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Friday, February 25, 2011

VENTURE FINANCE – REALITY VS. RUMOR: A Plan to Find Your Financing

Dick Brown
Venture Finance - Reality vs. Rumors with Dick Brown

Step 1 - BP Review:
Last month we discussed the need to have your finished Business Plan reviewed by an experienced, successful entrepreneur – or better still, a VC or Merchant Banker – folks that are daily involved in the “money business” and funding real deals. You’d be amazed how different one of these “players” will gauge the emphasis of what you’ve written.

When finished, your BP is now a clear, readable, document that succinctly describes your venture. It has color, pictures, graphs, illustrations and coherent financial projections. Most important, it tells the reader (your potential investor) how much money they can make and shows how you’ll achieve that ROI for them.

Step 2 - Executive Summary
I applaud the “new wave” that uses PowerPoint presentations for their ES rather than just text. It’s not said often enough, but part of your task is to entertain the reader, not bore them to distraction. PowerPoint is much better. Again, the ES must cover: the basic function of the company; the background of each team member; any celebrities, “names” or “players” among these; your “edge” which will help provide success; how much money you need; and, again most important, how much money each investor will make and how your team plans to accomplish this.

Step 3 – Hire A Pro
You’re a basketball coach. Your team is tied in overtime and there’s 6 seconds left in the game. The referees just awarded your team a technical and you have one foul shot attempt to put the game away. Will you have your star scorer take it or will you call upon the worst player on your bench that hasn’t played for more than two minutes a game all year?

Raising money is hard work, time-consuming and frustrating. It’s also a whole different world from any you’ve probably encountered before. The “players”, rules, customs, and even the language and their subtleties are very different. Unless you feel very comfortable in this environment, hire someone that does. The same person that reviewed your BP and ES may be a good choice. Methods of payment vary, but some kind of and initial payment or retainer plus a nice bonus for success (getting your funding) are common arrangements. It could be the best investment you can make for your venture.

Step 4 – Create Your Fund Raising Strategy
Even experienced entrepreneurs ignore this step, probably the most crucial to your success. Create your Battle Plans along with your new consultant.

The first step is marketing your venture. The most important part is getting exposure to enough potential investors so you’ll get a few “leads”. Consider that in direct mail promotions a response rate of 1% is considered great and 3% to 5% an outrageous success. Even worse, the real response from sending generic emails to any investor lists is far smaller. Most of these end up caught as potential spam filtered by email programs, totally unseen by your target audience.

Potential Marketing Approaches Per Audience:
  1. The “3F’s” (Family, Friends and Fools) - Total Investment Target: $100,000 or less. Average investment per person: $5,000 to $25,000.
    Most state and federal laws allow you to take investment funds to a limited number of these “insiders”. If you need $100,000 and you get an average of $10,000 per person, you need 10 investors. Since these are people close to you, your success rate may be as high as one in three, so your “Hit List” must have at least 30 names. Be sure to check the laws where you live and also conform to all the paperwork required (even for your father or mother).

  2. Angels - Total Investment Target: $1,000,000 or less. Average investment per angel: $25,000.
    Angels get a lot of publicity. They are generally considered a “friendly, helpful” financing source. Perhaps this is because not long ago many of today’s angels were fledgling entrepreneurs. However, over the last few years this once fertile group has been decimated by the recession. Even worse, those remaining that still have disposable income have banded together into “Angel Groups”. Ironically, the latter has erected substantial barriers against entrepreneurs, including fees for presenting to the groups; a mountain of paperwork to complete; and, long lead times.

    Even more daunting, angels are individual investors and you must observe all existing state and federal regulations to take their money - an expensive and time-consuming task. Consequently, many of these groups have really morphed into social clubs for dilettante entrepreneurs. Personally, I advise any of my clients against considering this type of financing with one exception. If you need less than $200,000, you can: join every angel club in your territory; spend substantial time creating personal relationships with as many angels as possible; and, closing deals without the cost and delay of making multiple presentations – an outgoing, aggressive “sales” attitude comes in handy (the legal restraints still exist.)

