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
the entrepreneur
• 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.

Happy funding…

EZ the VC

Thinking of further funding for your “burning” hot venture?

So, your little business is successful and is expanding. That’s great!
So why are you so upset?

Ooh… Your “burn rate” (cash spent per month) is exceeding forecasts because your company is growing beyond your wildest expectations and your reliable funding sources like your Mom and Dad, credit cards, and best friends are maxed out, yikes!
Have no fear, VC is here…

No, VC is not an STD but an acronym for Venture Capital; a viable alternative to more debt financing that can come at a cost.

Venture Capitalists typically invest in companies with huge growth potential, usually in high-tech start-ups. Because VCs invest in “potential” early rather than in latter but proven tangible growth, they are similar to start-up entrepreneurs in that they face great risk which can potentially lead to a complete loss of invested capital should the start-ups fail (remember the dot-com crash? Ouch).
So why do VCs invest in potential?

Because the potential rewards can be even greater; the risks are offset by proceeds from successful portfolio companies distributing multiple returns on VC investments. How? Professional VCs use their cumulative investment experiences to minimize their exposures and maximize their limited resources.

But why VCs, you ask?

VCs play an important role in economies by investing in companies that are cash-strapped and cannot secure bank loans because they don’t have any tangible assets to trade as collateral. VCs typically begin to invest cash in exchange for shares in the portfolio company and later supplement with debt financing.
VC is a broad sub-component of Private Equity, an asset class of equity securities in privately held companies, that is typically funded by High Net Worth Individuals (HNWIs) or Institutional Investors via pooled investment vehicles or funds operating as LLCs.

VCs also offer value beyond the traditional financing role by adding skill sets and industry connections not easily attainable by new enterprises. But VCs also take a more hands-on approach to their portfolio companies by securing Board of Director positions that can influence company decisions and via restrictive covenants among other things.

It’s my company, why would I want to give up control to some VC, you say?
VCs can be a “double-edged sword” in the sense that you give up some control over the venture only to gain in strategic guidance, operational expertise and corporate governance among other things. It’s like being married; you yield some individuality to “synchronize” with your VC partner and benefit from the resulting synergizes, after all it is long-term partnership at least until the IPO or other liquidation event.

Ooh… that’s why…

Ultimately, you can go it alone and maintain control over your successful venture, but if you want your successful business to grow you’re going to need financing. Chances are that your best bet is a “suitable” VC, especially if you have no collateral.

By the way, VCs tend to discard virtually all the investment opportunities offered to them, so if a VC comes knocking do get to finicky, go open your door. Can you imagine where Bill Gates, Pierre Omidyar, Steve Jobs or Michael Dell would be if they didn’t?

Think about it…

EZ the VC

Exemplar Featured in Texas Law Blog

Exemplar would like to thanks Bradley Clark, who wrote a concise and persuasive blog about law firms and trade in Texas. Unbeknown to us, the Texas ethical rules prohibit law firms from having wholly "trade names," and mandate that law firm names ONLY contain the last names of lawyers from the firm.

Pardon our french but... what. the. hell. How is that ethical rule protecting these firms' clients? Are client really going to be confused as to whether their lawyers practice law? We've never had a customer come up to us and say "Gee, we didn't realize Exemplar Law Partners, LLC, was a law firm - shouldn't it only contain last names? It would alleviate the confusion for me." Though colloquially our firm has been shortened to the snappy "Exemplar," customer appreciate this small gesture of creativity and individuality. The Texas ethical rule referred to in Mr. Clark's blog is simply archaic, and deprives Texas lawyers of a simple way to be innovative in the industry. C'mon people - let's get out of these little ruts so we can really move forward to the real issues facing the legal industry today.

Microfinancing: the Virtuous Cycle?

We are pleased to present another entry from a member of our team and legal intern, EZ.

BY: EZ

Microfinancing is MACRO- everyone is talking about it- and seems to be benefiting from it - but how can you get in on it? An increasingly large group of private organizations provide entrepreneurs, who are often ignored by financial institutions, with microloans and other basic financial services such as savings accounts, insurance policies, and monetary remittances. More importantly, microfinance offers hope to entrepreneurs in less fortunate areas who might otherwise consider illegal means of finance, like predatory moneylenders, who oftentimes charge an annualized interest rate of 1000% for a monthly loan.

