A Quick Guide to Raising Venture Capital - PART 1

Sunday, 7 February 2010 | Spin-Offs and Start-Ups

The Wall Street Journal Europe Future Leadership Institute invites international thought leaders and decision-makers to portray their work, research and findings. The chapter "Spin-Offs and Start-Ups" collects articles designed to help students and young entrepreneurs creating their own company. The article below was written for the Future Leadership Institute by Oliver Gajda, international renowned expert on venture capital, former Director of Europe Unlimited and member of The Future Leadership Institute Eagle Group.

1. Introduction

As a student with a great idea, or later in your career as an employee embedded in corporate life or in between jobs, you might consider building your own business. There are many things to consider before taking such a step, including income security and working hours, but once thrown into the deep end you will have to keep going. Indeed, running your own business is not that difficult, you might find, if only you have cornered a market in which you can produce an adequate margin to live on. But lets be more ambitious and think about growing your business, make it a household name across borders. In most cases this will include financial hurdles that need to be overcome through an injection of external capital.

Any ambitious entrepreneur will at some point or another encounter the need to enter into fund raising negotiations in order to take their company to the next level. No matter with whom you will negotiate, you can prepare your success by making an effort to understand the different forms of financing, their benefits and their risks and downsides.  This cannot and will not be done here. The aim of this blog is to help you to understand what it means to opt for venture capital and to prepare you effectively for meetings and negotiations with investors. The execution depends on yourself and the people you talk to.

To start, let us quickly outline a few obstacles you may need to take on. You must analyse your own strategic position. This will be based on your personal understanding of your business idea, its market potential, as well as its financial and social value. You will base your business strategy on your own judgement, plus that of a few friends or mentors. Write things down, put them into a clearly structured document or, even better, a number of clearly structured documents: these are your business plan, your business presentation, your executive summary, and last but not least your elevator pitch. In order to find out how clearly structured you have drafted your documents, you should take the opportunity to test them on friends or business partners in order to gain:

* open and frank feedback on the strategic strengths, weaknesses, opportunities and threats;

* a first insight into how potential investors or business partners could perceive your idea; and

* a foundation in presentation and relationship building skills, which will be key later on.

Something else that is advisable, but unfortunately too often not exercised, is the ongoing improvement of your materials and public presentation skills. First impressions count, therefore, you should also:

* Take ample time to sharpen your documentation and your elevator pitch. Frequently!

* Repeatedly practice presentation skills and methods, pronunciation and enunciation of difficult terminology or foreign language parts.

To become good at selling your idea by giving a pitch is different from running through an executive summary, a presentation deck or a business plan. Only practise can prepare you. Firstly, the person you are presenting to makes all the difference as to what and how you will make your presentation, because every investor has his or her own preferences and dislikes. Have different volunteers help you with that or imagine different people, if this helps. You need to be on top at all times!

Unfortunately for some, but fortunately for others, documentation and presentation are not all. The presenting entrepreneur needs to understand their businesses, its shortcomings and its advantages in detail. They need to be able to communicate the relevant aspects, both positive and negative, clearly and comprehensively to the opposite party if and when needed. While many entrepreneurs and start-up managers have a good understanding of their customers' or suppliers' needs, often from their own professional experience, they are often inexperienced when it comes to talking to investors. As a result, many fund raising road shows are going nowhere - either because the entrepreneurs fail to sell a perfectly good idea or because the idea is not of interest to investors. You should, of course, avoid both scenarios.

It is actually not that difficult. You need to understand what kind of capital you need and from whom, by when and what you need it for. Assuming you know the what, there are many possibilities for young and growing companies to obtain financing, including family, friends, fools and fiends as well as business angels, banks (overdrafts, short or medium-term loans), factoring and invoice discounting, bootstrapping, leasing, public support programmes (regional, national, European) and, of course, professional venture capital investors. If you look around, you will probably be able to spot a few other sources that you can tap into.

The financing forms providing private capital at an early stage assume the highest risk, especially private persons and business angels, but do not necessarily get the highest rewards. It is the venture capitalist, who is able to provide large amounts of capital necessary to really push an early-stage company into the market, who also expects the highest returns. Therefore venture capital is not right for every company or every entrepreneur - overall, venture capital prefers highly scalable growth companies, often with technology focus.

Furthermore, venture capital is rarely the first external source of funding for any company these days. In general, a company will have used a variety of other financing sources before it approaches venture capital investors for the first time. But when is your business ready for venture capital? Simplified, unless your business offers the prospect of above average (read exorbitant) growth in turnover and profits within five to seven years - indeed, three to five might be a more realistic period to think of - it is highly unlikely that you will receive venture capital.

On top, you will need an experienced, ambitious and hard working management team as well as a realistic but visionary business idea. But let us take this step by step. Going forward we will quickly consider different investors, define venture capital in a little more detail, define your idea, produce your relevant documentation and guide you towards a pleasant but hard working - and hopefully successful - fund raising experience.

by Oliver Gajda