Now the electronic age has brought an avalanche of new gizmos to the equation, such as CDs, emails, and online business plans. A cell phone number has become as essential as a business land line.

Just how useful are these gizmos, really? In truth, by themselves, they are just not very useful at all.

For instance, it is not unusual for me to receive emails with business plans attached. Some come with a cover note in the email, some don’t. They all get trashed without being opened.

What the dickens makes that entrepreneur think that I’m going to spend my time and money to open the business plan, print it on my printer, and then cheerfully read it, especially when I might be letting loose a new virus into my computer system?

Hog wash.

A variation on this theme is a rather arrogant young CFO I know who sends out the business plan in a CD format. “It’s cheaper than printing,” he says. It also saves a lot of time, since he won’t have to spend any time at all talking with the venture capitalists who don’t call. Heck, he saves himself out of business before he ever gets started!

There are some valid uses for e-technology in the funding process, such as:

1) Angel investor groups are increasingly using an online submission form;

2) Venture capital firms sometimes request an online submission form and approval for submitting a full business plan;

3) Attaching a CD to your hard copy business plan is an excellent way to include bulky or complex information, such as patents and financial drill downs;

4) Including your web site, or a link to it, on the CD is important, especially if your business relies on its web presence for business;

5) Creating an online business plan for investors is an outstanding means of spotlighting your team, your product, your marketing skill and all the other elements of your business plan; and

6) Email is invaluable for keeping in touch with the investor and providing timely responses to questions.

But first start with your traditional business plan. You will need it. No matter how the process begins, at some point you will present your formal written business plan.

It seems silly sometimes. With all the technology at our disposal, we still put our ideas into a formal written business plan.

The truth is that, once you are asked for the business plan, your investor is about 80% in your corner. Now he wants to judge your formal presentation and persuasion skills, so he asks for your business plan.

Investors just don’t lend on sketches on a napkin anymore, if indeed they ever did.

And, while the hard copy business plan is essential, even more essential is the process of developing that business plan. Creating a successful business plan doesn’t allow for many shortcuts. So, create it.

By the time you are ready to submit your application to an angel investment group online, you will have in hand all the confidence that your research and organization can possibly provide.

There is just no substitute for shaking hands with your lender or investor, and knowing, just knowing, that you have the answer to any question he may throw your way – that’s what the process of a successful business plan accomplishes.

It is no longer a question of whether or not to use e-technology. Rather, it is a question of how best to use it. Make that determination before you ever shake that first hand. With you ducks in a row, you would be amazed at how much easier the process becomes.

Author: MaryAnn Shank
Article Source: EzineArticles.com
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You would need an outsider, one who is not part of the team, to eliminate any possible biases that may taint his judgment. Ideally, you should employ someone or even a group of people who can expertly analyze your work. There are companies that specialize in such services wherein the people who run them are either investors themselves or are very familiar with such.

A business plan review by a specialist company is conducted by professionals who know what should go into your documents. They will look into all the important details (every part of a business plan is) including the format used, the presentation, and especially the content. They’ll even tell you if, from their professional point of view, whether it is feasible or not.

Since they are familiar with what investors look for in these presentations, they can make suggestions so that your documents will appear compelling enough. They can propose approaches and strategies that you can take based on the strengths of your plan. They will also point out weaknesses and possible pitfalls that you should either avoid or remedy.

If your documents contain too much unverified information, they’ll point them out. If they lack data that can be crucial to the approval of your proposal, they’ll point those out as well. Any content that is inconsistent with the rest will be called out. They’ll zoom into your team and see if they have sufficient credentials to persuade the small business investors that their money will be in capable hands.

One advantage of having your presentation pass through a business plan review is that, not only will it ensure the accuracy and coherence of your presentation but, it will also make sure that you are prepared to handle the presentation. Having undergone a rigorous process in the review will allow you to gain the ideal mindset as well as the confidence to face your potential small business investors.

1.) How much money is already invested? Do the client or other individuals/companies have a stake in the business?

Sometimes the difference between getting a loan and getting rejected is as simple as that. Imagine you’re coming to an investor with a fabulous business plan and you need, say, $500 million for a resort and real estate project. In your proposal you clearly state that you do not have one single dime invested yourself (yes, we had a business proposal like this once!). Do you honestly believe an investor is going to give you the time of day? Of course not. You haven’t taken any sort of risk — why should the investor?

In your business plan, it is key to explain fully, in the executive summary and then later on in the financials, just what monies are involved. Okay, so maybe you don’t have any money involved in that resort project, but you DO own the roughly 50 acres of land it will sit upon which is worth maybe $75 million. Good! Mention that in the proposal clearly and accurately, including what kind of land it is, along with a map, some distinguishing features (is it ready for construction, water, pathways, roads, accessibility, etc.) If you have other sorts of assets, something, ANYTHING that can be used as collateral against your loan, make sure it is explained and described.

