Venture capital is more plentiful than ever—and so is the number of entrepreneurs seeking it, particularly in the technology field. These entrepreneurs often are not experienced business people and are not versed in creating business plans, making investor presentations or approaching venture capitalists (VCs). CPAs frequently serve as the principal outside advisers and the first “reality check” for entrepreneurs seeking millions in capital investment. Here are some “dos” and “don’ts” for CPAs to consider in advising clients on how to get funding from a VC.
|Help Your Client
Find the Right Partner
Research the VC’s history. Venture capitalists are as distinctive as the entrepreneurs that approach them. The best VCs are long-term investors, not day traders, and bring significant value to the businesses they fund.
Understand the venture capitalist’s niche. Is the VC active in your client’s industry? Different firms focus on different industries in order to optimize the strengths they bring to the relationship. Also, some venture capitalists focus on different stages of business development.
Determine whether the investment fits in the VC’s portfolio. What other companies has it funded? Is your client’s business idea complementary to other investments the VC firm has made? Or does it compete?
Make sure your client has a well-thought-out business plan. This will be the first impression an investor has of the new venture. Make sure the plan is complete—not a “work in progress.”
Get someone to provide a referral. A third-party recommendation to the VC is the best way to get your client’s business plan to the top of the “stack.” Competition for attention is fierce—entrepreneurs should realize top VCs receive dozens of business plans each week.
Don’t include a nondisclosure agreement (NDA). VCs frequently receive several plans with similar ideas, and insisting on an NDA is a sure-fire way to insure your plan will not be read. VCs can’t negotiate an NDA with each entrepreneur, and they don’t want to get dragged into court if they fund one of 10 companies that submitted a similar plan. Send only less confidential information or send the plan only to top-notch firms.
Avoid Spam e-mail. Business plans spewed to multiple firms by e-mail likely will end up in someone’s “deleted items” box.
Timing is important. Remember that business ideas run hot and cold. Do you think you can get funding for an online bookstore now?
Make Sure the Business Plan
Have realistic financial projections. Nothing hurts credibility more than projections that show your client’s revenues will exceed Microsoft’s in three years.
Spend time on the marketing plan. It’s an important but often ignored part of the business plan. Market the company’s leadership in the industry and what your client will do to stay on top. Use the plan to demonstrate the client’s understanding of buying patterns as well as his or her strong grasp of both direct and indirect competition.
Show long-term plans—not just the first product. VC firms invest in a business, not a product.
Be aware of the venture capitalist’s expectations in the deal. The VC often requires a seat on the board of directors with veto power over major transactions. VCs typically receive preferred stock with dividend and liquidation preferences over the common stock held by the business founders.
Don’t overemphasize the technology. Entrepreneurs often think their technology is so unique a marketing strategy is not needed. This leaves the business plan with a significant element missing.
Don’t forget that venture capital is expensive. Venture capital is a costly source of funding designed for risky investments. Venture capitalists generally target a 60–80% annual rate of return on their investments, in part to make up for high failure rates.
Don’t forget that VCs require a built-in exit or liquidation strategy. If no IPO or sale of the company is completed within a certain time frame, they may require that its stock be repurchased by the company.
|Source: Christopher L. Rizik, senior vice-president, Ardesta, LLC, Ann Arbor, Michigan.|