Microfinance is not a new concept. Modern microfinance has been around since the 1970s, but, as Marguerite Robinson explains in “The Microfinance Revolution,” has only recently developed into an industry. The attraction of socially responsible investments (SRIs) and the ability to make an enduring economic and social impact is a primary motivator for this growth. The Internet has also shed light on the difficulties of starting new businesses in less fortunate areas, such as third world countries. It has also allowed would-be philanthropists the opportunity to join peer-to-peer (P2P) sites, such as KIVA and Microplace, and place soft loans of $25 or less with a credit-worthy but struggling entrepreneur. Lastly, technological advances have increased the efficiencies of delivery while simultaneously reducing the costs of funding giving the philanthropists more bang for their buck.

Alas, not all is well in Camelot. Shockingly, most small scale philanthropists willingly give microloans not knowing that the P2P’s local field partners (LFP), were charging exorbitant interest rates of up to 70% as well! This is due to the high administrative costs of delivering funds to remote clients in distant regions. Yet some microlenders have learned to reduce their costs significantly and develop more efficient models (which are less susceptible to waste), like Bangladesh’s Association for Social Advancement or ASA (Hope in Bengali), which has become self sufficient and is no longer accepting funds. Some have even received ratings from the American Institute of Philanthropy, such as Grameen America and FINCA (see http://www.charitywatch.org/toprated.html#peace).

So what can you do to help and, more importantly, avoid doing more harm than good?

1) Perform your due diligence and check the LFP profiles on your P2P site

2) Compare the LFP’s average interest rate against both the P2P’s benchmark and the local money lender rates. For example, KIVA offers LFP info at http://www.kiva.org/about/partners/

3) Be selective in where you allocate your microfund investment. This will encourage positive competition that should support the more efficient partners, which, in turn, should induce the laggards to improve their business models and pass on the benefits to those who truly need it. Deutsche Bank recently reported that the industry has 1 billion micro-borrowers who need $250 billion whereas the industry currently has an estimated loan volume of about $25 billion. Hence, demand far outstrips supply by 10x.

Remember, for many out there, you are the instrument of HOPE! So try to make the most of your social investment by simultaneously improving on the efficiencies of a most virtuous cycle.

To learn more check out these links:

MFG
Wikipedia
Microcredit
Muhammad Yunus
JAK
JAK
Association for Social Advancement
ASA.org
Bank Rakyat Indonesia
FINCA
Needs and Services
Microplace
KIVA
DB Research
Microscholarship
(An innovative offshoot of the micro-industry)

Happy lending!

E.Z. the Lender

So what if negative advertising is effective?

The topic of marketing and advertising is usually a sore spot for entrepreneurs. However, the question no longer is "should" I market my business; it's an absolute necessity. Today, in a world full of advertising noise, the question is "how" do I market my business. One of Exemplar's fabulous legal interns, Ms. Anna Bielejec, has written a cheeky and innovative blog on negative advertising and its effectiveness. I would like to share her point of view with our readers. Enjoy!

By: Anna Bielejec

Consumer susceptibility to the sensational finger-pointing and mud-slinging of negative advertising is on the rise and there is nothing we can do to stop it. Actually, there is. While curbing our general attraction to negative advertisements is not something we, as consumers, might actually be capable of doing, we can curb the opinions that we later form from them. Sure. Negative ads can be rude, crass, mean, dirty, spiteful, and absurd. They can also be harmless and entertaining. Apple’s famous “Hi, I’m a Mac” hipster dude, and his balding “I’m a PC” nerd co-star, is a subtle yet effective way at conveying to consumers the message that Mac computers are better than PCs. Could Mac have made a friendlier commercial? Maybe, but who cares about that? They are recognizable, memorable, and oh so witty (sort of).

Scientific analysis of the psychology behind negative advertising has provided insight into why it is so effective. Psychiatry professor at UCLA Dr. Marco Iacoboni conducted an experiment utilizing functional magnetic resonance imaging techniques to monitor the brain activity of President Bush and Sen. John Kerry supporters during the 2004 presidential campaign. During the test, when subjects were shown images of the candidate they opposed, far more brain activity was detected than when they were shown an image of the candidate they supported. As such, this experiment underscored our subconscious favoritism for negative stimuli.

I like to think of the brain as a nightlight in an outlet at the end of a dark spooky hallway. It lights up the moment things go dark. During the day, the hallway isn’t spooky and the nightlight is off, because when it’s light outside the hallway is boring and familiar and nothing about it catches your eye. There aren’t any giant spiders and the crooked baseboards are just as dusty as they were the day before. This comfort and familiarity ends abruptly the moment nighttime appears, though. When daylight retreats and darkness falls, in steps the unknown, the controversial, the spooky. You know. The point at which your hand-held spider-dar breaks and you realize your makeshift Proton Pack is missing. This is when the nightlight lights up! Such is the case when it comes to our brains and advertising: they’re plugged in, but they’re only truly riled up when the hallway spiders come out. Thus, like a nightlight, our brains light up, right on cue, with every publicity scandal, political debacle, and every other negative bit of press that our metaphorical hallway spiders could be ascribed to, night after night, week after week.