If you have partners who have chipped in $250,000 for a project worth at the most $2 million, you have a significant edge over other people. Most investors we have dealt with like to see at least 10% of the required funds already in place.

2.) How accurate is the research involved? Does the client know the market, the competitors, and his or her chances?

We can’t begin to tell you how many business plans we have come across that had little or no market analysis or competitive structure. The client had no idea about the target market, the competition he was facing, nor even demographics of the area. He had an exciting product, but it was difficult to ascertain just how much success he was going to have SELLING it.

In many cases, an investor isn’t as interested in the product as he or she is in the product’s success on the market, so a good business plan should have a clear, accurate description of that market. Many things should be included like:

a.) Demographics of your target market and market analysis, with factors such as age, race, income, etc. Think about your average customer walking into your store for your product or service. What are they looking for? What do they look like? How much do they want to spend?

b.) A market analysis that describes the trends and statistics of your potential market. Will your product or service be in high demand for a long time — or will it have limited ‘shelf-life’ on the market, coinciding with a new fad, for example. Will the product or service be affected by shifts in the market? Is this a stable target market with limited shifts taking place, or does the market wildly fluctuate?

c.) Do you know your competitors? What are the similarities and differences between what they sell and what you sell? How are you better than them? How are you inferior to them? (Yes, you need to include that, as much as you don’t want to.)

3.) How realistic are the financial projections?

Be extremely honest. No start-up business makes a profit in its first year, no matter what you are selling. So make sure not to show that in your business plan. Also don’t be too alarmed at the first-year loss. We had a client with a business plan that showed a $400,000 loss against a $2,000,000 loan in his first year of operations and he panicked. Then we explained that he was going to have a loss because his first year of operations would have high expenses as he organized and finished all his preparations for his new company. Investors expect you to have a lousy first year — don’t beat yourself up about it. It’s not the first year that concerns them anyway — they are thinking 3-5 years down the road. If after three years your company isn’t showing a profit, that is when the investors get nervous. After all, why should they put their money into something if your business proposal shows that you won’t be able to pay them back? Luckily for our panicked client, his second year showed a profit of about $30,000 and his Year Three profits would equal $375,000, almost erasing his first year loss. He was going to have a steady 40% increase every year after that.

In many instances, the investor thinks long-term, and so should you. Your financials should explain what is going on, and what will happen. Don’t try to sugar-coat things, per se, but put a healthy spin on a mediocre beginning. Don’t impress the investor with what IS happening — impress them with what is GOING to happen.

4.) Does your proposal look professional?

You’d be surprised how many proposals are overlooked with something as simple as a large ‘BUSINESS PROPOSAL’ on the first page. This is merely common sense. If you want people to take you seriously, show your most professional side. Your proposal should be checked for errors, misspellings, proper formatting, and headings, and have clear, easy-to-read graphics or images. A client tried to convince us to use a dazzling bold red text over a green bar-chart and we hastily explained to him why it’s not a very good idea to ruin the eyes of a potential lender. Include pictures or illustrations, maps, diagrams and other visual aids, if possible. Also, take a good look at your writing. The character Rusty, played by Brad Pitt, in ‘Ocean’s 11′ said it quite well: “Don’t use 7 words when 4 will do.” Talk about your management team, but don’t drone on about how instrumental a part they have played in your life. Talk about the great product you have, but don’t go on about testimonials from other people,(or if you must, include them in the appendix) And don’t be funny. Humor should be left at the doorstep. If you want to be funny, become a stand-up comic. Treat your document and the people reading your document with the utmost respect.

5.) Is the management team solid? Are there good people involved?

Remember that your business is not, and should never be, about you. There have to be some good people involved with you to make it run smoothly. It does not matter what service or product or project is being offered, if you think you can convince an investor you’re a veritable one-man show, you are out of your mind. A client we recently wrote a business proposal for was creating a new mobile-phone service, and amazed us with the list of engineers, technical advisors and IT professionals he had attained. When we saw how the management structure was fully laid out, and how each individual was going to fit in, we knew right away this particular proposal had a good chance to get in the front door.

Investors want to know who is on board, what their job is, their experience in the field you have chosen to represent, and a little of each person’s background and education. A solid management team, with a full layout as to positions, responsibilities and backgrounds, is a sure-fire way to get an investor looking at your proposal a lot more.

6.) Is the exit plan well defined?

