By Carl Grant on behalf of Cooley, LLP
The D.C. Metro region is a hotbed for startup and emerging growth companies in a handful of rapidly expanding markets. The national capital region is home to a vast array of software, internet, wireless, security, biotechnology, and healthcare companies all competing for a piece of the pie in these and other very competitive up-and-coming industries.
Many of these companies will, at some point, need to raise capital, and many will look to the venture capital market as a way to do so. Here are some tips from Cooley, LLP, that can help prepare them to venture capital dollars:
1. Target List. Create a target investor list using key criteria including: industry sector; investment stage (i.e., Series A, B, C, etc.); geographic proximity; amount to be raised; comparable/competitive portfolio companies; potential investor contacts. Find out as much information as you can about the current investment status or activity level of your target investors.
2. Ready for Prime time? You usually only get one bite at the apple so don’t seek venture capital if you are not quite ready. Consider raising angel money or friends and family money first in order to hit important milestones that will make your business more marketable to venture firms.
3. Documents. Prepare three documents: a thoughtfully reasoned full business plan; a one-page executive summary of the business plan; and a Powerpoint presentation. A full business plan should include a business model, financial projections and assumptions. Remember: even if the full plan does not get read, the process of writing it will crystallize the issues. You are selling securities so understand your disclosure obligations under applicable securities laws.
4. Projections. It is critical to have detailed projections, with clearly defined assumptions, to illustrate path to revenues and profitability, target vertical markets, etc.
5. Write well. If you can’t write well, ask a friend who can to help or hire a good writer.
6. Elevator Speech. Write your “elevator” speech: you must be able to articulate your vision in a succinct way in less than a few minutes. What is your value proposition in plain English?
7. Practice Your Pitch. Find a friendly audience (including at least one experienced investor) who can help identify gaps and weaknesses in your pitch. When you make your actual presentations, space them so that you can incorporate feedback and suggestions in subsequent pitches.
8. “Kitchen cabinet”/advisors. Surround yourself with good advisors who are experienced in raising venture capital, whether board members, attorneys, accountants, professional investors or industry executives.
9. Liquidity. Know your probable path to liquidity. Venture investors are not interested in “lifestyle” companies or overly long-term investments.
10. Management Team. This is critical to investors and it is important to articulate clearly your background and experience, who has joined the team and who will likely join the team. Do the founders have money or meaningful “sweat equity” in the company? You must have some skin in the game.
11. Competition. Know your competition and be prepared to distinguish your business model. Wrong answer: there is no competition.
12. Clean Capital Structure. Create a good, clean capital structure (usually a Delaware c-corporation with 10,000,000 to 20,000,000 shares of common stock).
13. Understand Valuation and Capitalization. If you don’t understand the basics of a corporation’s capitalization, then ask someone to explain it to you (e.g., authorized vs. issued stock; reserved option pool vs. granted options). Prepare a detailed capitalization table. Understand what realistic valuation expectations for a company like yours may be to determine if venture capital is the right fit.
14. Document Options and Equity. Adopt a stock option plan with a 10%–20% reserved pool (but remember that the full pool usually gets counted in your pre-money valuation by venture investors). Document options and stock issuances right away. Don’t leave equity arrangements unwritten. Don’t enter into “squirrelly” stockholders agreements. Do include a right of first refusal in your bylaws.
15. Know your Intellectual Property. Set up an IP counseling session with an attorney. Before you approach venture firms, know what is proprietary and likely protectible (patents, trademarks, copyrights, trade secrets). IP may or may not be a barrier to entry.
16. Due Diligence. Review a sample due diligence request. Prepare a due diligence binder. This facilitates the fund raising process and gives the positive impression of being highly organized.
17. Term Sheet. Review a sample term sheet with an attorney before you start the process. Approximately 80% of the terms contained in a term sheet are non-negotiable, so focus on the more critical 20%.
18. Life Cycle. Know with certainty where your company is in the life cycle and target investors accordingly. Is your company in the hangar, on the runway, taking off or at cruising altitude?
19. “Window Dressing.” Do you have a business card? Phone number? Website? Product prototype? References? Remember, sometimes little things send big signals about your stage and progress.
20. Non-VC Investors. Consider lining up a strategic investor or partner or reputable angel investor first and use that to leverage venture capital interest.