The Difference
Firms that are trying to get past No Man’s Land must deal with the Capital Gap, the gap between their current capital structure and the funding they need to finance growth. What about
Venture Capital as an alternative in the current environment?
The current landscape of the Venture Capital universe is directly related to the blow up of the global economy by the financial services industry in 2008. We still have not recovered. According to the National Venture Capital Association, the number of venture firms has declined from more than 1,000 in 2002 to 462. In the second quarter of 2012 80 percent of all venture money was raised by just five funds. The number of deals is down and the amount of dollars is down from 2011 to 2012.
M&A in the Foreseeable Future
Due to stock market conditions, IPO volume is down. The only viable exit strategy over the last few years, and for the foreseeable future is in M&A deals. In a robust IPO market, M&A deal prices are usually predicated around IPO prices. Right now M&A buyers are bargaining harder and basing the deal on cash flow multiples, which are lower than IPO multiples. All of this means that venture capital companies have fewer options and must accept lower multiples on their invested dollars if they need to exit from an investment. This also means that the investors will demand that you do more with less capital.
Having said all of this, if venture capital financing appears to be your best option for raising growth capital, then I am assuming that you have either used friends and family, “angel investors” ,and/or internally generated earnings to reach a positive cash flow position. Generally speaking, over the last few years “seed” funding and early growth capital has largely come from these sources, not from venture capital. It is always difficult to raise venture funding, but you are in a much better position to do so if you are cash flow positive.
Now What?
Your company has now decided to engage in a growth capital raise. Now what?
Do your homework by identifying firms that invest in your market space. Make certain that you have proper legal counsel that is experienced in representing companies in venture, IPO, and M&A transactions and who will be proactive in guiding and introducing you to the appropriate institutional funding resources. Have the law firm review and actively participate in the business plan development, investor presentations, and other areas that will be analyzed during any due diligence process. These documents must be “bullet proof”. Your law firm should also be very engaged in helping to evaluate, not only your terms sheet, but also investors’ viability. You need to consider the age of the fund, syndicate partners that they usually work with, and whether the fund(s) will set aside and commit to any follow-on funding that may be required.
I have found it to be imperative that your legal counsel provides you with an opinion as to whether you, the CEO and your management team are fundable. This is a key, because you have a chance to acquire funding with an “A” management team and a “B or C” business plan, but no chance to acquire funding with a “C” management team and an “A” business plan.
At Least 6 Months
Be prepared to spend no less than six months to complete a venture capital deal. Be prepared as a management team, particularly the CEO and CFO, to dedicate more time to this than running the company.
During the fund raising process, it is essential to make certain that your company and the venture fund are compatible as to personalities, objectives, time lines, expectations, etc. Do your homework by talking with other CEO’s who are funded by this venture group.
Fund raising is like entering into a marriage, if you take investment dollars from the “wrong people” your life will be miserable. It’s no different than a marriage between an incompatible couple.
While acquiring the right venture capital backing is particularly challenging right now, it remains an important alternative for emerging growth companies to consider.
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Contact Mike at mike.viguerie@newportboardgroup.com