Unless your lender is going to get involved with you through a joint-venture, or partner, chances are he or she does not want to stick around with you forever. Investors want to know what you’re offering them later on down the road, when it’s time to cut you loose and count the money you made for them. Some examples of exit plans include:

a. Creating an initial public offering (IPO). If your business has the possibility of going onto the stock exchange later on, and investors can share in dividends, this is very important for them to know from reading your proposal. Let them know how long it will take to get an IPO, and estimate the price per share you foresee, if you’re offering investors a first-buy once the IPO goes public, etc.

b. Buyout. Perhaps your shoes-string business is going so well, your investor is impressed enough to want to buy your company completely for several million dollars. If you want to offer this alternative to long-term investing, make sure you let the investor know the approximate value of the company after a certain number of years. A business valuation report is very helpful in this regard. Let the investor know exactly what he or she might be getting into and if it’s really worth pursuing. If you can do a valuation of the company based upon your projections, it may assist the investor in determining if you are worth the time and effort to invest.

c. Sell the company to others. If your business has the possibility of going up for sale to other interested parties, the investor should know details such as possible buyers, how much they could pay, the value of the business at the point of sale, etc.

d. Pay out of equity. Let’s say Steve wants equity in George’s company and receives 20%. Steve loans George the initial funding and an agreement is made that Steve will own this equity for 10 years. Each year, George will pay Steve 20% of the gross profits. At the end of ten years, if any money is still owed on the loan, which is doubtful, George will pay the equity of 20% and a balloon payment of anything that remains on the loan. All this, of course, must be agreed upon at the outset, so make sure you define this clearly.

7.) How much money do you need and how will it be used?

As weird as it sounds, we have had business proposals come past our desks that explain how much money is needed — but fail to tell us what it’s being used for. An investor will balk at someone who says they need $100 million for an oil well project yet doesn’t explain where all this money is going. Our business proposals include a special heading for Start-up expenses (when dealing with a start-up company, of course), that explains and lists the expenses the investment will cover, and for how long.

If you want to really impress investors, include what we call a “phase plan”. For example, let’s say you want to start that oil well project. In Phase One, you show the investor what you’ll be spending, in this case, for surveys of the land, preparations for drilling, etc. Phase Two could show expenses for drilling equipment, personnel, and construction of the wells. Phase Three could discuss refining procedures expenditures, and so on. You have detailed out a full “shopping list” for the investor, and they not only know what you’re spending, but how it’s being spent, and an estimated time when it will be spent.

8.) How will the money be paid back?

On the heels of exit plans, an investor likes to know how you’re going to pay him or her back. If you can agree on a certain percentage each month, or each year, that is fine. If you want to offer annual equity and a share of profits, that’s great too. But whatever your options are, make sure the investor knows what you’re offering. Detail out all the pay-back options that are available, and order them in importance to you. You might want to think twice if your business has the ability to make $50 million per year, and your investor only gave you $5 million at the beginning, yet you offer a 35% equity every year! Reward your investors, yes, but don’t shower them with untold riches for nothing. A happy investor is always good, but make sure you’re happy too so that your business continues to prosper.

9.) What is the SWOT like?

SWOT stands for Strengths, Weaknesses, Opportunities and Threats — and if you do not know these, you have no business, well, running a business. Your proposal should describe each of these areas accurately and with great detail, at least a few paragraphs for each.

Strengths: What really makes your business stand out? Where does it excel?

Weaknesses: Where does your business need help? Where is it lacking?

Opportunities: What positive trends, actions or events do you see that will have a profound and positive effect on your company’s success?

Threats: What negative trends, actions or events could cause harm to your business — and how will you sail past those rough waters smoothly?

10.) How relevant is the business to our society?

A lot of people will try to tell you that investors really don’t care about this factor, but from our experiences you would not believe the amount of investment firm applications we have seen that ask this exact question. How your business impacts society, whether locally, nationally or world-wide, can have a positive or negative impact on investor interest. If you have a business proposal that offers 4,000 jobs to your city, or will strengthen economical development, or includes environmentally-friendly factors or some sort, your proposal looks that much better. Try to take the time when writing to think about how your project affects others around you. What are the benefits? The long-term effects? The opportunities for others? Every business has the ability to impact society in some way. Informing an investor in detail about how your particular project will do so, tells an investor that you care enough about your project to do the extra research, go the extra mile — and it shows a great deal of determination and heart.

And every investor loves that!

Author: Paul Kraly
Article Source: EzineArticles.com
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The fact that a lot of great new business plans come from teenagers out of school or in college is not surprising. Some of the largest computer companies including Google and Microsoft were started with ideas that the entrepreneur had while still in school.

Developing a business plan and finding startup funding for a teenage business follows the same principals. However, sometimes it is just harder for a teenager to get an appointment with venture capitalists for funding.

A business plan with a marketing strategy that has been tested and proved verifiable results is essential for teenage entrepreneurs. It is the business plan and the results that can get help a teenage business entrepreneur get VC funding.

A teenage entrepreneur needs to revise the business plans and the sales pitch before meeting with venture capitalists. If the business plans are not professionally done, teenage entrepreneurs face the risk of not being takes seriously by venture capitalists.

