Venture Capital Process

Successful venture capital funding is a process of reducing perceived risk to the lowest possible
level. The funding source has fiduciary responsibility to its investors. This requires a thorough
“due diligence review “of all aspects of your business.

Venture capital sources will often require you to justify every assumption made for a projection
five years into the future.

The business plan must show the investment parameters requested, as well as a plan to liquidate
the investor's position (the exit strategy) at a later date by either a payback formula, initial public
stock offering (IPO), or plans for a merger/buyout by a major company.

In the U.S., there are currently more than 6700 venture pools, private firms, SBIC's and
corporate investors, with over $200 Billion under management. With the globalization of the
economy, there is easily five times that much venture capital available from worldwide sources.

Even so, more than 80% of all startup companies are funded through informal sources such as
friends, associates, and private investors

Seven Levels of Research and Planning for Every Startup:

1. Feasibility studies to determine whether a given venture should be attempted.

2. The preparation of the business plan for the first round and subsequent rounds of
investment and operations.

3. Determining optimum debt and equity ratios, and developing a financial plan.

4. The development of an operational plan to get the project up and running.

5. Development of prospective funding sources for both debt and equity.

6. Preparation of project evaluations for both pre- and post-investment analysis.

7. Planning investor and owner exit strategies through mergers, acquisitions, IPO's,
LBO's, or ESOP's.

Venture Capital Stages

 Early Stage Financing:

Seed Capital: Primarily for product development and market research.

Startup Capital: Company has complete business plan, initial marketing begins.
Company is ready for business, but no commercial sales yet.

 Expansion Financing:
First Stage: Funds for full scale manufacturing and sales.

Second Stage: Essential working capital for growing receivables, inventories, and payables.
Company may not yet be profitable.

Third Stage (Also known as "Mezzanine Financing): Funds for major expansion, new products.
Companies near the break-even sales.

Fourth Stage (Known as “Bridge Financing”): Financing for a company expected to go public
in the next six months. Repaid with proceeds of the IPO, and used to restructure previous equity
positions.

 Acquisition/Buyout Financing: $3,000,000 - $20,000,000

Acquisition: Funds provided to finance the acquisition of another company. Also high interest
"Junk" Bonds may be used or substantial debt from banks.

Leveraged Buyout (LBO): Funds provided to enable a management group to acquire a product
line or business from a public or private company. Revitalized management may have as little as
1% of their own money invested.