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Raising venture Capital


  • pg 1

            Venkatesh Sridhar
Who is the guy?
Why are you here?
What is Entrepreneurship
What is Entrepreneurship
What is Entrepreneurship
         …to be an Entrepreneur
1.    India Shining
2.    No Boundaries
3.    Opportunities for ALL
4.    Abundant Resources
5.    Easier to Market
6.    Self Actualization
7.    Control your own destiny
8.    Learn from Mistakes
9.    Adrenaline Rush
10.   The Sky is limit..less
    …to NOT be an Entrepreneur
   Inconsistent income
   Risk of Failure
   Difficulty in attracting investment
   Cult Leadership is DIFFICULT
   Losing your identity
   Guerilla Marketing, Accounting, etc
   Financial Management
   Lack of Benefits, Perks, etc
   Negative Feedback
        My Childhood Dreams
   Play Cricket for India
   Beat Prakash Padukone’s record
   Own a Mac
   First Car to be a BMW
   Be the CEO of an IT company
   Be richer than Bill Gates
   Be India’s PM
Difficulty of success
            Difficulty of success
1.    Business Plan
2.    Sales
3.    Poor Operational planning
4.    Money
5.    Poor Management
6.    Lack of Exp. & Know.
7.    Lack of Focus + Commitment
8.    Poor Customer Service
9.    Inadequate HR Management
10.   Not taking professional advice - CAs,
      Lawyers, etc
            What is VC?

• private capital (equity)
• early-stage, high-potential, growth
• generate a return through an eventual
  realization event such as an IPO or trade
  sale of the company.
             Who is a VC?
• person or investment firm
• Former entrepreneur or Fin guy
• Types of VC:
  • Angel
  • VC
  • PE Investor
• At early stage startup – Angel
• Later stages of growth – VC
• Last stage – PE Investor
 How does the VC Industry work?
• Sources of Capital:
     Professional Venture Capital Firms raise money
      from Insurance Companies, Educational
      Endowments, Pension Funds and Wealthy
     These organizations have an investment
      portfolio which they allocate to various asset
      classes such as stocks (equities), bonds, real
      estate etc.
     One of the assets classes is called “Alternative
      Investments”- venture capital is such an
      investment. Perhaps 5% to 10% of the
      portfolio might be allocated to Alternative
     The portfolio owners seek to obtain high
      returns from these more risky Alternative
       VC Industry Overview
• Successful Entrepreneurs, HNIs
• Investment Firms
• Venture Capital Fund either industry/sector

        General       Limited
        Partners      Partners
         What do VC’s do?
•   Source
•   Fund
•   Mentor
•   Manage
   Why should I go to a VC?
• You want Rs. 10 Lakhs to start
  • Borrow from friends & family
  • Borrow from banks
  • Borrow from VCs
What do I need to do to attract a VC
Things you need to showcase
• First an understanding of whether a
  particular VC invests in the sector
• A sound sensible b-plan with sensible
  PRO projections
• Realistic valuations
• Right Attitude
• Respect for OPM
So, How does a business get
Consult & Validate
Build a team
Money, Money, Money…
NO… But I might say yes
             •10 Slides
             •20 Minutes
             •Yes, No, Maybe?
What does a VC look for?
Revenues + Awesome Team =
What Should I be careful about?
            98% Rejection:
•   Exaggeration
•   Poor articulation of revenue generation
•   Under estimation of resources
•   Over estimation of demand
          Common Pitfalls
• Raise too much or too little capital
• Focus, Focus and FOCUS
• Not deciding on valuation pre-money
  (value of organization before
• Not Identifying exit strategies for VC
• Not reading term sheets carefully
So, how do I go about it?
                  Depends on stage

        • Early            • Some
          Stage              Customers
        • No                 Some              Stable with
Angel     Customers   VC     Revenue      PE     profits
          No               • Zero or No
          Revenue            Profits
 Structuring Angel Investment
• Decide on valuation pre-money – art not
• Carefully analyze amount to raise – less is
• Identify milestones to achieve to create
  shareholder value for next round
• Rule of thumb - $500k-$1M gets 1/3 of
• Usually in convertible preferred stock
     Structuring (continued)
• Don’t overprice deal – it will come back
  to haunt you
• Summarize terms in term sheet
• Use offering memo, term sheet and
  business plan to sell the deal
• Many possible terms in deal – but
  structure it to sell.
• Angels don’t make counter-offers
Most difficult part is finding enough
• Can’t advertise
• Can’t send out mailing to large number of
• Can’t use Internet to advertise or solicit investors
• Usually can’t get a reputable securities dealer to
  sell the deal
• Must rely on referrals to get to enough
  prospective investors
• Rule of thumb – one in ten will invest
      YOUR MISSION - Creative
•   Customer prepayments
•   Supplier extended terms
•   Customer funded product development
•   Subcontract manufacturing
•   Avoid capital expenditures
•   Preserve cash for marketing
• Persistence beyond belief
• Harder than selling insurance
• 9 no’s for every one yes
   Assume you have raised
$1,000,000 and made progress

 •   May now qualify for Venture Capital
 •   Assuming prototype and beta testing
 •   Exciting, growth market
 •   Early revenues
 •   management team
 Raising $1M to $5M from VC

• Usually only source for this size
• Too small for public offering
• Too large for individuals
The process of raising venture
 •   Decide Company is candidate
 •   Prepare even better business plan
 •   Get introductions to VC firms
 •   Get one VC firm to be lead
      Process (continued)

•   Due diligence by the lead VC firm
•   Proposed letter of intent
•   Many issues to negotiate
•   Usually takes a minimum of 90 days
      What to Expect
•   Convertible preferred stock
•   Convertible notes
•   Notes with stock purchase warrants
•   Board representation
What to Expect (continued)

 • Veto power over major corporate
 • Shareholder agreement
 • Limits on executive compensation
 • stock options to key employees
 • financial reporting
Raising Capital from Individuals
or VC Firms is Legally Intensive
• Securities laws - federal and state
• Structure can be complex
• Many issues - need experienced
• Expensive
Corporate Cleanup Is Usually

•   Stockholder disputes
•   Shareholder agreements
•   Contractual problems
•   Stock option problems
•   Shareholder loans
VC’s Bring More Than Money
         to the Table
• Access to potential customers,
  suppliers, financial institutions
• Instill discipline in the organization,
  painful but good
• Good strategic sense
• Understanding of future financing
   How to Negotiate the VC

• Separate seminar
• Get experienced advice
• Most entrepreneurs only do this
  once or twice
• Experienced lawyers do it weekly
Questions, Comments, Feedback

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