Ever Dealt WIth A Venture Capitalist?

[olimits7]

Hi,

I have some project ideas that I will like to get developed, but I don't have the capital right now to invest in these ideas...I was thinking of trying the "venture capitalist" route.

1. Has anyone ever worked with a venture capitalist that invested in your project ideas?

2. If so, what type of equity percentage (%) split did the venture capitalist take for investing in your project ideas?

Thank you,

olimits7

[digitalv]

Generally we take 40-51% of the company, but "ideas" are a dime a dozen and an idea alone is worthless.

If you have a functional product or service that can be demonstrated then you're on to something. You (personally) are also a major factor in consideration - even if you have a solid product, if your personal finances are questionable (ie; bad credit) your odds of getting a deal are slim. We like to see that you have some skin in the game, which tells us that you believe in your product so much that you're willing to expend all of your personal resources to see it to reality. Also, your ability to lead the company is important as well. Do you have relevant management experience? All of these things are a factor in consideration.

An exit also needs to be presented - is the product/service something that would be able to sustain itself as a public company, or be an attractive acquisition target to a larger company? If not, you're going to have a hard time finding capital. A VC isn't going to take a percentage of revenue, payment, or dividend - we need something that can be liquidated, so it's either stock in the company that can be sold on the open market, enough ownership where we could sell the business if the deal would benefit everyone, or tangible assets that can be seized and liquidated in the event of a failure.

Most people new to this will balk at the high percentage of ownership, but you have to realize that out of every 10 deals 9 of them are losers and one will be a home run so we need to have a stake in the company to compensate for the losses. Second, that number can drop over time depending on how the deal is structured - for example in some cases we would take the majority share in the beginning but as you were cash-flowing you would have the option to buy back your ownership at an agreed price depending on the valuation of the company. Another example, we don't take the large ownership but an agreement that gives us the right to purchase the majority ownership position for $1.00 (exercised at our discretion) is drawn up. This is rarely used except in cases of minority or woman-owned businesses - there are opportunities that exist for minority/women owned businesses that you can't take advantage of if we own 50% or more of your company. So instead, we buy 49% and an agreement that we can optionally buy the other 2% for $1.00 at any time. That protects our position and ability to remove you if you're a complete idiot, but as long as you AREN'T a complete idiot you stay in control and still get to say you're a minority-owned business. :)

We don't want to control your company or "take it away" later, it's just protection on our end because a lot of money is being put up that you aren't personally guaranteeing. Another suggestion - you need to be as realistic as possible on your projections and capital requirements. Many companies run out of money because the CEO low-balled the amount of funding required in order to make it look more attractive to the investor. On the flip side, a lot of companies request huge marketing budgets but don't present a plan on HOW they're going to market the business.

Don't even think about mentioning television unless your product is a fit for direct response (infomercials). If it's not a potential infomercial product, plan to test market on the web in $10,000 increments and fine-tune your marketing before producing a commercial.

Anyway, sticky me with some more details on what you're looking to do and I'll offer whatever help I can, but if it's just in the 'idea' phase right now keep the idea to yourself until you can get something working developed. Remember that most VC's have at least one other investment that could easily do whatever you thought of, so don't give your ideas away. We (and most of the capital providers I'm familiar with) aren't going to sign an NDA for a startup - not because we want to take your idea, but because in this day and age it's highly probable that something very similar to it is already on the drawing board. Then we would be in the awkward situation of trying to prove that we were already planning on doing what you're doing, and you're going to be trying to prove that we just made that up so we could take your idea. It can get ugly and benefits nobody.

That situation isn't an issue when you already have something functional BEFORE you spill the beans.

Anyway, I don't mean to sound like a downer but there is a lot more to this than most people realize. If you want to at least disclose whether this is a physical product or a web service and how far along you are in the development of the idea I might be able to shed some more insight.

[akmac]

digitalv-Fantastic post.

[olimits7]

digitalv, thank you for the detailed reply; a lot of good info in your post!

olimits7

[fabulousyarn]

DigitalV:

This is a really great post. I have an additional question - because I am looking for funding as a etailer who has experienced incredible growth that I want to continue with - are VC's interested in straight etailing (albeit, in a very organic industry with a very techsavvy orientation)situations, or is it really only having to do with new company ideas, new eproducts, etc.

Judy

[digitalv]

It's a lot better to be in that position than to be a startup right now, that's for sure. :)

Anything that's already cash-flowing is worth taking a look at, the question is how much growth you're talking about. For a one-person business going from making say $2,000 a month to $10,000 a month looks like excellent growth but if you have to start hiring people for it to continue you find that cash runs out pretty quick.

It's really more about the numbers than anything else.

[fabulousyarn]

Hi DV:

Actually, I've gone from 3,000 two years ago to 30/40 thou a month, 60 during the holidays - and thats as basically a one person operation (me) with a few part timers packing and shipping. I'm looking to triple it without too much headcount - its about inventory and capitalization for us, more than anything - not bodies. That's why I'm thinking about alternative ways of funding it. We are doing numbers now - it may just be a bank loan kinda thing.

[digitalv]

Sent you a sticky.