RAISING CAPITAL FOR YOUR START-UP VENTURE (5)

By Ayo Emakhiomhe.

Please note that all your comments are very welcome.

1.     Credit Card

This is a short term funding instrument. It allows for quick cash for quick purchases without having the cash readily available. It can be used online, on Point of sale machines, on ATM’s, on the phone, etc.

It should not be used as a sole source of financing, it should be used only when all other sources have proved absolutely inaccessible or a sure backup in a matter of hours/days is available.

This is usually good for trading and other short gestation business lines.

In Nigeria it is not usually advisable to use the credit card to run a business whose cycle is longer than 2 weeks. This is especially because of the high costs attached to the card.

To acquire a credit card in Nigeria, you have to apply to one of the various agencies selling the card like banks. And we have so many variants available.

You must have already had a bank account with good credit/turnover history to get one.

2.     Business Angels.

These are people with considerable capital available to fund your business idea/venture.

They are all around us and are usually interested in investing in your idea/plan if it is in line with a particular business course they want to achieve.

They are termed angels because they do not need to know you or sometimes, they do not even need to meet you, but they will invest all or most of the capital you need to start you business and usually take equity stake in the business.

To assess these angels, you must have a well thought out and outline business plan set out with a clear vision and objectives. This is where business development consultants like Coinbox limited comes to play to assist you in achieving this feat.

You can access them through investment clubs, business development consultants, investment adviser, your bankers, on line, and so many other sources.

To employ any of the methods outline above, you must have already done your research/feasibility study and prepared a business plan. If you have not, please prepare that first before deciding which method or combination of methods will best suit your business plan and needs. If you do not have a business plan, you are like a blind man that wants to run a marathon with lots of dangerous obstacle courses and your competitors are fully sighted while you have not the slightest idea of the track.

Also, always Endeavor to start small; Even if you have all the capital to hit the high market with your product or service. Always start with just a small test first. Do a Test run of your venture before slowly releasing funds to grow it to size. By doing this you will see any small problems that otherwise would have been hidden by large outlays and your mistakes and losses will be small. Also, backing out if necessary will be at minimal loss/damage.

The author can be reached at coinboxlimited@gmail.com or 2348023526682

Please don't forget to click on the 'join this site icon' on blog page to get the posts directly in your mailbox. Thank you

VENTURE CAPITAL INVESTMENT MEMO

Hi, many of us would have been looking for ways and means to design/produce an investment memo to give prospective investors who are interested in investing in our business. The article below is for us.

Please note that this is only a guide and not the real thing, you will still need to consult with your lawyer, business and financial consultants to draw up this document. 

You can always contact us at COINBOX LIMITED if you don't have any business or financial consultant.

VENTURE CAPITAL MEMO

By Healy Jones 

A friend from business school recently asked me to help him understand what goes into a venture Capitalist’s investment memo. He is thinking of joining a startup and may ask some friends and family for seed financing, and so wants to be discuss the idea with them in the same way that a VC would. After this discussion I realized that most startup entrepreneurs probably don’t understand the inner workings of a venture firm or sophisticated angel group. In an attempt to help demystify a part of the venture fund raising process I’ll explain the typical VC investment memo. Understanding the documents that a VC uses to discuss a startup internally to get approval for (or socialize the idea of) an investment may be helpful to your startup as you seek funding. After all, knowing how a venture capitalist is likely to internally publicize, share and memorialize the investment in your company can help you anticipate where some of their questions are coming from.

I’ve worked for/interned for a few of funds, so feel like I have a pretty good idea of what is standard investment memo material. I am not going to talk about any “special” or unique things I’ve seen in any particular venture firm’s investment memos, only the sections and themes that are recurring across all the funds I’ve spent time with.

Keep in mind that the purpose of these memos really vary by firm. Some firms use the memo to educate the investment committee on the startup and the memo is an important part of the deal approval process. Other firms circulate memos as more of a heads up to the other partners, alerting them to the deal and seeking advice and introductions that can help with due diligence. Regardless, someone at the VC is consolidating the learnings on your company, market, technology and team and putting that information into a format that helps the investment team efficiently reach a funding decision on your startup.

