Entrepreneurs seeking venture capital often approach the market a bit naively. Though there are similarities to applying for funding through traditional lenders, there are also some differences. For example, venture capitalists can set any terms they want whether they fit traditional funding models or not. For example, a bank may require returns that are 5 times within a 5 year period. The venture capitalist may require 8 to 10 times within that same time period.
Successfully obtaining venture capital requires being fully prepared to meet the special demands of venture capitalists. Since these are private lenders, they can set the bar high in order to lower risks. The venture capitalist wants to know if you are going to make money, how long it will take to see investment returns, what kind of track record or related experience you have, and whether the company management team is competent, innovative and forward thinking.
If you can answer these questions successfully, there’s a good chance you will attract funding. However, matching the company with the right investor is critical. Term sheets detail the proposed agreements and at this stage it is critical that each side ask the right questions, come to a full understanding of expectations, and agree to valuation. There should not be any major surprises during the final negotiations once the term sheets are agreed upon.
Keep Your Deal Sweet and Not Sour
As odd as it may sound, you can select the wrong venture capitalist if you do not clearly explain your business model in terms of how you plan on operating and what your long term goals are for success. It’s not a matter of fabrication, but more a matter of clear communication. A deal can go sour really fast if the venture capitalist discovers during final negotiations that the company management really plans on taking a different growth path than was explained or has plans that were not divulged and could potentially adversely impact operations.
Viewing End Goals Through Valuation
If this seems obvious then you would be surprised how many negotiations fall apart even after terms sheets have been agreed upon. One of the main areas of contention is business valuation. Business valuation is normally figured by determining the discounted cash flow and then adding the residual value of the business. The projected cash flow will extend to the end of the agreement because that is the period in which the venture capital funders expect to get their money back.
Of surprise to many businesses applying for venture capital is the fact the venture capitalists will value their business much lower than the business believes is accurate. However, the venture capitalist viewpoint is one of minimizing risk and earning a profit while a business is anticipating growth and profits and is willing to take risks to achieve their goals. The business and the venture capitalist have the same end goals but will approach valuation differently while deciding if it is possible to reach those goals. Want more info or assistance? Visit http://www.funded.com