Forums: Discussions for entrepreneurs and small business.

Hi Stefan, I think what you are trying to do is putting the carriage before the horse.

Many VCs actually don’t do straight equity deals and adopt a funding scheme that is similar to yours (e.g. with convertible debentures). Where the two approaches differ is that you plan to decrease VC participation when the company starts hitting or exceeding certain milestones or financial benchmarks. This contrary to what venture capital investments are all about! The name of the game is minimizing risks and maximizing returns.

Another important point to make is that entrepreneurs usually don’t get compensated for having good ideas or working hard. The only thing that matters to VCs, or any investor for that matter, is that your concept is sound and that you have the professional background to execute your business plan.

VCs typically add value to a company just by investing in it. Having said that, what do you think is more desirable, owning 100% of a company that is worth little or nothing and requires bootstrapping, or owning 65% of a company that has $1.5 million in the bank to execute its business plan?

Anyways, if you are concerned about getting short-changed in a private equity deal, why don’t you do one on your terms? It’s called a private placement or Regulation D Offering. Essentially, it’s like a mini IPO with the important distinction that you can’t offer or sell your securities to just anybody. Qualifying investors will have to meet certain wealth and sophistication criteria.

There’s a great article available on our website at http://www.insights.fastventures.com under the “Reviews” tab that offers important insights. Another article offers interesting ideas on how to identify and approach high-net-worth individuals as potential investors.

You will need to put in a lot of hard work and it will take some time; but at least you will be in the driver’s seat and save a lot of money.

If you interested, you can contact me via our website and I will be glad to take a look at your business plan and offer my five senses.

I hope this helps.


Mark



-------------------------


Jackson Steiner
http://www.JacksonSteiner.com

Advanced Document Design for entrepreneurs, intermediaries, and the financial services industry.
http://www.Publications.FastVentures.com

Hello Mark,

Thanks very much for response. Honestly, I have degrees in  economics and finance, but this  "GET and NEGOTIATE FUNDING" are  more a self study where I still lack of terminology and overview. What is very important for me! I should  get fluent in those things very soon.

However, I would like to quote on your remarks.
"Where the two approaches differ is that you plan to decrease VC participation when the company starts hitting or exceeding certain milestones or financial benchmarks."
This exactly what I want to do. No need to be paid a risk premium where there is no risk anymore. You are right that investors returns would decrease with company maturity instead of making tenfold return on exit. But this is the case when we talk about only one business, the plan is to deliver a business after business, what means conversion after conversion for the investor, hence  a higher level of ROI and less risk since it is convertible debt. I have made a nice graph on that.

"The only thing that matters to VCs, or any investor for that matter, is that your concept is sound and that you have the professional background to execute your business plan."
I have heart a saying that fits for this situation: "Ignorance is a bliss" ...I wish I could afford it :)
Yes, i am aware VC care only about their return and if the plan sounds OK to be execute make their return. Well, the one thing is they miss is that they hardly see/have a vision above three years horizon, they lack the knowledge to foresee emerging trends until they have emerged and only than enter into investment, and exactly than all the risk gets accumulated. That is not an approach at all by my opinion, if you can be one of the trend creator/leaders it is easier and less risky!

Private placement sounds great. It is like a great advertisement pitch sent to VIP persons/fund CEOs/owners. This would work when investors receive the prospect with all figures and partner contracts. And especially when one of them agrees, the rest will follow and maybe start dealing between each other and extracting premium returns. That is just perfect!!! Why deceive one when we can do many in "a game set"? That is way more than help Mike! 10x!

"If you interested, you can contact me via our website and I will be glad to take a look at your business plan and offer my five senses"

Your company provides consulting, right? I would have you close in mind, when the team makes decisions on the consulting parties. By my plan, they should get a stake too :)

Regards,

Stefan

The risk is BEFORE you show the execution. You are asking investors to invest in high risk ventures, and take less profit if the execution does well?

Hi Johnqh,

I have always hold execution constant at modest business level of Good. Although I know people that do marketing with 1 mil. that could be done for 100k for the same results.

If to be absolutely correct risk starts to decrease in the very moment you show proof of concept. VCs run than the risk through their complex models where often more risky positions decrease their overall risk position. But in general you are right risk is before execution, but execution is a dynamic process, as well as return is. So what I meant that by the end of the investment risk diminishes and that decreases the premium paid for risk, since we are talking about periodic convertible debentures!!!

It is gona work! My team has already drafted the plan for the next three rounds of investment where every last and next investor interests are aligned. You know, you have a small investor for preparation stage, risk investor for expansion stage, and multi-fund for business internationalization..and hopefully you get a second one or two more funds for merger and acquisition type of growth. So all shall be nice and smooth!

Regards,
 

What you are offering is a heads you lose, tails I win deal. No investor in his right mind will touch it.

In any start up investment, there is a very real chance that every penny of the investment will be lost. That`s the heads you lose part for the investor.

Once in a while, an investment hits it big, and things pay out big time. In that case, the one that makes all the risk worthwhile, you want to say, hey, surprise, you didn`t lose it all, it did work out, but I am going to reduce your return so I can have more. That`s the tails I win part.

Either way, the investor takes a big up front risk, and either loses it all (and, yeah, arrogance aside, there are no guarantees here) or gets a modest return.

To top it off, you seem incapable of seeing it from the investor`s point of view, and seem  to think they are out to trick you. Those are not good qualities to exhibit to people who are looking at a entering into a long term relationship where trust and mutual understanding are pretty important.

