Raising Entrepreneurial Capital

1
Raising Entrepreneurial Capital

• Chapter 8
• Anatomy of a Venture Funding

2
New Tech's Criteria for Investors

• Capital Required 1.575 million, 600,000 in
  venture capital for expansion of an established,
  profitable company.
• Would prefer an active investor with knowledge of
  the computer industry.
• Geography The closer the investor, the better.

3
Goals of Investor Meeting

• Make a strong first impression.
• Establish good rapport.
• Be prepared for specific and probing questions on
  all aspects of the company and the proposal.
• Know what questions to ask the investor.

4
Expected questions

• Your competitive advantage?"
• Size of your market, and how do you know?"
• "Why do you think this company has the ability to
  achieve rapid and sustained growth in such a
  competitive industry?"
• "What are your financial forecasts based on? How
  liquid will the company be during the expansion?
  What do you expect gross margins to be?"

5
Negotiating basis

• Determine opening positions. bottom-line terms
  and conditions, and acceptable compromises.
• Consult with your financial advisor and lawyer
  throughout the process.
• Think of the investor's point of view when
  determining their terms and negotiating strategy.
  
• Stay open-minded and flexible.
• Look for common ground with the investor.

6
Practical lessons

• Approach negotiations from a win-win perspective
  while keeping the investor's position in mind as
  options are considered.
• Almost everything is up for negotiation.
• Negotiations may take time and several meetings.

7
Due diligence requests (1)

• New Tech's financial statements for the last
  three years
• three years of income tax returns and payment
  schedules
• details of banking arrangements

8
Due diligence requests (2)

• summary (and copies) of the main contracts in
  place (contracts, leases, patents, insurance
  policies, mortgage documents, sales or supply
  contracts, etc.)
• list of key customers with historical and
  projected sales data and order backlog, if
  available
• additional industry information on the computer
  power module market and related technology

9
Due diligence requests (3)

• list of suppliers and backup suppliers (if one of
  the needs is a specialty product or service)
• returns and warranty data to assess the quality
  of the product and to assess any contingent
  liabilities related to the products
• recent appraisals of tangible assets
• an organization chart

10
Due diligence requests (4)

• corporate minute books and documents (e.g.
  articles of incorporation, by-laws)
• a summary of all outstanding or pending
  litigation with an accompanying letter from the
  company's lawyer explaining the expected outcome
  of each lawsuit and
• historical and future budgets along with actual
  figures (which will be required to assess
  management's ability to produce accurate
  forecasts and to determine future expectations).