There are several business avenues that are open to teenagers. One business service is pet sitting and pet accessory designing. There is some money to be made from this business. Teenagers planning to start a pet business require only a small amount of startup capital. Most times they will be able to get the finances from family and friends.

Teenage entrepreneurs should also find a way to make their age an asset rather than a liability when approaching business investors for funding. One way of doing this is by showing the investor a list of courses completed as well as extra curricular work undertaken.

A teenage entrepreneur who is interested in maintaining a balance between work and school should keep an account of all work done for school as well as for work. The entrepreneur should also as far as possible try and maintain the business within the startup capital provided and not pitch into personal savings.

It may be difficult for teenage entrepreneurs to be taken seriously when they first approach venture capitalists for funding. However, sound business plans and market research that supports the idea will help entrepreneurs find their funding.

For more resources about Invest capital or even about small business investment company and especially about business investor please review these links.

A business entrepreneur of a new business needs to write several business plans to attract different people. There are several versions of business plans to do so from mini plans to full length presentation business plans.

The full length presentation business plan, which outlines the business proposal as well as the financial outcome of the business, is what most banks and other lending agencies are interested in.

Banks concentrate most of their attention on the financial strength of the business plans. Although the concept of the new business is important to them, the bottom line is much more significant.

Venture capitalists and angel investors on the other hand go through scores of business proposals every day. While selecting from a pile of business proposals, they are looking for ones that clearly outline the business plan and make an impression fast.

Venture capitalists see hundreds of plans in a year, so they take very little time in examining each of these business plans. Therefore to catch the attention of venture capitalists, the business proposal for a new business needs to be cogent and succinct. Entrepreneur should also highlight the impressive backgrounds of the management team.

Angel investors also go through several business plans in a year and therefore like brevity in the business plan.

Business plans that need to be presented to potential partners should deal with the ownership structure and clearly spell out matters of control and accountability.

Business plans that are presented to suppliers of a new business are completely different from the ones that are submitted to venture capitalists. These business plans tend to focus on cash flow of the new business. Suppliers like to make sure that entrepreneurs are able to meet the monthly payments for the supplies.

Finally, employees like to see business plans that are edited to their understanding. These plans need to show employees in which direction the company is heading and what the future plans for the new business involves.

For more resources about Invest capital or even about small business investment company and especially about business investor please review these links.

Business investors funds usually used to accommodate the additional funds needed. The investor can be a group of private individuals or one individual who invest in a business for a return of a piece of the profits.

There are several kinds of investor funds you can use to take your business to the next level. These types of funds can come from an institution like a bank or a private investor. Not all of the following may apply to you, but you must always weigh all of your options, especially at the early stages of business.

One of most common types of investors funds come from ones family. Asking the help of family members can be something that works. As long as you can provide a decent enough return to your investor and have good relations with your family then you can ask for their help. The most fundamental benefit of asking for investment from your family is that the business will always remain in your family.

Another commonly used source is venture capitalists. Venture capitalists buy into businesses all the time primarily because they are looking for returns on their investments and because they can mobilize and inject large amounts of capital fast.

Keep in mind that they are one of the most stringent investors fund sources when it comes to screening. Typically, venture capitalists deal only deal with businesses that offer very high rates of return, such as those that offer rare products, inventions, new medicines and technology, or cutting-edge research.

Another common source of investor funds are angel investors. These investors are commonly wealthy individuals that are interested to take on a percentage of your profits by providing you with the appropriate capital.

As you can see there are many ways to get some investment in your business. Before you proceed with engaging in negotiations with these people you should keep in mind that you will need to have a solid business plan or else no one will invest.

Author: Gus Smitherson
Article Source: EzineArticles.com
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Business plans essentially outline the vision of the company and predict its financial future. There are several lengths of business plans ranging from full length plans to mini plans. The length of the business plans depends on the number of words required by an entrepreneur to outline the new business proposal and impress upon investors its financial sustainability.

Business plans can be divided into four separate types based on the length and their material. The different plans business plans include working plans, presentation plans and even electronic plans.

Of course, the length of the business plan is not in any way related to the novelty of value of the new business proposal. Although the length does have something to do with the new concept business it has a lot more to do with the presentation style of the entrepreneur.

Mini business plans are usually 10 pages in length. They provide Venture capitalists with a cursory idea of the new business concept, financing needs, marketing plan and financial statements. Mini business plans cannot substitute full length plans and should not be relied solely upon when seeking funding.

Working business plans are used by entrepreneurs to run and operate businesses. Working business plans are usually circulated within employees of the office. As with the miniplan, these business plans are informal in nature. They are intended for comments of a business proposal by employees of the office.

