3
Simple Steps to Venture Financing—Step 2: Get Ready (#3
of 4-part series)
by Cassie Hoag, Equity Architects, LLC
So venture capital may indeed make sense for your company. Now you need to prepare for the scrutiny that a sizeable investment commands. First, if you’re structured as a limited liability company (LLC), a partnership (GP/LP/LLP), a professional corporation (PC), or are operating as a single proprietor, you should restructure as a corporation (Inc). Talk to your accountant or lawyer about how best to do this. Next, here’s what your company should prepare to attract the attention of venture capitalists:
| Historical & Current Financials | A Profit & Loss Statement (“P&L” or Income Statement) for this year-to-date, and each of the last 3 years (or since you’ve been in business), with monthly detail; a Balance Sheet for each of the last 3 years; and a Cash Flow Statement for each of the last 3 years. |
| Business Plan | Detailed, organized and up-to-date plan that defines your vision, mission, market, differentiated products or services, goals, strategies and tactics to compete, grow the business and make money. |
| 5-Year Projections | Projected P&L Statements, Balance Sheets and Cash Flows for the next five years. P&Ls should provide monthly detail. Revenue assumptions should be footnoted and must be realistic and supportable. These projections become part of the Business Plan. |
| Valuation Model | Takes your 5-year projections, theorizes the amount of money raised and equity position of the investors, considers similar transactions with other companies, and typically applies a discount rate to future cash flows to come up with the present value of your company. VCs always create their own valuation models to make investment decisions—it’s prudent to anticipate their process. This is a document for your eyes only. |
| Capitalization Table | A spreadsheet that shows who owns how much of your company; usually expressed in shares of stock. If not previously established, the price of those shares is the value of the company divided by the number of shares outstanding. |
| Executive Summary | Highlights the key points of the Business Plan and goes on to address the value of the company before the financing, the amount to be raised, the value of the company post-financing, and the likely return on investment for the VCs. Written version should be translated to a 20-minute PowerPoint presentation. |
| Elevator Speech | Take the Executive Summary and distill it down to 1, 3 and 5 minute “pitches” that can tell someone new exactly what your company does, why it’s important and exciting, and why the time to invest is now. Practice and commit to memory. |
| “Clean House” | Get everything in order, from your office and facility to regulatory, environmental and legal issues. Organize rather than shove paperwork indiscriminately into drawers. Decide what you’ll tell employees. This is like selling your house: you need to get it clean and keep it that way. |
© 2006 M. Cassandra Hoag, Equity Architects, LLC
Cassie Hoag is the founder and managing director of Equity Architects™, LLC, a financial advisory firm that helps small businesses realize their potential through equity or debt financings, mergers and acquisitions or reorganizations. You can reach her by email or call 949-388-7375.
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