Venture Caplitalists - what to expect

Pub07

Myself and a friend may be meeting some of these guys next week to secure funding for a business idea. I'm just wondering has anyone got any experience with this?

What kind of info will they be looking for once they've read your business plan? What % stake in the company would they be looking for?

We are slightly concerned that if we can't come to an agreement with them on share %, they will just break off negotiations and basically steal our idea as they will have our business plan. I don't want to enter into a meeting where I'm forced to take a certain position just to avoid being screwed over. We don't see any other options on financing the business as we haven't the capital to secure a big enough loan off the bank to do it ourselves.

Would it be a good idea to bring a lawyer to the meeting?

stepbar

Is there any way you can source the finance else where? A good firm of accountants always have high profile customers who maybe interested.
Have you any assets that you can offer up as security?

Venture capitalists should only be used as a last resort. They won't want a minority shareholding in the company. Think of the Dragon's den. Same idea. Be prepared to hand away more than 30 - 50% of your business for pittance.

What sort of money are we talking about here?

Pub07

Well there is no way we would accept that type of percentage. If this business goes the way we expect I would never forgive myself for being so shortsighted.

We had a look at the what Enterprise Ireland were offering but it seems you already need to have a business up and running with a fair bit of capital in it to get anything worthwhile off them. We think we would be eligible for the Research, Technology and Innovation Scheme grant at some stage but as that only applies to companies that are up and running it won't help us at this stage.

We would be talking minimum €250,000, preferably €350,000 and that is not including advertising. Although if got to that stage we should be able to secure a grant to cover advertising costs.

We would definately be interested in sourcing the money elsewhere, we are confident of convincing someone of our idea's potential and getting them to invest, if they've got the capital. We do not have enough assets to offer as security, we could probably get 80K together but that would be me taking most of the risk for the same reward and even still it is not near enough.

I never considered that accountants idea. We have considered private investors and there is one very successful guy we know and could talk to if only he was ever in the country these days. I would be very interested in any more info you can give me as this is the first time we've done something like this and are looking to get the best possible deal.

Could we just walk into an accountanty firm and ask if they have any clients that might be interested in funding a hi tech startup for a certain amount of equity? Or would the amount we are looking for be considered too miuch for a private investor?
Are there other options we should be looking at?

antoinolachtnai

The amount you are looking for is small money in investment terms, although that doesn't mean it's easy to get. The investment is too small for a venture capital company (because of the way VC's are structured, it's a long story).

If you don't have money of your own, and you don't have any customers, and it is absolutely critical to get that amount of money to get up and running, then you should be looking at giving away 30 or 40 percent of the equity in this company in the first round, at least.

Imagine if it were your money. This would be a complete shot in the dark. You guys have absolutely nothing to show.

Who will give you a grant to cover advertising costs? What about marketing costs? How are you going to pay your marketing guy?

Here's what I recommend you do, although I know little about your circumstances, and you I don't think you want to say too much.

Think about the real costs of bringing this thing to market. Really think about it.

Go to the meeting and don't bring your lawyer. Don't bring your business plan. Be able to talk about the basic core special thing your business does.

Then ask these guys whether they think of your idea and what they think might be the best way to proceed with it.

Once you have this patter down, give the patter to everyone you know who might be able to help you.

Why don't you tell your successful friend about your idea over the telephone?

Try to get referred to a firm of accountants by someone who's heard the patter, rather than just showing up in reception.

Pub07

Hmm, that looks like a plan. I think your idea of getting a bit of a buzz about it could be the way to go. I have an uncle who deals in bonds in Davys in dublins, Im sure he must know some individuals who could be interested in a high potential start up so I'll give him a shout. I can't image giving so much equity away at an early stage especially as whatever's left after that has to be split 50/50 between me and my friend.