Presentation plans are business plans that are submitted to angel investors and venture capitalists. These are the plans that highlight the new concept business and which are used by entrepreneurs seeking funding. This plan is suitable for showing to bankers, investors and others outside the company.

It is essential for entrepreneurs developing this business plan to be very specific with the details of the plan. Most venture capitalists and angel investors will also expect this business plan to have some information on competitors as well as a strategy to combat the competition.

Business plans are crucial to the success of a business. Often, it is the business plans that decide whether entrepreneurs get startup capital or not.

For more resources about Invest capital or even about small business investment company and especially about business investor please review these links.

Angels is an individual capital investor who wants to support small businesses, and often enjoy being involved in advising the businesses they invest in. Angels tend to back businesses in fields they understand well, and generally do not demand controlling interest in the companies they back. They tend to dole out money in relatively small amounts, but on favourable terms. They are generally driven by the soundness of your business concept, and will want to see a thorough understanding on your part of how the day-to-day operations of your business will lead to positive cash flow. They tend to expect positive returns on investments from your business becoming profitable in the near term.

Factors are <a rel=”nofollow” onclick=”javascript:pageTracker._trackPageview(‘/outgoing/article_exit_link’);” href= http://www.launchfn.com/id150.html >small business investors</a> that buy your receivables, usually at a steep discount. If you have the prospective to expand, not enough cash, but outstanding receivables from reliable payers, you might be able to find a factor who will give you a percentage of those receivables in cash right away, in exchange for 100% of the receivables when paid. Factoring is a risk-driven

business, and depending of the overall conditions of industry, and the relative risks in collecting from the people who owe your business money, factors will discount the value of your receivables by as much as 50% to 70%.  Keep in mind that these numbers vary quite dramatically, and can be as low as 20%.

“Irrational Investors” is the kind of <a rel=”nofollow” onclick=”javascript:pageTracker._trackPageview(‘/outgoing/article_exit_link’);” href= http://www.launchfn.com/>capital investor</a> every small business person can appreciate. These are people who believe in your business, or in you, to the point that they will give you money on tremendously favourable terms. Small businesses you might realize are funded by irrational investors, whether they are relatives, mentors, employees, or fellow members of the church choir. In fairness, even though irrational investors will often not bother to ask for any guarantee, you need to document all agreements with these investors, and arrange for fair equity or reasonable repayment terms in exchange for their money. If fairness isn’t enough of a reason in itself, in the event of an audit, you can count on the fact that the IRS will want to see appropriate paperwork and realistic terms on all of your loans and capital investments.

This doesn’t mean that only the elite get the opportunity to meet with these kinds of investors about their business proposals, but that meeting and connecting with the right people can be an effective strategy for getting an investor’s attention. Many of today’s investors and venture capitalists are funding fewer and fewer proposals and are swamped year in and year out with proposals and business plans for startups and new ideas. Most of today’s investors are often approached with more ideas and requests for funding than they can ever actually have time to review. Because of this, today’s startups need to be more competitive and innovative than ever before when it comes to seeking funding.

While posting your startup information on a number of reputable sites that connect with these kinds of investors and sending emails to them can be helpful, never assume that this is enough. At the same time, don’t continuously spam your potential investors with your requests, as that is one of the fastest ways to get your proposal thrown in the “do not call” pile. Instead, focus on developing an effective elevator pitch, attend events where investors are likely to be present, and connect with local investors and middlemen who are likely to be able to introduce you to investors.

Middlemen are often your best bet for getting the opportunity to meet potential investors in person, make an impression, and share something about your idea or project. Middlemen come in a variety of forms, but most often are the people that interact frequently with investors. A middle man can be another entrepreneur, other investors, lawyers, accountants, and market and technology executives. Before you begin your search to obtain funding, it is important to learn about who your local investors are first, as these are often your best bet for obtaining funding. In addition, you are more likely to be able to attend events where you can mingle with these types of investors and their middlemen and share your ideas.

Author: Dave Vower
Article Source: EzineArticles.com
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Professionally managed venture capital firms generally are private partnerships or closely-held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists themselves.

Venture capitalists generally:

- Finance new and rapidly growing companies;
- Purchase equity securities;
- Assist in the development of new products or services;
- Add value to the company through active participation;
- Take higher risks with the expectation of higher rewards;
- Have a long-term orientation

When considering an investment, venture capitalists carefully screen the technical and business merits of the proposed company. Venture capitalists only invest in a small percentage of the businesses they review and have a long-term perspective. Going forward, they actively work with the company’s management by contributing their experience and business savvy gained from helping other companies with similar growth challenges.

