78 Smooth Ride to Venture Capital

contain certain key clauses that could be non-negotiable from the VC’s
standpoint. Your prior awareness about such agreements would help you
to formulate your negotiating strategy and close the deal speedily.

The Importance of Being Well Prepared

VCs are busy people who receive hundreds of funding requests every
day. As they cannot go very deep into every business proposition, they
create their “filters”, or specific criteria, to help them short-list the busi-
nesses they could invest in. Therefore, it is important for you to under-
stand these filters in order to focus your efforts and improve your
chances obtaining venture capital funding. We will discuss more about
this in Chapter 20.
The statistics below, highlight the importance of being well prepared
if you are to succeed in raising venture capital.
Typically, this is what happens to business plans presented to VCs:

65% are rejected after the first reading.

20% are rejected after a thorough review.

10% are rejected after due diligence.

3% are rejected following failed negotiations.

2% succeed in raising funds.
As you can see, the odds are stacked against the entrepreneur. There is
a lot of competition for VC money. Only the best, and the best-
prepared, businesses succeed in obtaining VC funding.

Timing of Raising Venture Capital

The process of raising venture capital is very time-consuming. It de-
mands a lot of your time, in spite of the fact that you will have hired pro-
fessionals to guide you through the entire process. Once you start this
process, you will find that it will need your complete attention and a lot
of your time. Therefore, you should start this process when you have the
time to focus on it for the next 6 to 12 months. This means that you
should be in a position in your business such that there are no mission
critical activities happening to distract you from the process. Ironically,
 The Process of Raising Venture Capital 79

the best time to initiate the VC funding activities is when you least need
the money in a hurry.
Secondly, if you have had a good year financially, then the end of the
fiscal year and the sign-off of the audited financials would be a good op-
portunity for raising venture capital. You would be flushed with the fi-
nancial success of the previous year and that will show in your confi-
dence while dealing with the VC. You would also be ready with your
current year’s forecast after completing your budgeting exercise for the
year. The data will be fresh in your mind, as will be the future direction
of business, so you will spend less time preparing the documents the VC
requires for making his decision regarding funding your company.
Thirdly, any major event (in your business) that has a positive impact
on the future of your business is a good inflexion point to consider rais-
ing venture capital. This event could be the completion of your product’s
trial run, acquisition of a new customer or a big order, and the like. Any
such event would indicate that you are ready to move to the next stage of
growth of your business’s lifecycle. And raising venture capital at this
point would facilitate your moving into the next stage of growth.
The last point regarding timing relates to the external environment.
When capital markets are booming, you are likely to get a higher valua-
tion for your business. Also, when stock markets do well, VCs are able
to raise more and more money for investment. As there is competition
among investors to find the best opportunities to invest, your negotiat-
ing position is likely to be better and your chances of getting funding will
be much higher when the capital markets are doing well.

Table 9.1
Pitfalls in Raising Venture Capital — What Can Go Wrong
General
 Underestimating the length of time taken to obtain funding.
 Underestimating the management time taken to prepare.
 Not having a scalable growth business.
 Not using experienced advisers.
 Inappropriate timing of fund raising.
Contd . . .

}
80 Smooth Ride to Venture Capital

Targeting Stage
 Inexperienced advisers or incorrect advice.
 Badly made business plan, executive summary and elevator pitch.
 Selecting wrong VC in terms of industry focus, investment size, investment amount
and return expectation.
 Portfolio needs of the VC preclude investment.
 IRR not good enough.
 Timing and mode of exit is unsuitable.

Screening stage
 Business plan not well drafted.
 Management lacking in credibility.
 Lack of integrity — selective disclosure, false statements, partial truth, etc.
 Lack of chemistry between the founders and the VC.
 Valuation not agreed upon, or considered too high by the VC.
 Equity stake required by the VC is too high for the entrepreneur.
 Funding amount is too high or too low.
 No syndicate VCs available.

Due Diligence Stage

 Shareholder issues.
 Legal cases or other contingent liabilities.
 Employees issues.
 Valuation adjustments post due diligence not agreed to by the entrepreneur.

Legal Agreements Stage

 Control issues.
 Anti-dilution issues.
 Share transfer issues.