VC Secrets: The Language of Venture Capital

Dear ,

As promised, here is your new issue of the Expert-zine.

The Language of Venture Capital 

  By William F.(Bill) McCready
  CEO/Founder, Venture Planning Associates, Inc.
  http://www.ventureplan.com

When seeking financing for your venture, it's easier to gain
the confidence of potential investors if you speak, or at
least understand, their language. For instance, entrepreneurs
are sometimes surprised to learn that 'Venture Capital' is not
a catchall phrase meaning 'funding'. In fact, it's a specific
type of funding with definite terms and guidelines.

The following is a sampler of terms you may come across as you
go through the funding process. 

VENTURE CAPITAL

Venture capital is a process by which investors fund early
stage, more risk-oriented ventures. It differs substantially
from 'traditional' financing in the following ways: 

- Funding provided to new or existing firms with potential for
  above-average growth. 
- Often provided to startup and other emerging enterprises
  because they lack the collateral, track record, or earnings
  required to get a loan. 
- The investment, typically requiring a high potential of
  return, is structured so that it can be liquidated within a
  three to seven year period. 
- Then an initial public offering may take place, or the
  business merges or is sold, or other sources of capital
  are found. 
- The entrepreneur typically relinquishes some level of
  ownership and control of the business. 
- Venture capitalists typically expect a 20-50% annual return
  on their investment at the time they are bought out. 
- Typical investments range from $500,000 to $5 million. 
- Management experience is a major consideration in evaluating
  financing prospects. 

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STAGES of DEVELOPMENT of a BUSINESS

  SEED CAPITAL. Source of funding for the early stages of a
  startup venture where the product, process, or service is in
  its conceptual or developmental phase. 

  STARTUP. From founding the business to the beginning of
  operations and the generation of revenue. 

  FIRST STAGE. Initial growth phase, funded by the initial
  capitalization. Management and operations are in place, and
  markets initially identified are being penetrated using
  available resources. 

  SECOND STAGE. The business seeks to expand its product line,
  expand its facilities, identify and penetrate new markets,
  and continue the growth phase. 

  THIRD STAGE. The business is established in its target
  markets. 

  MEZZANINE FINANCING. Financing provided, usually by private
  investors or venture capital firms, prior to a company going
  public, or initiating its next stage of financing. 

  PRIVATE PLACEMENT. An offering of debt, equity or limited
  partnership interests to a small number of investors
  (generally 35 or fewer) on a 'private' basis. Exempt from 
  the registration requirements of the securities laws. 

  DILUTION. Either the percentage reduction of ownership in a
  company resulting from the sale of additional shares of
  stock, or in the difference between the price paid by
  investors in either a private-placement or public financing. 

  DUE DILIGENCE. The process of investigation by venture
  Capital firms and other investors of a company, its business,
  and financial plans, prior to proceeding with an investment. 

  FEASIBILITY STUDY. A study that evaluates a proposed
  venture's potential for success. 

  EQUITY STAKE. An equity ownership position that is provided
  to a funding source as compensation, or additional
  compensation, for providing management consulting, financing
  or miscellaneous services. 

  SWEAT EQUITY. The value assigned to the entrepreneur's
  contribution or investment of time and effort in the venture.

FIND a CHAMPION

If you have not raised money for a venture before, you will
find this a very interesting experience. Even people who love
your idea, will run to the exits when you ask them for money.

The most important thing you can do is find an experienced
money raiser or gatekeeper for your business. Have your
management team interview at least 5 candidates, and do your
due diligence. You want someone with direct connections in 
your industry sector who has successfully raised money in the
past for your type of company.

While the money sources will want to hear directly from your
team, the use of a properly selected gatekeeper will help you
with introductions and champion your cause. Choosing the wrong gatekeeper can
delay receiving funds or even totally wipe out
your deal.

TIME FRAME

Vital to your success is the awareness that fund raising is a
never ending-process as your company grows. The end of one
round of funding is just the beginning of the next round. 
You can expect to invest at least six months in finding your
first round of funding, and three to six months for your next
round.

Good Luck and Happy Hunting!

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Teri McCready, Publisher  
Tel. (858) 457.3434 /  email: marketing@ventureplan.com

5370 Toscana Way                San Diego, CA 92122 USA

Copyright 2000-2002, Venture Planning Associates, Inc.
ISSN: 1529-1316

Everyone's an expert in something, but almost no one
is an expert in everything!
        Teri McCready, Publisher, Expert-Zine
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Received on Saturday, 11 October 2003 01:21:38 UTC