Do you think it's possible to secure 300K for a max of 20% equity or is this totally unrealistic?
That is in essence valuing the business at €1.5 million which would we expect to surpass very within a very short time frame. Would the higher the potential of the business enable you to secure more money for less equity?

antoinolachtnai

Pub07 wrote:

Do you think it's possible to secure 300K for a max of 20% equity or is this totally unrealistic?
That is in essence valuing the business at €1.5 million which would we expect to surpass very within a very short time frame. Would the higher the potential of the business enable you to secure more money for less equity?

That sounds great in theory. The only problem is that your company isn't worth EUR 1.5 million. It's worth nothing. You are expecting someone to give you EUR 300,000 for one-fifth of nothing on the basis of something good that might happen in the future. Have you or your friend any experience with turning around this type of scenario?

If as you say, you plan to surpase a 1.5 million euros valuation, say to get to a five million euros valuation, even if you and your friend only retain 50 percent of the company, then you will have made 1.25 million euros each without having put in any money and having received salaries all through. Are you sure you aren't being greedy?

If your company is going to be as massively successful as you reckon, then you are going to have to take in extra capital and no doubt the original investors are going to be concerned about being diluted by the new capital.

My main concern for you is not that you will get ripped off by a prospective investor but that you really don't know that much about what you're doing or what the problems you'll encounter will be, and that everyone who meets you will realise this within minutes. Also, I'd say you have no idea who is going to buy this business off you at the end to give you and your investors a return.

Still, go and talk to a bunch of people you trust and see how you go. Think a lot about how you present your idea so people can grasp it quickly.

jmcc

The main things they will be looking at are team, track record and tenacity.

Is your team good? Do the people have the abilities to make the business successful. Have you actually got a track record in building a successful business? Have you the grit to keep on going regardless. They are the other things that VCs invest in beyond the business plan. They have to have confidence in the people they are investing in more so than the business plan.

One of the biggest problems, as Antoin has mentioned above, is the promoters giving their businesses a highly optimistic valuation based on no sales and no track record.

If it is just at the business idea stage, look at applying to the Enterprise Ireland backed EPP programmes (the one for the South East is http://www.seepp.ie ).

The other important aspect to remember is that the VCs will do a lot of research and you have to know your market inside out. You have to know all threats and competitors. But ideas are easy - it is the execution that is difficult. If you don't believe enough in your business to lose everything, don't do it.

Regards...jmcc

Pub07

antoinolachtnai wrote:

That sounds great in theory. The only problem is that your company isn't worth EUR 1.5 million. It's worth nothing. You are expecting someone to give you EUR 300,000 for one-fifth of nothing on the basis of something good that might happen in the future. Have you or your friend any experience with turning around this type of scenario?

Basically that's how much confidence we have in our business idea.

My main concern for you is not that you will get ripped off by a prospective investor but that you really don't know that much about what you're doing or what the problems you'll encounter will be, and that everyone who meets you will realise this within minutes. Also, I'd say you have no idea who is going to buy this business off you at the end to give you and your investors a return.

Yes, I've thought of that, experienced business people will see us coming a mile off, until we develop some experience ourselves. We will be looking to bring in one or two of these people to advise and oversee us from an early stage once we receive funding. As for being ripped off during the investment stage, that's our biggest worry of all and I might see if I can get my uncle involved in some advisory role in the company to counter this. Well, we won't be interested in selling the whole thing off at any stage, maybe a certain % so we have a few quid in the arse pocket. The investors can sell off their stake whenever they want as there would be no shortage of people looking to buy in if the business is a success.

jmcc wrote:

The main things they will be looking at are team, track record and tenacity.
Is your team good? Do the people have the abilities to make the business successful. Have you actually got a track record in building a successful business? Have you the grit to keep on going regardless. They are the other things that VCs invest in beyond the business plan. They have to have confidence in the people they are investing in more so than the business plan.

We have no track record of running a successful business as we have never owned a business before, but you have to start somewhere. We're very interested in business in general we've been looking to run our own operation for quite some time. We haven't got experience in this area but we're not naive fools who are going to be overwhelemed by guys in suits. We know exactly how we want our product developed and marketed and we will be insistent on a very high level of quality. Hopefully we can get this across sufficiently in our business plan and our lack of experience doesn't count against us too much. By the way, that's lack of business experience, when it comes to the product itself we are very knowledgeable.