Venture capitalists mitigate the risk of venture investing by developing a portfolio of young companies in a single venture fund. Many times they will co-invest with other professional venture capital firms. In addition, many venture partnership will manage multiple funds simultaneously. For decades, venture capitalists have nurtured the growth of America’s high technology and entrepreneurial communities resulting in significant job creation, economic growth and international competitiveness. Companies such as Digital Equipment Corporation, Apple, Federal Express, Compaq, Sun Microsystems, Intel, Microsoft and Genentech are famous examples of companies that received venture capital early in their development.

Private Equity Investing

Venture capital investing has grown from a small investment pool in the 1960s and early 1970s to a mainstream asset class that is a viable and significant part of the institutional and corporate investment portfolio. Recently, some investors have been referring to venture investing and buyout investing as “private equity investing.” This term can be confusing because some in the investment industry use the term “private equity” to refer only to buyout fund investing.

In any case, an institutional investor will allocate 2% to 3% of their institutional portfolio for investment in alternative assets such as private equity or venture capital as part of their overall asset allocation. Currently, over 50% of investments in venture capital/private equity comes from institutional public and private pension funds, with the balance coming from endowments, foundations, insurance companies, banks, individuals and other entities who seek to diversify their portfolio with this investment class.

What is a Venture Capitalist?

The typical person-on-the-street depiction of a venture capitalist is that of a wealthy financier who wants to fund start-up companies. The perception is that a person who develops a brand new change-the-world invention needs capital; thus, if they can’t get capital from a bank or from their own pockets, they enlist the help of a venture capitalist.

In truth, venture capital and private equity firms are pools of capital, typically organized as a limited partnership, that invests in companies that represent the opportunity for a high rate of return within five to seven years. The venture capitalist may look at several hundred investment opportunities before investing in only a few selected companies with favorable investment opportunities. Far from being simply passive financiers, venture capitalists foster growth in companies through their involvement in the management, strategic marketing and planning of their investee companies. They are entrepreneurs first and financiers second.

Even individuals may be venture capitalists. In the early days of venture capital investment, in the 1950s and 1960s, individual investors were the archetypal venture investor. While this type of individual investment did not totally disappear, the modern venture firm emerged as the dominant venture investment vehicle. However, in the last few years, individuals have again become a potent and increasingly larger part of the early stage start-up venture life cycle. These “angel investors” will mentor a company and provide needed capital and expertise to help develop companies. Angel investors may either be wealthy people with management expertise or retired business men and women who seek the opportunity for first-hand business development.

Investment Focus

Venture capitalists may be generalist or specialist investors depending on their investment strategy. Venture capitalists can be generalists, investing in various industry sectors, or various geographic locations, or various stages of a company’s life. Alternatively, they may be specialists in one or two industry sectors, or may seek to invest in only a localized geographic area.

Not all venture capitalists invest in “start-ups.” While venture firms will invest in companies that are in their initial start-up modes, venture capitalists will also invest in companies at various stages of the business life cycle. A venture capitalist may invest before there is a real product or company organized (so called “seed investing”), or may provide capital to start up a company in its first or second stages of development known as “early stage investing.” Also, the venture capitalist may provide needed financing to help a company grow beyond a critical mass to become more successful (“expansion stage financing”).

The venture capitalist may invest in a company throughout the company’s life cycle and therefore some funds focus on later stage investing by providing financing to help the company grow to a critical mass to attract public financing through a stock offering. Alternatively, the venture capitalist may help the company attract a merger or acquisition with another company by providing liquidity and exit for the company’s founders.

At the other end of the spectrum, some venture funds specialize in the acquisition, turnaround or recapitalization of public and private companies that represent favorable investment opportunities.

There are venture funds that will be broadly diversified and will invest in companies in various industry sectors as diverse as semiconductors, software, retailing and restaurants and others that may be specialists in only one technology.

While high technology investment makes up most of the venture investing in the U.S., and the venture industry gets a lot of attention for its high technology investments, venture capitalists also invest in companies such as construction, industrial products, business services, etc. There are several firms that have specialized in retail company investment and others that have a focus in investing only in “socially responsible” start-up endeavors.

Venture firms come in various sizes from small seed specialist firms of only a few million dollars under management to firms with over a billion dollars in invested capital around the world. The common denominator in all of these types of venture investing is that the venture capitalist is not a passive investor, but has an active and vested interest in guiding, leading and growing the companies they have invested in. They seek to add value through their experience in investing in tens and hundreds of companies.

Some venture firms are successful by creating synergies between the various companies they have invested in; for example one company that has a great software product, but does not have adequate distribution technology may be paired with another company or its management in the venture portfolio that has better distribution technology.

Length of Investment

Venture capitalists will help companies grow, but they eventually seek to exit the investment in three to seven years. An early stage investment make take seven to ten years to mature, while a later stage investment many only take a few years, so the appetite for the investment life cycle must be congruent with the limited partnerships’ appetite for liquidity. The venture investment is neither a short term nor a liquid investment, but an investment that must be made with careful diligence and expertise.

