6.0 Institutional Equity

FUNDING A BUSINESS >> Each section contains key Action Items located within the downloadable Action Guide >> Click to Download Action Guide.

CRITERIA AND SOURCES

6.1    Criteria

  • Same as private but more intense
  • Does your business have the potential for significant returns?
  • Who can introduce you to the right VC?

ACTION ITEMS: Complete the Action Items in your Action Guide.

LIST who you know that could introduce you to the right VC:

1)

2)

3)

6.2    Venture Capital Firms

  • Financial institution that focuses on providing capital, in the form of equity, to companies who offer them the prospects of significant growth
  • Partners and associates at venture capital firms are known as venture capitalists
  • Unlike angel investors, Venture Capitalists are professional institutions that invest other people’s money
  • Are judged and compensated by the performance of their investments
  • Require significant market potential of $50 million, $100 million or more
  • Most VC investments will lose money and only a few will be wildly successful

Venture Capital Firm Financings

  • Investments between $1 million and $25 million
  • Specific criteria that guide them
  • Stage
  • Sector
  • Geography
  • Scale, speed and liquidity potential
  • VCs tend to fund technology companies
  • VC’s provide more than just cash, management, introductions, etc.

6.3    Strategic/Corporate Investors

  • Corporations
  • Two Goals:
    • Earn financial returns
    • Partially control ventures that could effect or “disrupt” their business model
  • Could provide value well beyond their capital contributions
  • Strategic advice
  • Industry connections
  • Distribution assistance

6.4    Private Equity Firms

  • Investing in private companies (those that are not listed on a public exchange) in return for shares of those companies
  • Subsets of private equity
  • VC
  • Buyout investing
  • Recapitalizations
  • Mezzanine investing
  • Deal sizes are generally very large
  • From a risk/return perspective, private equity falls in between debt capital, which is low risk/low return, and venture capital, which is high risk/high return investing

A very small percentage of businesses actually receive funding from venture capital and private equity firms since the majority of business in the U.S. is made up of small businesses.

A venture-funded business must be capable of enormous rapid growth and exhibit a revolutionary business model that will change the marketplace.  Additionally, the business will have an exit strategy such as an initial public offering or the opportunity to sell the business to a larger entity.

Some venture capital organizations may look at 1,000 business plans before investing in ONE business!

Typically, your business will have already raised money from angel investors before seeking venture capital and may have rapidly growing revenues.

Venture capitalists are comprised of a very small group of elitist investors who know their money is needed to make your company grow.  They expect extremely large returns on their investment and although they want you to succeed, they can be brutal on you and your business.  They may force their vision and management decisions on you, so be prepared to stand firm.

Introductions to venture capitalists, strategic/corporate investors and private equity firms are the norm and someone within your angel investment round will often provide an introduction.

If you don’t have someone that can refer you to any of these organizations, begin to search for a referral source.  Just like angels, you can contact them directly, but it’s much better to be referred to any of the institutional equity firms at this stage.

Search the venture capitalists or other firms’ websites for their members, their board, their investment portfolio of companies and finally search the portfolio company websites and their individual board members as well.

Develop a list of names from each of the sources above and circulate that list to your personal advisors, investors and contact network.

If you’ve made it to this stage, generally there will be someone in your network that knows someone on the list that you distributed and can provide a “valuable” introduction.

You should also “make friends” with the entrepreneurs listed as portfolio companies on the investment firm’s website.  Contacting the business or entrepreneur in advance of reaching out to any of the firms will enable you to learn about their relationship together and may provide valuable lessons before seeking funding from them.  Additionally, they may be willing to provide an introduction to the firm’s leaders if they like you and your business model.

If you’ve exhausted every resource and can’t find a single referral to the venture capitalist or one of the other funding firms, then go ahead and contact them directly if you have a solid, high-growth, revolutionary business model that perfectly aligns with the firm’s investment criteria posted on their website.

Conduct further research via the National Venture Capital Association at www.nvca.org or the Private Equity Council at www.privateequitycouncil.org.

ACTION ITEMS: Complete the Action Items in your Action Guide.

CONDUCT further research via the National Venture Capital Association at www.nvca.org or the Private Equity Council at www.privateequitycouncil.org.

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