product is truly unique so that potential substitutes are not available, if customers face high costs of switching from your product to a competitor's or if you have special access to marketing channels.
Quality of Founders. Are the founders competent, experienced and of high integrity? The importance of this factor cannot be overstated. A venture capitalist will walk away from an otherwise attractive company if he or she has questions about the character and competence of a founder. One of the tried-and-true adages of the venture capitalist is "be careful when choosing your partners."
The most important thing you can do is to associate yourself with advisors who have experience with, and access to sources of venture capital, They can often help you make a "short list" of possibilities and even hand deliver your business plan in order to boost credibility and distinguish it from the many others a venture capitalist receives. They can also make you aware of opportunities and forums to present your company to sources of venture financing which are not generally available to other companies.
Maturity of Product. Is your product or process beyond the early prototype stages? And have you adequately protected your idea or technology by filing patents or copyright registration, or through trade secret agreement? A venture capitalist will prefer proven technology, even if the application of the technology has not yet been established. However, if you have not taken adequate steps to protect your ideas, you may not have an asset that is of interest to venture capitalists.
Exit Strategy. Will your company be in a position to go public or be sold in a reasonable time frame? Initial public offerings and sales of the company are the classic exit strategies for founders and venture capitalists. Venture capitalists need to obtain a high compounded rate of return on their investment in order to justify the risks they take in financing unproven emerging companies and to satisfy the requirements of their investors. If no exit strategy is in sight, the venture capitalist will be concerned that he or she will have to commit funds indefinitely.
Added Value. Does the venture capitalist have experience or technical experience that would add value to your company? Many venture capitalists have technical backgrounds and are industry leaders in a particular technology. They will look for companies only in their fields so that they can bring more tan money to the table.
Share in Management. The venture capitalist will insist on substantial, if not controlling, participation in the management of your company. Once you become comfortable with this idea, you need to find a venture capitalist with whom you can work and who wants to work with you.
How to Select a Venture Capitalist. Entrepreneur's Guide to Venture Capital Sources, 2005 Edition, lists 850 venture capital funds. How will you know which ones to approach with your business plan? How will you know who among them might be interested in, or bring value to, your company?