One of the biggest problems, as Antoin has mentioned above, is the promoters giving their businesses a highly optimistic valuation based on no sales and no track record.
The other important aspect to remember is that the VCs will do a lot of research and you have to know your market inside out. You have to know all threats and competitors. But ideas are easy - it is the execution that is difficult. If you don't believe enough in your business to lose everything, don't do it.

We have total belief in our business idea. It's not everyday you think of something that will be very appealing to the general public that doesn't exist yet.

I appreciate all the advise so far.

antoinolachtnai

Pub07 wrote:

Basically that's how much confidence we have in our business idea.

That's not confidence, it's foolhardiness, or at least it might be.

Yes, I've thought of that, experienced business people will see us coming a mile off, until we develop some experience ourselves. We will be looking to bring in one or two of these people to advise and oversee us from an early stage once we receive funding.

But you aren't going to be able to hire in expertise. You aren't raising enough money to do that.

As for being ripped off during the investment stage, that's our biggest worry of all and I might see if I can get my uncle involved in some advisory role in the company to counter this. Well, we won't be interested in selling the whole thing off at any stage, maybe a certain % so we have a few quid in the arse pocket. The investors can sell off their stake whenever they want as there would be no shortage of people looking to buy in if the business is a success.

This is not how it works. There isn't really a market for shares in private companies, particularly, where the shares don't give the buyer control.

We have no track record of running a successful business as we have never owned a business before, but you have to start somewhere. We're very interested in business in general we've been looking to run our own operation for quite some time. We haven't got experience in this area but we're not naive fools who are going to be overwhelemed by guys in suits. We know exactly how we want our product developed and marketed and we will be insistent on a very high level of quality. Hopefully we can get this across sufficiently in our business plan and our lack of experience doesn't count against us too much. By the way, that's lack of business experience, when it comes to the product itself we are very knowledgeable.

Have you really budgeted the money to develop to a high level of quality? If you want to get your letterhead, website and business cards done by one of the better agencies, it will cost you 8 percent of the money you want to raise. If you need to build prototypes and all the rest of it, it will cost even more. If this thing is going to be so big, it's hard to see how you won't spend at least a few hundred thousand on marketing alone.

How come you know exactly how you want your product marketed? Do you really have the marketing background to be able to say that?

We have total belief in our business idea. It's not everyday you think of something that will be very appealing to the general public that doesn't exist yet.

That's great to hear. And it's good that you know your business backwards. But don't let your enthusiasm blind you to the business realities. You don't have a business. You don't even have a management team. All you have is an idea. Please try to be realistic about valuations.

patto_chan

Are you sure Enterprise Ireland can't help you? Suggest you try the High Potential Start Up:
http://www.enterprise-ireland.com/CommonPages/High_Potential_Start_Ups.htm

VCs may give you money but will demand a significant amount of equity I think. Be wary

information

antoinolachtnai wrote:

This is not how it works. There isn't really a market for shares in private companies, particularly, where the shares don't give the buyer control.

There should be an exit strategy in your business plan, its usually
A trade sale or an IPO.

antoinolachtnai wrote:

f this thing is going to be so big, it's hard to see how you won't spend at least a few hundred thousand on marketing alone.

marketing costs are massive and always underestimated by people with no
marketing experience

antoinolachtnai wrote:

Please try to be realistic about valuations.

VC's will have their own methods to value a business, which will be vastly
different to yours.

If you where to do a deal with VCs, it will also take 6 -12 months and
10k-50k in legal fees before you would see any money.

VC's don't usually deal in the sums you are talking about.

Enterprise Ireland will give you 40k in a feasibility grant to develop the
idea if you get HPSU status.
Then when you raise money they will match what ever you raise.

I would advise you to go the BES route, you will need a grant from EI
in order to be elegable. Talking to one of the accounting firms that
specialises in BES schemes.

REDZ

They generally look for a 30% return per annum, with a max 5 year term.

