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FM-11 Venture Capital SCORE Chapter 570
	Venture Capital
Also see our sheet on SBIC's Venture Capital is money invested through private partnerships in start-up companies that are projected to have a high rate of return and able to sell stock to the public in three to five years. The typical venture capital firm is a partnership of three to six investors, each of whom have experience in the field in which he invests. There are more than 500 venture capital firms around the country, according to the National Venture Capital Association (NCVA) (www.nvca.org). In 1998, the Philadelphia area had a record year of $303 million in venture-capital investments. This is small in comparison to Silicon Valley where $4.5 billion was invested in 787 companies last year. Investment growth so far this year has been phenomenal, in 2Q99, $3.04 billion was invested in California alone while $908 million was invested in Massachusetts and $516 million in New York. The typical venture capitalist may review 1,000 or more business plans per year and invest in only five or six. Also, only about two out of ten firms that got venture capital ever proceed far enough to raise money in an initial public offering (IPO), which is the typical way that investors reap profits. Further, the odds are about six in a million of an idea becoming an IPO. And, a large percentage of companies funded with venture capital either fail or return a meager profit. Start-up companies typically get several rounds of venture capital at different stages of their growth. First-round amounts alone might be $3-5 million. Because the risk of investors is so high, venture-capitalists demand an ownership interest in the company, which for initial rounds, can run from 5% to 30%. Subsequent rounds may require a larger amount of money, but entrepreneurs typically have to give away less ownership because the company is more established and, presumably, the risk is far less. If the company is successful, venture capitalists can make back several times their initial investments. The venture capitalist typically becomes an advisor and mentor and otherwise is actively involved in the company. To help your company acquire venture capital, here is a list of ten bits of advice from area venture capitalists. 1. Do due diligence on investors. Make sure they have experience and can provide an added value to the company other than capital. 2. Make sure your valuations are reasonable. Venture capitalists say that too many entrepreneurs have unrealistic valuations of their company. 3. Be intelligent about giving up equity. Keep enough ownership to grow your company. See venture capitalists before you need the money. 4. Clean up your credit history first. Present yourself in the best possible way. The real value of a company is human capital so lenders want character, collateral and capacity. 5. Know what the big picture is. Don’t get bogged down in technical detail and the inner workings of the product when presenting to investors. 6. Be succinct. Describe your entire business unit with financial information in 10 pages. 7. Have an exit strategy. There must be a well defined way for the venture capitalist to get out of the company. 8. Know your customers. Talk to and get to know your important customers. 9. Develop realistic financial projections. Enthusiasm and sincerity should be well grounded. 10. Target the right sources. Venture capitalists have specific industry focuses. Select one or two that you think will be interested in your idea.