Typical contents of a venture capital investment memo

A. Intro/executive summary – This part is usually only a page long; it needs to very concisely summarize the opportunity; depth and discussion of diligence findings will be found later in the document in the respective sub-sections  

1. Business Summary – Couple of paragraphs to set the stage on the opportunity
2. Proposed Financing – $ invested; size of round/sources of capital; (go into more dept in the Deal Description/Details section) 
3. Pros of the Investment/Reasons to Invest – Bullets on why the investment is exciting. Usually mention management, market and technology differentiation. (If you don’t have these, why are you investing?)
4. Cons/Key risks – Highlight the key issues that could derail/destroy the company/the investment’s return potential. Holes in mgmt team, competition with deep pockets/stated interest in the space, etc.
5. Deal goals – Use of proceeds; milestones to be hit with the funds from this funding; alignment with management and other investors on goals and direction of company (if a complicated investment or many other investors may require its own section later.)

B. Market opportunity – After the introduction comes the meat of the investment memo. Each section is as long or short as required for the particular investment opportunity. The market section tried to explain how big the potential market is and how/where the startup fits into that market. 

1. Market - Size of market; discussion of analysts’ opinion on market; summaries of customer and ecosystem reference calls
2. Problem to be addressed – Does management’s description of the problem match up with the VC’s diligence findings?
3. Pain point/value proposition – Not a description of the product, but a description of the “relief” that is felt by customers; what customers/potential customers has the VC talked to and what have they said?
4. Competition - Very important section. Articulate what the competitive landscape is NOW and in the FUTURE. How does the company fit into the ecosystem.

C. Product – What does the product look like; who is buying it; why are they buying it and does this match up with the market opportunity/stated pain point addressed; is the product defensible; can you actually make it and how much R&D is required 

1. Product description – include who the buyer is at the customer
2. IP – if an important part of the investment thesis; did a lawyer conduct an IP review?
3. Product development timeline/roadmap
4. Price points/margins/economies of scale – who is actually “making” it and what is required to get “production” to scale; if a web based business what are the key costs of delivering the product
5. Highlight issues on the product/features to be developed from the reference calls with potential customers/existing customers

D. Sales/marketing strategy  

1. Re-define ideal customer – how reach them/where are they
2. How much cost to acquire/what is the sales process timeline – are there different costs by different channels
3. How does this fit with the reference discussions/market analysis conducted
4. If company has current customer then case studies and list of major customers/revenue concentration
5. Are partnerships/business development tactics to be important in the startups marketing/customer acquisition plans

E. Team/advisory board - This is perhaps the most important section. Sometimes it should be put right after the Intro/Summary. There needs to be real detail on each team member and the people to be hired/needs analysis. VCs usually have an honest write up of which team members are scale-able and which will need to augmented

F. Operational plan - The more “grown up” the company is the more detail will be spent on historical financial statements.

1. Quarterly or monthly burn rate
2. Historical financials – only important/included if the company has real historicals; if of a certain size, say over $5 million in revenues, then an accounting review may be required; not usually included in detail if the company is still developmental stage
3. Use of funds – make sure the metrics highlighted in the “Deal Goals” section match the metrics you will be funding towards…
4. Revenue plan/revenue model and build up
5. Margin discussion
6. Staffing plan – looking at the staffing needs from a “how much it will cost” perspective

G. Deal Description/Structure/Details

1. $ invested; size of round/sources of capital; ownership; 
2. Type of security
3. Any other interesting facts such as what management is putting in or is a convert note rolling in at a discount/etc.

H. Long-term financing plans 

1. Reserves set aside for the investment in the fund
2. Total amount of capital needed to get the business to self-sustainability
3. Going forward financing plan – milestones that will be hit with the current fund raise & explanition of how those are valid value creation metrics for the industry

I. Exit analysis - Who are the buyers; how big does it need to be if an IPO is a considered outcome; what are comparables worth; return profile

J. Deal history - Source of deal; who has met; what diligence has been done;

Appendix 

1. Capitalization Table
2. Other supporting documents
3. Some funds put the references and due diligence findings in the investment memo, others reference them and make them available to the partnership on a server or in a database

I’m not suggesting that you try to manage your venture funding process to the fund’s investment memo. However, I strongly believe that if entrepreneurs have a greater understanding of VCs’ internal deal procedure then they are more likely to be successful in raising venture capital. I hope this discussion of the venture capital investment memo is helpful, and welcome your comments.

SOURCE: http://www.startable.com/2009/05/07/venture-capital-investment-memo/

Published May 7th, 2009