CathalMc

Hi Pub07.

You haven't given us enough information to advise you correctly about your particular situation, I believe some of the previous advice may be a little general and not tailored to your specific hi-tech case. I do think your enthusiasm and optimism are palpable which is an excellent start.

Some questions to focus yourself and this thread:

Will a physical product being produced, or is this a service like a IT service? For a product, have you considered mechanical/electrical/aesthetic design elements in your product, and how these might be accomplished- is the expertise all in-house or will you need external companies to undertake part of these? Have you talked with these companies and done your research on them? When the time comes, be prepared to negotiate. Some companies may consent to a credit line, deferred payment in exchange for future guarantee of exclusivity of purchasing etc., which is probably all you'll have to offer.

Secondly, do you or your partner(s) have any marketing and sales experience? A financial institution would like to see almost obsessive market research. Target demographies identified that support your proposed marketing structure. A VC firm will typically bring in specific market experts and absolutely scrutinize your proposal. What about the global sales potential for this product - it might sound lofty right now, but remember how tiny the Irish market is. And you aren't selling to the Irish, you are selling to your target demography sector - x% - of the Irish. Global markets are crucial to consider as a small nation. Start considering language issues or cross-cultural potential your product may have early on, to take immediate advantage of the European market when it is prudent. Again, this kind of vision and preparation is standard in successful entrepreneurs.

Does your 1.5 million valuation have a realistic breakdown? Dropping figures like that will immediately prompt clarification questions. For X thousand Euro investment, how will this be used. What is your margin for unforeseen costs? How much are you personally invested in this venture - what are you personal finances - perception of financial commitment can be important.

Have you a trusted legal adviser for matters like patents of any inventions/novel processes This may be an issue ever before you start the company. Have you identified a niche market, or one in which existing companies have near-competitive products? For instance, if you sell mobile phone with levitating capabilities then companies like Nokia, Siemens, Motorola will have reverse engineered your technology, and copy-cat products will hit the market in 18-24 months. You need the patented IP to remain competitive. On the other hand, a completely vacant market is one in which consumers are unaccustomed to spending, which brings its own, mainly marketing, challenges - and patents are again crucial to dominating the market.

Is your business initiation suitable for bootstrapping? There are numerous advantages to establishing a business track record first. This is particularly suitable for an IT/online business for example, working from home. Also consider any cheap route for prototyping by using any connections you might have in colleges. A lot of VC investment tends to come in a businesses second year or thereafter anyway. Be aware the VC interviewers will probably see a number of ill-prepared people that same day, so any similarity to them - baseless numbers, glaring business inexperience or emotive hand-waving arguments - will not be persuasive.

Finally, there is, of course, a lot of common sense in not wanting to part with significant portions of your company - but the reality might be a choice between 100% of nothing and loss of investment, or 40/50% of a potentially profitable company. For a hi-tech start-up, in particular, this is frequently the case. Equally, percentage partnerships might be the only way to attract high grade employees in the early years.

Moving on, be aware that Irish/European venture capitalists are notoriously stingy in comparison to their American counterparts - so most of the success stories one hears are from here (I'm in California), leading to this: http://www.finfacts.com/irelandbusinessnews/publish/article_1010703.shtml
... which personally I think is a disgrace to the innovation support structure in Ireland.

For some more hearsay on my behalf, for European hi-tech start-ups I'm accustomed to hearing success stories from are frequently started in Switzerland and Cambridge, England. I speculate that apart from the excellent college system - EPFL in particular - that there is better venture-capital attitude there, which may be interesting to research if you have the inclination.

bardcom

Perhaps you could learn from talking to others in a similar situation. There's an ad-hoc group of technologists with a rather dim opinion of Irish VC's who go by the name of Paddy's Valley.

Paddy's Valley is an ad-hoc group of Irish business and technology people who have decided to form their own delegation to tour Silicon Valley and create closer bonds with companies and people in the mecca of the computer world. The tour nicknamed "PaddysValley" will head off on December 2nd 2007, taking advantage of the new air routes from Aer Lingus. The December 2nd visit will be the first of what is hoped will be regular trips, building up stronger and stronger links between Irish technologists and Silicon Valley.

