How long does an angel seed round take to close once business plan and pitch are completed?

Tuesday, May 3rd, 2011

There are tens of thousands of angel or seed round deals that take place every year, and every deal is different. It depends on a number of factors, some of that depend on the investors and some that depend on the entrepreneur. There are cases of investors handing over a check in the first meeting with the entrepreneur, and there are cases where it takes nine months to work out all the details and due diligence. In our experience, it usually takes around four to six months to work out all the details of an angel or seed round.

One common problem is not being able to raise the entire amount required. If you have told investors that you are looking to raise $500,000, but are only able to collect $200,000 from investors, you cannot assume that you can simply close the angel seed round at $200,000, because the angel investors may question why you now feel that $200,000 was sufficient. If you really need $500,000 to succeed, your angel investors may not want to invest $200,000 in a seed-stage venture that you yourself feel is not sufficiently capitalized. If you end up “in limbo”, it might feel compelled to keep trying to raise the remaining amount, since returning what you’ve managed to collect may be hard to accept.

How to get funding or investment for developing a product?

Saturday, April 30th, 2011

Seed funding is typically the very first investment of money used to for market research and developing product. Seed funding can come from the entrepreneur’s personal savings (e.g. from inheritance or a severance package from the founder’s prior job) or from “Friends & Family”. Seed capital is usually designated as equity, but it can also take other forms. For example, it can take the form of debt, including credit card debt. It can also take the form of government grants. The US Department of Energy, for example, provides grants for the development of products that benefit the environment and reduce household energy consumption.

You can also get seed funding in the form of subsidized rent at a business incubator. Many communities have incubators that provide funding for patent applications and help in product development. You may want to check with your local chamber of commerce, or local college or university, for a list of such incubators.

Venture capital firms can also be a source of funding for product development. Some venture capitalists specialize in developing and bringing a new idea to market. In addition to providing funds, they can introduce you to key professionals, such as patent attorneys or patent agents.

What makes a good business plan? – What do VC’s /Angel Investors look for in a business plan?

Tuesday, April 26th, 2011

Every investor is different, but most like business plans that are both informative and brief. Ideally, a PowerPoint presentation of around 15-20 slides would be enough to explain most ventures. First, try to describe the business in a single sentence. Then describe the problem that your company aims to solve, how customers currently solve such problems and how your company solve such problems (presumably in some new or different way). You should describe your product line-up, and also describe your plans to develop new products over time. Investors will also want to understand your business strategy, including your pricing, distribution and promotion strategies. They’ll want to understand your revenue model, the cost of customer acquisition and your list of customers or prospective customers.

Venture Capital firms and angel investors also need to understand how big the opportunity is. You can help them by calculating the size of the market today and in the future, based on your definition of the market, and indicating who the main competitors are and what their market shares are. How does your product or service compare against that of the competition, what competitive advantages does your company enjoy and how do you think your market share will evolve over time?

Describe your team, including founders, managers, directors and advisors. This is particularly important for early stage companies, who often have few resources beyond the team.

Last, but not least, be sure to share your company’s financials, including P&L, balance sheet, cash flow statement, and capitalization table. You may also want to mention the main terms of the deal that you would like to propose to the investor.

What must be kept in mind when making the first presentation to a potential investor / VC? – Things to keep in mind while presenting Bplan to VC / investors

Friday, April 22nd, 2011

Everyone can be an investor, so it’s difficult to generalize about the best way to persuade any investor to invest in your company. Even if we examine only two types of investors, angel investors and early stage venture capital investors, there are many differences in their attitudes and preferences. However, here are some tips on what to keep in mind when making your first presentation to such investors:

1. Do you homework and have your facts at your fingertips. You should have a clear idea about every aspect of your venture, including the economics. Even if you are an engineer, that’s no excuse for not understanding the financial and accounting aspects of the business. Astute investors will expect you to know “the numbers”, including your assets, liabilities, revenues, profits and margins.

2. Know your investor and understand their preferences. Some investors invest in specific sectors or stages, so if you know this in advance you can position your company appropriately. For example, if your investor focuses on high technology, you can highlight the technical aspects of your business.

3. Build trust. There are many ways to do this. For example, you might start by showing up for the meeting on time and being presentable. You can also build trust by identifying personal connections (e.g. common acquaintances or a common alma mater) and by being a good listener – and don’t forget to keep smiling!