  3. The “Pro’s” (VC’s and Investment Banks) - $1,000,000 or more. Investment per pro: Unlimited.
    These organizations are the “crème de la crème” of investors. Also, they’re the toughest to crack. An average VC company can receive over 100 unsolicited business plans a month. Of these, only 1% to 2% ever gets any money.

    However, it’s not like winning the lottery where the operative skill is pure, dumb luck. Intelligence about the breed; sophistication; clever marketing and dogged determination can substantially increase your probability of success.

    The first thing you must realize is that these organizations operate similar to an exclusive club and if you’re not a member your odds of winning are very bad. However, you don’t need to belatedly apply to attend Choate, Harvard or Yale. You can enter the club by having another club member anoint you. Enter again - the consultant you’ve chosen. He must “know this territory” and have personal contacts within its existing members. His reputation will get you in the door. (The rest will still remain up to you and the quality of your venture.)

    Even with the help of your Mentor, the marketing task still remains daunting. There’s simply no reliable way of knowing which of “the Pro’s” have cash to invest or which industries they current covet. You have the same problem as already mentioned in emailing enough ES’s to whet the appetites of those firms actively investing. Even as a new club “member”, sending out emails to “” isn’t going to work. You need to send your materials directly to individual members. Your trusty consultant ought to be able to help. Unique, distinctive materials that cleverly convey the spirit of your venture and it’s highly attractive ROI are absolute musts.

    You’ll get responses and “the game is on”. Your consultant, fellow team members and you must decide your “story” and the rules for which person tells it to which lead. Further this will get very complicated with multiple conversations amongst your entire team and investors over an extended period of time. You’ll need some good “sales tracking” software and the discipline to use it. After some period of time and employing the seduction techniques that a dozen, mature Casanovas would envy, you get real interest that will lead to serious meetings.

    Very quickly everything will all get very complicated.

    It is at these meetings that most entrepreneurs fail, usually due to inexperience and not taking the precaution of rehearsal and playacting against the roles of the potential investors. Even amongst the best of those that survive these gauntlets, the average, inexperienced entrepreneur sadly “gives away his store” somewhere in the negotiations and loses the lion’s share of the about-to-be-realized rewards.

    The ways entrepreneurs fail are multiple, some legendary. However, it’s appropriate to repeat the tale of a computer industry legend, Ken Olsen, founder of Digital Equipment.

    Unfortunately, Ken died recently. I knew him personally and would rate him amongst the half-dozen most intelligent people I’ve ever met. Notwithstanding my opinion … in 1987, Digital cracked the Fortune 50, climbing to number 44 in the annual listing of the largest US industrial corporations. At that time, Fortune magazine declared Digital’s founder and president, Kenneth H. Olsen "arguably the most successful entrepreneur in the history of American business."

    Olsen’s company was originally financed by a VC, American Research & Development for a modest investment of some $70,000. ARD negotiated and received 77% of the company!

    There’s a message here that I explicitly point out for those not so bright or too egotistical for their own good. When dealing with professional investors, bring along your trusted consultant, legal counsel and whatever additional support you can add to your team. It would be a shame to have traveled so far and fought so valiantly only to be brought home on your shield.
Finally, A Brief Commercial!
Dick’s consulting company is American World (AW). His web site is

AW provides consulting services as defined in this article, but only for highly-qualified entrepreneurs.

AW also publishes his book: How to Raise Money, Insider Edition. Dick feels he put in “everything you’ll ever need to know to raise money”. It includes extensive tips on how to raise money, including the common pitfalls that await the unwary entrepreneur. It costs only $9.95 and is available as a downloaded file at

If you have questions, comments or suggestions, send them along. Contact Dick at American World ( You’ll get an answer.


For more information, please visit Dick's TNNWC Bio.

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1 comment:

Rick Falls said...

Is it just me or is anyone else sickened by the mention of state and federal regulations and laws regarding accepting money from friends and family.

Are you kidding me?

Is a wonder that anybody ever begins anything of significance when you consider the endless hoops and hurdles to clear prior to ever having what some consider to be a business.

A business should be as simple as providing a product or service to someone who has the ability to pay for it.

We need to simplify everything that we do and get back to a common sense and common decency approach to doing business.

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