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Frequently Asked Questions
This section will answer many of the common questions we receive from clients and other visitors. We suggest you join our mailing list for detailed topics published by current CEO's, CFO's and top Venture Capital Consultants. For detailed and confidential answers click here.- How to close the deal
- What percentage do VC firms want?
- What is the Lehman Formula?
- How do I find a strategic partner?
- How to find private investors for a startup.
Question:I have investors that are interested in my project, but they are hesitant to write a check. How can I get them to fund my project?
Answer: There are numerous possible reasons including the following:
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They are not yet convinced that the idea, product or service will be successful. Has a successful test market or market research been completed? Many times we see the "Missionary Marketing Approach" (a solution for which there is no problem) and the entire business plan is based on assumptions not on test marketing where packaging, price and utility are met with a consumers check. If possible, pre-sell your product or service to major users.
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They have questions about you or your management teams management and financial skills. Personal style. Weaknesses in the management team or even lack of forthrightness may cause investors to walk.
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They are concerned that more financing than you project may be needed. Things always take three times as long and are twice as expensive. If you do not have the financial strength to put in additional capital, they may have to advance additional funds beyond their willingness to invest.
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They see contingent liabilities or unknown factors on the horizon and need more information. In technology sectors there is the danger of unknown competitors.
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The closer the funding date becomes the more conservative they become. We have actually had an investor sit in our office and after three months of due diligence, with check book in hand, look out the window and decide to pass on the $500,000 investment.
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The investor wants more equity or puts additional restrictions on the use of funds. Perhaps the deal structure, payback time, liquidity and return on investment are not competitive with other investments being analyzed.
You should position your deal as a moderate risk with moderate to high returns. This means looking at all the possible downside risks and having a program to mitigate them and keep moving forward. Each deal is unique, but if you can answer all or most of the negative "What If" questions you will have a much higher chance of getting the financing that you need. Top
Question: What is the normal percentage or fee that Venture Capital firms receive for raising money? Is their fee taken as a percentage or do they receive a fixed fee per number of dollars raised?
Answer: Venture Capital companies (VC's) do not take fees for raising capital. They have funds in place (investments for retirement systems, insurance companies, etc.) that they invest in businesses. VC's provide expertise, due diligence and management assistance as well as funding.
Often they provide contacts to other VC's and Bank Lending sources to supplement their investment. Fees are most often charged by consultants and private placements.
Here the sliding scale, Lehman Formula is a good guide to follow: 6% for under $1 million, 5% on first million, 4% on second million, 3% on third million, 2% on fourth million and 1% on fifth million and beyond.
It works very much like points on a loan. If you are fortunate enough to attract a VC to your deal, you will need to know all about pre and post investment valuations.
We recommend you get our 7 Report Series on Venture Capital funding to fully understand this process. Top
Question: What is the Lehman formula?
Answer: The standard finder's fee is based on the Lehman Formula, of 6% under $1 million, 5% on 1st million, 4% on second, 3% on third, 2% on fourth and 1% thereafter.
Private Placement Fees done my NASD dealers will usually cost 10% of the offering, plus expenses. IPO's generally have an 8% fee paid in stock of the initial IPO to the underwriters as an incentive fee for floating the issue.
In general, debt and other financing instruments are billed at one half the above rates and act like points. We have heard of some companies charging up to 10% or even 15% fee. These should be avoided because the investor will not accept a fee that high.
Merger and Acquisition fees or small business sales fees can range from 3% to 10% depending on whether the company is acting as a finder or broker. Broker fees are higher because they are involved in the negotiations and have higher risk. Top
Question: I believe the best strategy for my startup software company is an outright sale to another company with a good strategic fit. (This is after investigating VC funding). I am setting up meetings with high level people in the companies where I think there's a potential fit. I have a business plan. I have a product. I have some revenues and some significant discussions with potential customers going on. What else should I do?
Answer: Here's what you need to do now:
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Show a three-year roll-out and profit picture of your program.
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Do a valuation study of the program to see the PRESENT value of FUTURE cash flows to your target acquisition company.
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Estimate the additional investment for development, marketing and implementation to reach these cash flows.
- In most cases, the earlier you sell your company, the less you'll be able to get for it. Top
Question: I have two good business ideas, but lack the experience to bring them to reality in the near future. Are there VC's who will take your ideas from start to finish?
Answer: Most entrepreneurs who lack experience should assemble a founder's team to work out the details of the product or service, develop the business and marketing plan using private placement money first.
Most venture capital companies will not look at seed capital or cold startup companies due to the risk and time and money required to see if the product or service is viable in the current marketplace. Venture Capital companies today work more toward the mezzanine financing levels with the idea of taking a company public within two years. You need a list of Angel Investors
We suggest that you get our 7 Venture Capital Report package that explains the entire process. These reports were developed specifically to bring up questions and provide answers to this question. Top
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