4. Be able to explain why your company can give them a better return than their other options. Entrepreneurs often think that their company will produce returns that are high enough for investors. However, the amount that is “high enough” depends on what other companies are projecting to those same investors.

5. Be ready to negotiate, and don’t be too rigid in your thinking. Remember that in an early stage investment deal, there are many points of negotiation and it’s often possible to overcome “deal breakers” by being creative.

Series A, B & C Funding Definition

Monday, April 18th, 2011

When you hear about Series A, B and C funding, that refers to various rounds of preferred equity funding. Preferred stock is similar to regular equity (“common equity”), except that it has special rights that give it certain advantages over common stock. For example, holder of preferred stock get paid first if a company is sold; only after preferred shareholders receive a pre-specified amount (e.g. some multiple of the amount they invested) do the common shareholders receive any money. Also, preferred shareholders typically get a fixed dividend rate, though for early stage companies the dividend payments are often deferred.

While company founders and insiders typically own common stock, venture capital and later stage private equity investors almost always insist on preferred stock. The first funding round, usually by angel investors or early stage VCs, is called Series A, and each subsequent preferred round goes by the next letter of the alphabet. VC firms often specialize in specific rounds. For example, some VCs will only invest in Series A rounds because they feel they can add the most value as a company’s first institutional investor. Other firms may focus on later rounds because they may have a particular competency in helping companies go public.

By the time a company has gotten to Series C, Series D and Series E, it has become a relatively mature business. Finally, when a company goes public, all the preferred stock usually automatically converts to common equity at a pre-specified ratio.

Raising Funds for new start-ups: Actions and Strategies?

Thursday, February 24th, 2011

Startups find it unviable to raise debt because they cannot afford to be burdened with a fixed interest payment in their early stages. Moreover they do not usually have any collateral to offer the bank and thus are constrained in their ability to raise debt. Therefore, before they raise debt startups rely on equity investment by angels. However even those investments are hard at the very beginning of the journey. The initial equity therefore, typically comes from personal savings.

Further funding without equity is usually obtained in the form of soft loans from friends and family.
In addition, startups looking to get funding without equity have a number of government sources of funds available to them. Government agencies provide grants, especially to startups that have a strong R&D component.

Startup funding without a significant amount of equity can also be provided through some incubators, Such funding of startups is usually in kind rather than in cash. Incubators provide subsidized office space, hardware and software, mentorship. In return startups may be required to repay the subsidies received over the course of their tenancy at the time they exit the incubator.

To sum up startups looking for funding without giving away shares in their venture can rely on

  • Friends and family
  • Government schemes
  • Incubators, (usually government sponsored ones)

However while looking at the question of sources of funding it is also important to look at how much funding you need. While funding is critical there are ways in which this requirement can be reduced in the early stages of a business. Here are three good ways to reduce the quantity of seed money a business requires:

  1. Eliminate fixed costs: Fixed costs are costs that get incurred irrespective of the sales of a business: rentals, equipment, fixed salaries, etc. Avoid these like the plague.
  2. Experiment, then say Eureka: Every idea an entrepreneur has appears like the ultimate ‘aha’ moment, no matter how many false epiphanies he/she has had in the past. Don’t burn your cash on your latest brain wave. Start small, and get a feel of the landscape before running through the streets of Syracuse screaming Eureka!
  3. Scrounge like crazy: You may eat (in order to live, and work on your startup) but anything beyond for you or your team can be considered a luxury. Well, not exactly, but you get my drift.

If you follow this advise you will be surprised how far your money will go.

What is the role of a VC association, like NVCA? Can they help me raise funds?

Thursday, January 27th, 2011

There are dozens of VC associations around the world (Stern Fisher has prepared a list of them, which you can view online), and most of them provide the following services: advocacy on behalf of the industry (e.g. with respect to government regulations), promulgation of professional standards, training, conferences and research. While VC associations do not typically provide direct assistance to entrepreneurs, the work they do in the areas of training, conferences and research can indirectly help entrepreneurs raise funds.

The training programs organized by VC associations typically cover issues such as term sheets, shareholders agreements and instruments (e.g. redeemable convertible preferred stock). Understanding these topics can help an entrepreneur negotiate with a VC firm, and during the training program the entrepreneur can meet investment professionals of all ages – including both junior associates and senior professionals that are part of the faculty.

Conferences sponsored by VC associations are another good way to meet investment professionals, who otherwise can be somewhat elusive. While you may not have time to have a meaningful discussion, you should be able to at least exchange contact details and set up a time to meet.

