Obtaining venture capital is one of the most challenging endeavors you will face in your lifetime. In order to even approach a venture capital firm you must ensure that your business has the proper corporate structure, an informative and properly drafted professional business plan and a clear executive summary. The business plan must include financial projections, a use of funds section and an exit strategy. It is also essential to understand what type of companies the firm you are pitching prefers and their investment parameters. Understanding this will provide you with the ability to design the initial deal structure and develop a negotiation strategy.
Things You'll Need
- Fax machine
- Copier or scanner
- Business planning software
- Legal documents software
- Web domain name
- List of venture capital firms
Determine the state in which you want to incorporate and then visit the secretary of state's website to reserve your company name. Decide whether you will use a C corporation, S corporation or limited liability company (LLC) as your corporate structure. Register your company's articles of incorporation (C-Corp) or articles of organization (LLC) with the secretary of state's website. Obtain an employer identification number (EIN) from the IRS via fax. Draft the company bylaws and hold your first board meeting. You will elect officers, record the meeting in the minutes and set the number of shares of stock (C-Corp) or units (LLC) that the company is authorizing at the first meeting.
Draft a two to three page executive summary as an outline for the business plan. The business plan needs to include sections on your business model; products and services; markets and size; management and competitors. State your funding request, which is the amount of money you are seeking, on the first page. Once completed, develop a two-minute "elevator pitch." This pitch should be designed to verbalize the essence of your company and capture the investor's attention.
Develop five-year financial projections coupled with a use of funds section. Obtain business financial projection software; this will make calculating taxes and cost of goods sold much easier. Ensure that you account for the little things, including insurances, licensing, phones, electric, water, taxes, furniture, leasing, and software and hardware costs. The use of funds section must contain operating capital requirements and all major cost factors such as payroll, property, patents, equipment, plant and construction costs.
Design a website. Obtain the domain name and choose a hosting center. Us the site to describe the company, its origin and what your company offers. Also describe management, their vision for the company and their past successes. Include their expertise and how they benefit the company. Provide a products and services section as well as a contact section with phone, address and email information. Make the site interesting, professional and a good fit with your corporate identity.
Formulate your company's exit strategy. An exit strategy describes to investors the way in which they will get their money back and, more importantly, how they will make money. This section states whether you will execute an initial public offering (IPO), a private placement or sell your company, and the time frame in which you intend to implement the strategy.
Research lists of venture capital firms and venture forums. Forums will have a number of investors at one event, allowing you to pitch your company to the group. Narrow the list by the type of investments the firm makes. Review the company's requirements on types of investments such as seed, early stage or growth; areas of expertise; deal structure (debt or equity); type of equity (common or preferred stock); controlling interest; boards seats; and other criteria that may or may not be acceptable. Use your network to obtain an introduction to a direct contact of the firm and call before sending any information.
Negotiate and close the deal. Meet the investor face-to-face. Develop a relationship. Be professional and confident in your meeting. Listen to what the investor wants; they are telling you how to close the deal. Investors are going to try to get the best deal they can. Do not accept the first offer. Negotiate the terms and structure. Have legal and financial business experts assist you with reviewing and drafting your documents.
Tips & Warnings
- Keep in mind that 100 percent ownership of an unfunded company is still nothing. Your job is to get your company funded and negotiate the best terms possible. Once funded you will be in a much stronger position. Be mindful that the investor is investing in your ability to succeed, so sell yourself as much as the idea. Be aware of brokers or middlemen demanding upfront fees. Deal directly with the investor and do not show fear or uncertainty.
- Be certain to comply with all securities laws, such as the federal Securities Act of 1933, individual state Blue Sky laws and Regulation D. Have expert legal advice in the area of business, securities and corporate law review all documents for compliance. Ensure that in the footnotes on page one of your business plan you note that "The material contained in this document is proprietary in nature, used for informational purposes only and is not an offer to sell stock"; and "Forward looking financial projections are subject to change due to future economic, political and other events beyond the control of the company." Finally, be sure to keep your business in good standing and follow the state law requirements necessary to protect you and your company.
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