All this talk of spiders tells us several key things. First, it tells us that our brains respond favorably to the emotion that savvy advertisers evoke in us and that these responses occur automatically and subconsciously. Second, in the face of such automatic responses, it also tells us that there is absolutely nothing we as consumers can do to thwart the brain’s inevitable hunger to experience this emotion. So, if there’s nothing we can do to change our internal programming for negative advertisements, what can we do? The answer is simple. We, as the consumers of the world, can exercise our brains with, wait for it, rational thought. This novel idea requires us to consciously analyze information and issues for ourselves, however emotional it may be, before we make any ultimate decisions in response to what was initially presented. Simple? Maybe not. Crucial? Absolutely. Spider-proof? I’ll let you decide.

Exemplar In The News! (Again!)

By: Shannon Jamieson, Esq.

Good morning, fellow Entrepreneurs! In October, our CEO Chris Marston will be traveling to San Diego for a 2-day conference - "Inside the Law Firm of the Future." The event is largely an off-shoot of the popular book "The Firm of the Future," written in part by Ron Baker (who will also be in attendance at the conference).

Whether you're in professional services or you use them, this is a conferecne you don't want to ignore. It will be the way customers will demand to consume professional services in the future, so it is vital that we all become educated (and excited!) about the coming change.

To read more about the event, visit www.insidethefirmofthefuture.com

Niches for Entrepreneurship are all Around... the House!

By: Shannon Jamieson

If I hear the phrase "in this down economy" one more time, I swear to God I'm going to throw an old-school temper tantrum. Yes, it's happening and yes, we have to deal with it. Many people are turning to entrepreneurship to make ends meet, and seeing opportunities where they otherwise wouldn't have. Take this student, for example, who was helping his folks around the house while job hunting. His time at home lead to a new business - cleaning out dryer ducts, of all things! However, Chris King's business idea is the perfect example of true grass-roots entrepreneurship - find a need in the market that isn't being met and meet it. No one was thinking to clean out their ducts, but doing so saves both time and money for homeowners by shortening dryer time (and thus saving electricity cost and energy depletion).

Simple concept, right? Maybe, but if it were, we would all own our own businesses. Ideas for great businesses, and viable models, can sometimes be difficult to spot; especially if you're exploring the concept of entrepreneurship for the first time. However, as King demonstrates, it's not impossible. If you're contemplating starting your own business, here are a few simple tips to keep in mind:

1) Be Observant during every day activities. The most successful businesses are built around making basic tasks or every day life easier. You needn't reinvent the wheel to be successful in entrepreneurship; you simply need to tweak it. Look around yourself during otherwise mundane activities and locations - the grocery store, post office, or even the subway during your morning commute. What are people struggling with or complaining about? Perhaps they have a need you can fill.

2) What grinds your gears? Entrepreneurship doesn't always have to be based in altruism, so be selfish for once. What ticks you off during the day? Your squeaky bathroom door? The kitty litter on the floor near the litter box? The constantly cluttered coffee table?(Both personal pet peeves of mine in my own life.) How can you address this situation in way that would resonate with other people? I'm not saying that these particular ideas haven't been addressed in the market - maybe they have. (However, I still haven't found a suitable solution for containing kitty litter in small spaces..) But I'll bet if you look hard enough at the things that grind your gears, you'll think of a creative way to solve that issue.

3) Lend a Hand. Now more than ever, Americans are BUSY. Forget this down economy crap - we have places to go and people to see. Each task we have to engage in as part of the journey just slows us down! This is the American mentality. As an entrepreneur, what can you do to alleviate this? Go old school. Walk a neighbor's dog. Mow a lawn. Cook some meals for someone elderly that lives alone. There's a reason these ideas are still around - people require these services! Not everyone, but in your neighborhood there may be enough of a need (here's where the nitty-gritty research piece comes in) to sustain a small business.

Are these tips revolutionary? Probably not. But they are tried and true, and I'm putting them out there to get your mental gears turning (or grinding, whatever) and think about how you can get off your butt and pursue entrepreneurship. For entrepreneurs, the time is ALWAYS now.