Part IV of Finding Funding for Your Venture

Revised Finding Funding Post

Making the Deal

What happens after you have met with potential investors and they seem to like your plan? You are probably pretty excited, but now is not the time to lose your cool. In fact the hardest part is still to come. There are countless ways to Make the Deal, the following are some expectations and by no means all inclusive as every deal is unique.

Expect and be ready for

You are going to need an attorney and a professional negotiator. Do not be a fool and attempt to do on your own. You will be dealing with professionals who do this for a living. The Entrepreneur is at an extreme disadvantage. However, you as the founder are responsible for knowing the details of the deal.
Investors will begin to place a value on your company. It is highly unlikely the value will be what you expected (especially if this is the first round of funding). The focus will be to determine how much your equity is worth and how much is to be purchased by the investor. Some methods are:
- Company comparables – used more often with newer ventures, biotech or incubator type companies that do not have established revenue streams
- Discounted cash flows
- Venture Capital Method

Investors will perform due diligence on you, your management team, your history, your company. This may take 4-12 weeks. Have detailed resumes and 10-20 references ready.

Do your due diligence. Ask for references, talk to some of the CEO’s of companies deals that went well BUT also talk with some that did not go well. You must determine their reputation, how they react to adversity, and their management style. It is a given – your investors will be involved with the management and operations of your company. If they become majority owners – can you work with them?

It may take 6 months or longer for this process.

Getting a “NO GO” is far more likely than receiving a “YES”. Only 2-4 % of ventures seeking funding will actually receive an offer (Terms). Always have a backup source in the pipeline.

The Entrepreneur’s Advisor™ can assist you in valuating your venture or verifying the value given to you by investors. Our proprietary software can also estimate or verify the IRR and ROI of the capital being sought after. We can also assist in due diligence research.

Potential Issues for Innovators, Inventors and Entrepreneurs

Investors may want equity ranging from 20% to 75% of the company.
Investors may want a 40% plus rate of return.
Investors may want control of your Board of Directors and/or key management positions.
Types of funding:
- Equity financing
- Debt financing
- Debt and Equity financing

Intellectual Property (IP) ownership

Capital staging: It is rare that the entrepreneur receives all the capital required for the business plan. Staging capital is a method for investors to hedge the bet they are placing on you and allows them to walk away of your venture is not meeting expectations. However, it provides a very positive incentive to exceed expectations and encourage effective use of funds.

It is likely that you will only receive enough to reach the next stage
Make sure terms do not change for next stage

Timing, conversions, interest rate in debt or shares, stock registration rights, rights of first refusal to investor for additional funding, vesting schedules, payment of fees associated with putting the deal together, co-sale provisions, anti-dilution protection, forced buyouts, key person insurance and many others. A good source for information on investor capital and terms can be found at:

Dow Jones Financial Services Venture Capital News

Entrepreneur Traps

Accepting terms without negotiation. Do not be bullied – everything is subject to negotiation and your image as a leader and manager is highly dependent of this.
Opportunity costs – spending too much time seeking capital and not focusing on the business. It may cost you $50k to 150k to obtain capital. Where would your business be if you spent this money on developing the business?
Underestimating other costs – legal, travel, financial etc.
Greed – finding funding = giving up ownership, control. Being greedy results in a NO
Impatience – sometimes it seems that nothing goes as quickly as it should. Maintain your composure.
There is no deal until the check has cleared the bank. A handshake or promise is not a deal.

Summarizing the Fund Raising Process for Entrepreneurs

I am asked many times each week if I can help someone find funding or are willing to work for possible equity in a venture. Unfortunately the vast majority of entrepreneurs do not comprehend the planning and effort it will take to achieve their goal.

This blog was written to help educate newer entrepreneurs understand that raising capital for a venture is a very long, costly, intensive and arduous task.

Key components of finding funding for your venture include:

Manage your passion to be able to think through your idea.
Raising money takes money! No one but the founder is likely to work for sweat equity alone. Professionals cost money.
Develop a well constructed Business Plan and “Road Show” that focuses on the opportunity and company. Have it reviewed by a 3^rd party.
Networking is critical. You are looking for introductions to people who can provide you a referral in order that someone else listens to your “Road Show”. The process is relationship based. The referral won’t be the result of an e-mail you must get on the telephone and get out and meet people.
Avoid service providers who make guarantees of raising capital.
Avoid business plans done off templates for less than $500.
Understand you are asking professional investors to make a “bet” on you. The higher the risk the more control and equity you will give up for funding.
Believe in yourself. If you don’t believe in yourself, no one else will either.
Check your EGO at the door.
Engage the services of The Entrepreneur’s Advisor™ to be your guide from idea conception through business fruition. The money you will save using our experience in starting a business will more than pay for itself in a short period of time.