Venture capitalists come in many shapes and sizes
By Richard Hellan, for SBT
For the entrepreneur or small business owner, looking for the funds needed to start a new business or aggressively expand an existing company can be a daunting task.
Traditional banking institutions often are not the best candidates for financial partnering in aggressive growth and development plans, and other resources for capital should be contacted.
A merchant banking firm, an "angel" network or a venture capital firm can be the best resource for obtaining the capital needed to realize a dream or achieve an aggressive development initiative.
However, finding the "right" financial resource partner isn’t easy. Without proper advice and guidance, ripe opportunities can be lost through delays and relationships lost on a journey that is not carefully planned.
Too often, business owners are encouraged to shy away from venture capital funding. They are encouraged to "buy into" the myth that venture capitalists and merchant banking firms are all alike. They are told that merchant bankers and venture capitalists are unscrupulous "wheelers and dealers," waiting "in the wings" to pounce upon the unknowing and desperate who have a lack of savvy in the complex world of finance.
That simply is not an accurate image of those firms with reputations for hard work, a willingness to take risk to achieve a commensurate level of reward, together with a commitment to engage in mutually beneficial business affairs — as partners.
There are as many different types of persons involved in the venture capital industry as there are in any other industry. Doing business with companies that have integrity and a reputation for honesty and engaging in good business practices makes good business sense at any time.
Entering an important business relationship with any party at any time requires approaching possibilities with a measure of caution and a commitment to conduct sufficient due diligence.
I suggest that following the guidelines listed below can be helpful to entrepreneurs and business owners looking for venture capital funding.
Guideline No. 1
Before meeting with a representative of any resource for venture capital, know something about the firm. Representatives of reputable firms will be delighted to forward to you or one of your advisors a wide variety of information to further familiarize you with their organizations, the focus of their investment interests, the levels of investments they are prepared to consider and their track record for good partnering.
Through some Internet research, you can become familiar with many of the venture capital resources.
Corporate resources for venture capital tend to fall first into three categories, and it is unusual for them to refrain from wanting equity positions in the companies they invest.
1) Some are interested in investing in startup companies in particular fields. These resources take substantial risks and generally expect very substantial returns on their investments, as well as substantial control of the management decisions necessary to protect their investments and assure success of the initiatives in which they are investing. They are ideal resources for serial entrepreneurs who bring them solid ideas, research discoveries, new innovations in technology, patents, etc. These firms tend to have short-term investment strategies with exit goals clearly defined, well in advance of their investment in a venture.
2) Some are interested in level-two investing — companies in need of a capital injection to take advantage of growth opportunities by capturing additional market share in their current respective industry quickly, or by entering new markets synergistic and contributory to their current corporate activities.
These venture capital resources can be good resources to turn to when you have a solid management team in place, already capable of taking your company to new heights of development, or when growth through acquisition can result in your firm gaining the talent it needs to manage the new resulting entity created by the capital injection.
Their interest in control of the management decisions affecting their investment will vary depending on the project being funded, the level of their investment and the spread of the total risk involved.
3) Some primarily want to partner with mature companies, companies capable of attracting a wide array of investor interest through various schemes. Business owners will receive little attention from these venture capital groups, unless their company is quite large or an especially well-known company in a niche market with terrific potential for growth.
Guideline No. 2
Before you meet with the representative of a venture capital firm, make sure you have a solid written business plan in hand — one that demonstrates your firm’s current financial position, its financial history, its strategic plan for development and the opportunity you wish to address by obtaining venture capital.
The larger the amount of venture capital wanted, the more detailed the document. If you do not have formal business plan in place, then get the help you need to develop one.
Serious, trustworthy venture capital organizations will not seriously weigh the opportunity you present to them without something "on paper," clearly defining the initiative you are proposing to be funded.
The document should clarify your management team’s ability to manage growth. It should also address your team’s enthusiasm for working cooperatively with new business partners.
Guideline No. 3
Don’t limit your search for venture capital to local resources, unless you have a compelling reason to do so. Seek outside counsel for contacts with venture capitalists groups and individual investors in other cities, states and even other countries who might have an interest in the initiative you are proposing.
Especially in today’s global marketplace, there are foreign investors eager to invest in successful firms of any size within the United States.
Guideline No. 4
Before you get close to negotiating an agreement with a venture capital firm, make sure you have engaged appropriate legal representation and negotiating talent (often not one and the same) to represent your interests. If you don’t know who to engage, then seek counsel of other business owners and advisors.
Executive coaches, investment bankers, merchant banking organizations and venture capital groups can bring an array of talent, money and contacts to the business owner who needs to support growth and development initiatives. Taking the time to search for venture capital in an informed and well-orchestrated manner can bring important and rewarding results.
Richard Hellan is the founder of Hellan Associates, Milwaukee.
Dec. 12, 2003 Small Business Times, Milwaukee