The Paddy's Valley website is at: http://www.PaddysValley.org

Check it out, meet some people, etc.

BTW, the paranoia surrounding your "great idea" probably seems very real to you. But experienced VC's and technologists in general have more experience than you, and know that good ideas are two a penny. That's why the focus on the team first and foremost. Cos if the team can't/won't execute, the idea is irrelevant in the first place. Don't be afraid to discuss your idea or tell other people (unless you want to get a patent, in which case you can't even speak to a VC yet because that would count as disclosure - assuming that your VC refuses to sign an NDA)

Have fun.

ircoha

bardcom wrote:

BTW, the paranoia surrounding your "great idea" probably seems very real to you. But experienced VC's and technologists in general have more experience than you, and know that good ideas are two a penny. That's why the focus on the team first and foremost. Cos if the team can't/won't execute, the idea is irrelevant in the first place. Don't be afraid to discuss your idea or tell other people (unless you want to get a patent, in which case you can't even speak to a VC yet because that would count as disclosure - assuming that your VC refuses to sign an NDA)

Have fun.

Two of the most crass remarks i have seen on this forum.

Good ideas are very few and far between and the idea is key.

information

ircoha wrote:

Two of the most crass remarks i have seen on this forum.

Good ideas are very few and far between and the idea is key.

Anybody who has a lot of experience in the start-up area will tell you that,
bardcom is correct.

There are lots of companies out there that are very successful, but are not
selling the best products or service. They have a better team and are working
harder than other companies.

I have been told by VCs that they would gladly swap 10 of their ideas for 1 of
someone elses, because a good idea is just an idea until acted upon.

Pub07

Well, the initial novelty of finally having a great idea has well and truly worn off now. We still believe the idea is excellent but there's alot of work at this stage preparing to meet investors and trying to get everything up to scratch to put ourselves in as good a position as possible. We now expect to have to give up a much bigger stake than originally anticipated and don't have a problem with this anymore.

We were in to the Enterprise board there last week and the guy we were talking to clued us in a bit more. Also the advice in this thread has been great and opened our eyes to things we hadn't considered.
We're currently working on a prototype software application for demonstration purposes and have the business plan almost completed. Everything seems to be in order except for the one thing we can't work on (or bluff ), the lack of business background. Is this really going to be that much of a turn off to investors? I would have no problem with them appointing an advisor(s) in ensuring that things run smoothly. Are we supposed to just throw in the towel because we've never done this before?

Any advice on how to deal with this issue when it comes up, as though it doesn't seem that important to ourselves, it seems as if it could be a deal-breaker with vcs.

Pub07

Could it be a good idea to take the initiative and address it head on in the business plan, detailing the issue and proposing solutions such as advisors, attending seminars, etc...it would at least let them know we are aware of the 'problem' and that we are not naieve.

antoinolachtnai

The thing to do really is to get someone on board who has some sort of business background. If you can't actually find the person, say that you are looking for the person. Going on courses, that sort of mullarkey is better than nothing, but it doesn't really cut it. As much as anything else, what the people putting in the money want to see is that someone experienced and savvy has enough confidence in you guys to put some time into your business.

At the same time, I would say that no one is going to run your business for you. It's good to do the courses and talk to as many people as you can for that reason.

The other thing to do is to ask the people you're talking to what they suggest you do.

ressem

The county enterprise boards are another option.
They've got the facility to provide capital loans up to 75K plus other part funding, and demand less than EI. Enough to get you to the stage of friendly trials and low volume sales?

The one I've had dealings with has close contacts to accountants/financial managers who have worked on a number of startups through their first few rounds of funding.
No skin off your nose to enquire.

http://www.enterpriseboards.ie/downloads.aspx

information

http://www.siliconrepublic.com/news/news.nv?storyid=single8712

Sonnenblumen

Pub07 wrote:

Hmm, that looks like a plan. I think your idea of getting a bit of a buzz about it could be the way to go. I have an uncle who deals in bonds in Davys in dublins, Im sure he must know some individuals who could be interested in a high potential start up so I'll give him a shout. I can't image giving so much equity away at an early stage especially as whatever's left after that has to be split 50/50 between me and my friend.