Types of Firms

There are several types of venture capital firms, but most mainstream firms invest their capital through funds organized as limited partnerships in which the venture capital firm serves as the general partner. The most common type of venture firm is an independent venture firm that has no affiliations with any other financial institution. These are called “private independent firms”. Venture firms may also be affiliates or subsidiaries of a commercial bank, investment bank or insurance company and make investments on behalf of outside investors or the parent firm’s clients. Still other firms may be subsidiaries of non-financial, industrial corporations making investments on behalf of the parent itself. These latter firms are typically called “direct investors” or “corporate venture investors.”

Other organizations may include government affiliated investment programs that help start up companies either through state, local or federal programs. One common vehicle is the Small Business Investment Company or SBIC program administered by the Small Business Administration, in which a venture capital firm may augment its own funds with federal funds and leverage its investment in qualified investee companies.

While the predominant form of organization is the limited partnership, in recent years the tax code has allowed the formation of either Limited Liability Partnerships, (“LLPs”), or Limited Liability Companies (“LLCs”), as alternative forms of organization. However, the limited partnership is still the predominant organizational form. The advantages and disadvantages of each has to do with liability, taxation issues and management responsibility.

The venture capital firm will organize its partnership as a pooled fund; that is, a fund made up of the general partner and the investors or limited partners. These funds are typically organized as fixed life partnerships, usually having a life of ten years. Each fund is capitalized by commitments of capital from the limited partners. Once the partnership has reached its target size, the partnership is closed to further investment from new investors or even existing investors so the fund has a fixed capital pool from which to make its investments.

Like a mutual fund company, a venture capital firm may have more than one fund in existence. A venture firm may raise another fund a few years after closing the first fund in order to continue to invest in companies and to provide more opportunities for existing and new investors. It is not uncommon to see a successful firm raise six or seven funds consecutively over the span of ten to fifteen years. Each fund is managed separately and has its own investors or limited partners and its own general partner. These funds’ investment strategy may be similar to other funds in the firm. However, the firm may have one fund with a specific focus and another with a different focus and yet another with a broadly diversified portfolio. This depends on the strategy and focus of the venture firm itself.

Corporate Venturing

One form of investing that was popular in the 1980s and is again very popular is corporate venturing. This is usually called “direct investing” in portfolio companies by venture capital programs or subsidiaries of nonfinancial corporations. These investment vehicles seek to find qualified investment opportunities that are congruent with the parent company’s strategic technology or that provide synergy or cost savings.

These corporate venturing programs may be loosely organized programs affiliated with existing business development programs or may be self-contained entities with a strategic charter and mission to make investments congruent with the parent’s strategic mission. There are some venture firms that specialize in advising, consulting and managing a corporation’s venturing program.

The typical distinction between corporate venturing and other types of venture investment vehicles is that corporate venturing is usually performed with corporate strategic objectives in mind while other venture investment vehicles typically have investment return or financial objectives as their primary goal. This may be a generalization as corporate venture programs are not immune to financial considerations, but the distinction can be made.

The other distinction of corporate venture programs is that they usually invest their parent’s capital while other venture investment vehicles invest outside investors’ capital.

Commitments and Fund Raising

The process that venture firms go through in seeking investment commitments from investors is typically called “fund raising.” This should not be confused with the actual investment in investee or “portfolio” companies by the venture capital firms, which is also sometimes called “fund raising” in some circles. The commitments of capital are raised from the investors during the formation of the fund. A venture firm will set out prospecting for investors with a target fund size. It will distribute a prospectus to potential investors and may take from several weeks to several months to raise the requisite capital. The fund will seek commitments of capital from institutional investors, endowments, foundations and individuals who seek to invest part of their portfolio in opportunities with a higher risk factor and commensurate opportunity for higher returns.

Because of the risk, length of investment and illiquidity involved in venture investing, and because the minimum commitment requirements are so high, venture capital fund investing is generally out of reach for the average individual. The venture fund will have from a few to almost 100 limited partners depending on the target size of the fund. Once the firm has raised enough commitments, it will start making investments in portfolio companies.

Capital Calls

Making investments in portfolio companies requires the venture firm to start “calling” its limited partners commitments. The firm will collect or “call” the needed investment capital from the limited partner in a series of tranches commonly known as “capital calls”. These capital calls from the limited partners to the venture fund are sometimes called “takedowns” or “paid-in capital.” Some years ago, the venture firm would “call” this capital down in three equal installments over a three year period. More recently, venture firms have synchronized their funding cycles and call their capital on an as-needed basis for investment.

Illiquidity

Limited partners make these investments in venture funds knowing that the investment will be long-term. It may take several years before the first investments starts to return proceeds; in many cases the invested capital may be tied up in an investment for seven to ten years. Limited partners understand that this illiquidity must be factored into their investment decision.

