Wednesday, August 19, 2009
Steps in the VC Funding Process
What do I need to do?
First, you can choose to approach a VC directly but a referral from a trusted professional such as a lawyer who works with VCs would be better.
Second, bait them with a smart business plan. Ideally, one that has an executive summary that attracts, maintains, and develops the VCs interest in your company, complete with supporting documents. The plan has to be realistic in that it objectively maps out the plan and corresponding cash flows including future growth, contingencies, and most importantly, the VC’s eye-catching liquidation options. If they like what they see in the executive summary, they’ll start nibbling on the actual business plan and might even be interested in funding it.
When writing the plan try a Who, What, Where, How and Why format to explain and must include:
• The concept itself
• The potential market size: Is there a recognized market for the idea? Give a 2 year plan and the several benchmarks to be achieved within that time-frame
• Market Analysis using known business management models such as Porter’s Five Forces Analysis – to describe the supply and demand as well as issues and solutions
• Execution: Operations, R&D, marketing and sales plan
• Address all the pitfalls and contingencies, examples include:Why your management team won’t be picked off one by one by your competition because they all have equity invested and thus vested interest, and Key-man Clauses
• Team members: Resumes; Feature the veterans who have the wisdom of several economic cycles under their belts
• Financials – the second most important document for VCs. Show how little cash you need to remain self-sustainable once you break-even but most importantly, you must be realistic
• Liquidations routes – the most important issue for VCs
• Non-disclosure agreements (NDAs) – the most important issue for the entrepreneurs
Third, if the VCs are even remotely interested, they’ll invite you (please bring your entire team along) to meet with the partners and grill you till you’re burnt to a crisp (just to see how you react to pressure). Keep in mind that VCs receive tons of business plans which are mostly discarded, so just to be interviewed by the partners is a big-step along the process of funding. But don’t wait to hear from the VCs, rather, be proactive and follow-up with the contact person and quickly fill in any blanks that may exist.
Fourth, the VC begins to conduct their internal due diligence processes. If your venture meets the VC’s requirements, it will be offered a “Term Sheet” which goes into the details of the VCs “private placement” for shares in your company in exchange for this “round” of funding. This will include among other things:
• The amount of the investment
• The pre-money and post-money valuation of the company – very important to
• Price per share of company stock
• Anti-dilution provisions – very important to the VC
• Voting rights
• Board representation – a must for the VC
Keep in mind that less than 1% of all submitted business plan eventually reach the funding phase.
EZ the VC