Do you think it's possible to secure 300K for a max of 20% equity or is this totally unrealistic?
That is in essence valuing the business at €1.5 million which would we expect to surpass very within a very short time frame. Would the higher the potential of the business enable you to secure more money for less equity?

You would need to be more realistic if you want to attract VC funding. You've no self funding, no business, no customer base, no sales and no margin. Sales are vimportant but ultimately margin, and especially relevant for VCs will be prospective exit strategies.
Generally if you have secured some EI funding (Feasability, Employment, RTI etc but EI will also probably expect equity/pref shares) this appeals to VCs and is seen as positive.

Unless you have an almost ground breaking idea and a well structured bus plan, I would be surprised if any VC would agree to your 'start-up' valuation.

VCs will probably look at 2-3 rounds of funding, be mindful of dilution, who the other shareholders are and insist on achievement of targets.

Good ideas are two a penny, starting and sustaining a successful (ie profitable) business is a different ball game.

Look for VCs who can offer more than finance (track record of similar business/networking possibilities etc). They've been burnt badly over the last years and consequently much more shrewd than previously. No surprises if its mainly VC money funding the venture.

IMO its a weak starting point to be reliant on solely VC funding.

Good luck and whatabout BES or private investors?

CelloPoint

antoinolachtnai wrote:

The thing to do really is to get someone on board who has some sort of business background./QUOTE]

People with "some sort of business background" just don't cut it anymore. Board members must be 100% committed, have their necks on the line, be experienced in their area and be capable of managing/leading a team in order for a VC to invest. Top three criteria for VCs (in order of priority) are (AFAIK):

- People
- Market size
- Product/Service offering

Gareth37

Pub07 wrote:

Myself and a friend may be meeting some of these guys next week to secure funding for a business idea. I'm just wondering has anyone got any experience with this?

Yes but you need more than an idea. VCs invest in people, market research and fiancial plan. You need reputable legal advisors and accounts. You may be in for a shock.

Pub07 wrote:

What kind of info will they be looking for once they've read your business plan? What % stake in the company would they be looking for?

Market research and financial plan, get out strategy for them and more. This needs to be done by a professional accountant experienced in such matters imo. 0% until you can prove many things.

We are slightly concerned that if we can't come to an agreement with them on share %, they will just break off negotiations and basically steal our idea as they will have our business plan.

No they won't. Its not your idea that they are interested in and if they did that once they would get a bad name. It just doesn't happen. They are interested in you, your market research and your ability to manage a profitable company. You can get them to sign an NDA but I don't think you should.

I don't want to enter into a meeting where I'm forced to take a certain position just to avoid being screwed over. We don't see any other options on financing the business as we haven't the capital to secure a big enough loan off the bank to do it ourselves.

Would it be a good idea to bring a lawyer to the meeting?

No. If you are worrried about someone stealing your idea then what is going to happen once you enter the market. I don't think you are ready for business yet.


EVERYONE thinks their idea is great.

The only thing that says whether or not your idea/product is great is the market research in your business plan.

What is your past business management record? What is the company's sale targets based on potential customer feedback.

Sonnenblumen

Gareth37 wrote:

The only thing that says whether or not your idea/product is great is the market research in your business plan.

Market research is an indicator but not proof. The real indicators are ones where customers are prepared to hand over money and in sufficient numbers so as earn a margin for the supplier.

Plenty of examples of market research indicated great new products only to flop after launch. Much of the dotcom bubble a few years back was as a result of great ideas but most costing more to sell than sales revenue. Crap logic, but it still goes on albeit to a much lesser extent.

A good VC will see through any fluff talk really quickly. A good VC is similar to a good company, in it to make money but with a shorter exit strategy.

Plenty of buried potential but you can only take cash to the bank.