I think you are a very poor candidate for venture funding. I think you should figure a way to grow the business without outside capital, or with some kind of bank or secured financing.

What you should not do is any deal where people want you to pay them a fee up front to "consult" or set up an offering. Those folks are sharks, and usually could care less if you get to where you want to go so long as they get their fee. StartUp Nation doesn`t control who participates here, so beware of strangers bearing gifts.

hey Hardknocksmba, thank you for the honest reply,

I am glad that the forum is evolving :)
and unfortunately I can not agree with you. Business is not heads and tails, it is much more. Lets think of it as a poker game instead, with almost infinite possibilities and scenarios. So, I absolutely disagree with you.

:D there are a lot of investors out there, in fact we all are, but the one I have met were not honest in their actions during negotiations, but this was partly due to my inexperience. So now I shall take the lead and pick the one i like. And I would have this option exactly because chances for all startups are low. That means two things. First there are a lot of candidates to invest for the fast returns and second the proof of concept is ever more important!!!

You said it! To build mutual trust!!! That is utopia. Trust over few millions or few tens of mill.? That is why I rely more on knowledge, experience, research, sixth sense and mostly on punctuate documents. Anyway, as far as everybody gets their ROI, I don`t care if they like it/me or if I should think as pink of them. I have a really nice saying for this relations: Playing chess with muscles.

Lets go back to the topic of this forum. About the convertible debentures. What do you think? Isn`t this a way to decrease investors risk. Like saying hey we will toss the coin ten times and sum the outcome, you+we might lose the bet, but not all your money?
So far I have read a lot of posts and what I have concluded that the investment relations and funding scheme is the second part. The most important part is about the business model itself. If you show that you can guess the toss, everybody would be rushing. If on the first toss nobody wants to share profits with you, then on the second round things would change.

10x for your advice :) A no gifts in life like there are no professionals concluding a professional job and payed per hour or in advance.

Regards,

1) You are completely wrong on the trust issue. No one will invest with you unless they trust you and believe in you. Most experienced investors look for people to invest in, not ideas or business models. The deal documents cannot possibly be detailed enough to cover every contingency, and litigation is way too expensive to be something you rely on as other than a last resort. On your side, trust matters just as much. You need to be looking at the investor`s prior track record and talking to people they`ve funded in the past to find out what kind of people they are, rather than relying on deal documents to protect you. If you are short on cash one quarter and they have it, they can always demand that the deal documents get recut, and if it`s that or shut down the business, you are likely to go along. Trust character, not paper. You need clear deal documents, but in the end great documents won`t make a deal with bad people a pleasant or profitable experience.

2) Convertible debentures don`t mean diddly squat unless you are in a position to pay them back. You won`t be unless the business works. The money is going to be spent on the business, and the debentures are going to be worthless scraps of paper unless the business itself generates money to pay them off. If it were otherwise, you could just go to a bank to borrow money and skip all the drama with investors. Saying, hey, this is debt, and you get paid first, means nothing if there is nothing in the pot when payback time comes. If you have easily accessible personal assets in the US to pledge to investors that they can levy on if the deal goes sour, fantastic, but otherwise don`t expect them to be too excited about whether you call it a debenture or stock (in the US, they will call it debt that gets converted in the normal course, because debt comes first in bankruptcy and if things go that way they want to be first in line to get back whatever they can).

3) Flipping a coin is a random event with a 50 50 chance no matter how many heads you`ve tossed in a row. Business is not that random, and, yes, if you`ve had a string of successes in prior businesses, it will be easier to get investors. If you have had that kind of success, you probably don`t need the money, and certainly don`t need to come to public bulletin boards for advice. If not, no matter how great you think your plan is, you are going to have to deal with the same issues everyone else does; no one is going to give you credit for being a big success until after you are one.

If you want to reduce what you give up to VCs, here are some of the time honored ways that work:

1) Get the company up and running on bootstrap money, and only go to VCs when you have a track record and large revenues. That`s what Microsoft did, and that`s one reason the founders did so well. The VCs got a relatively small share of what was already a profitable and functioning company. A variation on this is to take as little as possible in a first round, and raise more money in later rounds where you give up less of a percentage for the same amount raised. The trick is at every stage to raise as much as you need, because, and you can bank on this, if you run out of money before you are showing results, you are screwed.

2) Get every big fund in Silicon Valley salivating to do the deal because your idea and technology is so transformative and the upside so great. Because they are competing to fund you, you can get better terms. That`s what the Google founders did, more or less. Easier said than done.

Terrific hardknocksmba!
10x again for the helpful advices!
This time I agree with you :)

Haha, a track record of investment ..lol ... Although the funds I have talked with are not infamous, but really little is available publicly. When I asked them to communicate only in written form, so in a way to record our negotiations. However, they never replied! So,  I doubt that they would submit a trackrecord with details. Maybe, this was a rude signal from me that I do not trust them!!!

I wrote early  that the company is running so there is revenue and there are assets, but we are still in a bootstrap money. The best thing is that now it has a team!
The plan is exactly as you say - have few rounds with different investors and draw exactly what we need for purposes that each investor is usually funding. And as rounds go on, yes we would need a very trustful investor since what we would need is more connection and negotiating power that funds usually have.
It is gona be a hell of a search. I don`t wont to hear that lousy "We dont understand anythng from this business" again. This time we shall ask questions first! Like picking up a dude for a mission (dont want to use a girlfriend example although it is closer :).

This forum has eveloved well. Have alaigned a couple of view points and concluded into live scenarious. I hope anybody looking for a START UP  FUNDING would find it.

Many thanks to all participants,

Regards