Research conducted by VC associations can also be very useful as you plan your fund raising efforts. For example, the directory of members usually contains not only contact information, but also the sectors and stages preferred by each VC firm. Knowing this can save an entrepreneur considerable time and money.

What is the best type of incorporation for a tech company seeking funds (angel or venture capital)?

Monday, January 24th, 2011

Every country has its own corporate laws, but in general angel investors and venture capital firms prefer to invest in corporations in which it is possible to have different classes of shares, such as common shares and preferred shares. This is true not just for tech companies, but also for non-tech companies.

In the USA, Angel investors and venture capital investors typically invest in C corporations with the word “Incorporated” (i.e. “Inc.”) or “Corporation” tacked on at the end. In other countries, there are similar entities.
1. In Germany, Austria and Switzerland best type of incorporation (from the point of view of angel and venture capital investors) is the GmbH (“Gesellschaft mit beschränkter Haftung”, meaning “limited liability business association”), as well as the AG (“Aktiengesellschaft”, meaning “business association with shares”).

2. In the United Kingdom, the usual form is Ltd. (abbreviation for limited company) or plc (abbreviation for public limited company).

3. In France, Switzerland, Belgium and Luxembourg the best form is “SARL” or “société à responsibilité limitée” (“company with limited liability”) or SA “société anonyme” (abbreviation for anonymous partnership).

4. Italy uses “Srl”, or “Società a Responsabilità Limitata” (limited liability company) and “SpA” or “Società Per Azioni” (stock corporation).

5. In India the usual form of incorporation is a “Limited” (i.e. “Ltd”) company, also known as “Private Limited” if the number of shareholders is small.

Angel investors and venture capital firms typically do not seek to invest in partnerships, sole proprietorships. Pass-through entities, such as S Corporations and Limited Liability Companies, are also not preferred by angel investors and venture capital firms. There are many reasons for this – for example, unlike corporations, LLCs are not required to have a board of directors or officers.

If you received Venture Capital then do you have plan to return this fund to Investor ?

Wednesday, January 19th, 2011

Even if you don’t want to prepare a plan to return the funds to investors, a good Venture Capital firm will ask you to prepare one since the funds that they are investing do not belong to them; their funds have a limited life and they’ll need to liquidate their holdings in order to return the funds to their investors (called Limited Partners) before the dissolution of their fund. Some term sheets will include a redemption clause, which will specify a date by which you will need to return the funds to the venture capital firm. The typical exit options for venture capital include the following:
1. Company buyback of shares: This assumes that the business will be generating relatively large cash flows, which is often not the case for early stage companies that are focusing on growth rather than profits.

2. Sale to another VC firm: This is called a secondary private equity transaction.

3. Initial Public Offering (IPO): This is often preferred by entrepreneurs because they can continue to manage the company.

4. Sale of company to a strategic investor: In this scenario, you will probably have to give up control of the company. Also, the venture capital firm will be entitled to a liquidation preference, which means that when the company is sold, they (as preferred shareholders) will get to collect their funds first before any of the common shareholders.

How to determine valuation of my start-up in 3-5 years for VC funding?

Wednesday, January 12th, 2011

Valuation is in the eye of the beholder, and cannot be taken in isolation. When we say valuation is in the eye of the beholder, we mean that what a company is worth to me may be different from what it’s worth to you. I may have an idea or proprietary technology that will transform the company, whereas you may only perceive value in liquidating the company. Moreover, in VC deals, value is something that is negotiated, so a lot will depend on your negotiating skills. This is particularly true in the case of early stage companies, where profits (or even sales) have not yet started to roll in. There are many well known examples of very valuable companies that have not yet figured out a “revenue model”; they are valuable simply because they have a good story and a very credible management team.

Valuation is also something that cannot be taken in isolation. For example, you may be willing to give up a little in valuation in return for more control over the company (e.g. through board representation or veto rights). Alternatively, you may insist on a higher valuation if the VC asks for a higher multiple in terms of liquidation preference (i.e. the number of times the VC wants to multiply his investment before any proceeds of a sale go to the founders).

For early stage companies in particular, valuation is a very amorphous – and contentious – concept. The correct way to think about how to value an early stage company is “it depends”. While this may not seem like a very satisfying answer, if you adopt this approach you will find the fund raising process far more interesting.