Other Types of Funds

Since venture firms are private firms, there is typically no way to exit before the partnership totally matures or expires. In recent years, a new form of venture firm has evolved: so-called “secondary” partnerships that specialize in purchasing the portfolios of investee company investments of an existing venture firm. This type of partnership provides some liquidity for the original investors. These secondary partnerships, expecting a large return, invest in what they consider to be undervalued companies.

Advisors and Fund of Funds

Evaluating which funds to invest in is akin to choosing a good stock manager or mutual fund, except the decision to invest is a long-term commitment. This investment decision takes considerable investment knowledge and time on the part of the limited partner investor. The larger institutions have investments in excess of 100 different venture capital and buyout funds and continually invest in new funds as they are formed.

Some limited partner investors may have neither the resources nor the expertise to manage and invest in many funds and thus, may seek to delegate this decision to an investment advisor or so-called “gatekeeper”. This advisor will pool the assets of its various clients and invest these proceeds as a limited partner into a venture or buyout fund currently raising capital. Alternatively, an investor may invest in a “fund of funds,” which is a partnership organized to invest in other partnerships, thus providing the limited partner investor with added diversification and the ability to invest smaller amounts into a variety of funds.

Disbursements

The investment by venture funds into investee portfolio companies is called “disbursements”. A company will receive capital in one or more rounds of financing. A venture firm may make these disbursements by itself or in many cases will co-invest in a company with other venture firms (“co-investment” or “syndication”). This syndication provides more capital resources for the investee company. Firms co-invest because the company investment is congruent with the investment strategies of various venture firms and each firm will bring some competitive advantage to the investment.

The venture firm will provide capital and management expertise and will usually also take a seat on the board of the company to ensure that the investment has the best chance of being successful. A portfolio company may receive one round, or in many cases, several rounds of venture financing in its life as needed. A venture firm may not invest all of its committed capital, but will reserve some capital for later investment in some of its successful companies with additional capital needs.

Exits

Depending on the investment focus and strategy of the venture firm, it will seek to exit the investment in the portfolio company within three to five years of the initial investment. While the initial public offering may be the most glamourous and heralded type of exit for the venture capitalist and owners of the company, most successful exits of venture investments occur through a merger or acquisition of the company by either the original founders or another company. Again, the expertise of the venture firm in successfully exiting its investment will dictate the success of the exit for themselves and the owner of the company.

IPO

The initial public offering is the most glamourous and visible type of exit for a venture investment. In recent years technology IPOs have been in the limelight during the IPO boom of the last six years. At public offering, the venture firm is considered an insider and will receive stock in the company, but the firm is regulated and restricted in how that stock can be sold or liquidated for several years. Once this stock is freely tradable, usually after about two years, the venture fund will distribute this stock or cash to its limited partner investor who may then manage the public stock as a regular stock holding or may liquidate it upon receipt. Over the last twenty-five years, almost 3000 companies financed by venture funds have gone public.

Mergers and Acquisitions

Mergers and acquisitions represent the most common type of successful exit for venture investments. In the case of a merger or acquisition, the venture firm will receive stock or cash from the acquiring company and the venture investor will distribute the proceeds from the sale to its limited partners.

Valuations

Like a mutual fund, each venture fund has a net asset value, or the value of an investor’s holdings in that fund at any given time. However, unlike a mutual fund, this value is not determined through a public market transaction, but through a valuation of the underlying portfolio. Remember, the investment is illiquid and at any point, the partnership may have both private companies and the stock of public companies in its portfolio. These public stocks are usually subject to restrictions for a holding period and are thus subject to a liquidity discount in the portfolio valuation.

Each company is valued at an agreed-upon value between the venture firms when invested in by the venture fund or funds. In subsequent quarters, the venture investor will usually keep this valuation intact until a material event occurs to change the value. Venture investors try to conservatively value their investments using guidelines or standard industry practices and by terms outlined in the prospectus of the fund. The venture investor is usually conservative in the valuation of companies, but it is common to find that early stage funds may have an even more conservative valuation of their companies due to the long lives of their investments when compared to other funds with shorter investment cycles.

Management Fees

As an investment manager, the general partner will typically charge a management fee to cover the costs of managing the committed capital. The management fee will usually be paid quarterly for the life of the fund or it may be tapered or curtailed in the later stages of a fund’s life. This is most often negotiated with investors upon formation of the fund in the terms and conditions of the investment.

Carried Interest

“Carried interest” is the term used to denote the profit split of proceeds to the general partner. This is the general partners’ fee for carrying the management responsibility plus all the liability and for providing the needed expertise to successfully manage the investment. There are as many variations of this profit split both in the size and how it is calculated and accrued as there are firms.

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Author: Jason Tapolci
Article Source: EzineArticles.com
Provided by: Guest blogger