professional business plans

Question:

My questions have to do with the legality of methods of seeking investors. Could I market for these investors? What is legal as far as giving estimates of potential income? If I get a large number of private investors, what is the best avenue for holding the monies until the venture is officially begun?

Answer:
First of all, unless you are very sure about what you are going to do, run it past a lawyer first before doing it. If I understand it correctly, you can get yourself into enormous trouble.

If I were starting a business and looking for investment, I'd forget about venture capitalists initially and consider friends and relatives. They are far more likely to take the risk than a venture capitalist. But you must be careful with your offerings so run everything past a lawyer who is quite knowledgeable in that field before presenting it to investors.

Concerning venture capitalism:

Venture capitalists aren't about to just hand out money to anybody that comes along with a good idea, no matter how good the idea. They want to be sure that the risk is minimal compared to what they'll make. They are not guardian angels putting money into schemes just because the promoter promises them a huge payback.

The first question is how to find the venture capitalists. From what I've seen, possible business deals are typically referred to venture capitalists by people they know either personally or by reputation. And those people doing the references are going to want their cut.

There may be other ways to approach venture capitalists. But consider the fact that those who are better known are going to get approached with far more deals than they could possibly investigate, much less invest, and many of those deals are likely a waste of time or even fraudulent. The result is that something that arrives from an unknown source is facing a rather uphill challenge.

The question will then become one of finding the people who will be able to get the venture capitalists to look at your deal. All you can really do is ask around. Lawyers in the field will probably know some of them. Another good source is middle and upper level managers at the major accounting firms.

Before they pass the deal along to the venture capitalists, you are going to have to convince them, first. After all, if they present bogus or incoherent deals to venture capitalists, the venture capitalists are going to begin ignoring them.

You are going to have to have a business plan. A real and detailed business plan. If you have never done one, it might be a good idea to hire a major accounting firm to help you put it together. Of course, the person actually doing the work from a major accounting firm will probably be a fairly low level consultant, but he will have other business plans as models and will receive some guidance from his higher ups.

I'm not sure if it is part of the business plan or not, but you will have to provide resumes for your top people. And they had better have impeccable credentials. For example, if you have a vice president who's former job was as a low level manager at another company, they're probably not going to consider that well regardless of his abilities. They want to see that you have the management capabilities to successfully manage the firm. If you have some proven experience there, but not as much as you are going to need, you may be able to pick up some along the way, but you should probably include that in the business plan.

You're also going to have to have financial projections that show what you expect in expenses, income, growth, etc. This is something that really does take experience to do properly.

Assuming that you then have a professional business plan and sufficient managers of proven capability, the venture capitalists may then look at the plan. Many of them specialize in certain areas and in certain sizes of companies. No matter how good everything else is, if you want a million dollars in venture capital and a firm has a minimum requirement of ten million dollars, they're not even going to look at you. And if you're company is in petrochemicals and the venture capital firm is only interested in computers, they're not likely to pay much attention.

So depending on your field and on the size of your company, you might stir up some interest. Much of that interest is likely to be of the form "we're interested, but not in being the lead investor." That is, they might feel comfortable after someone else has gone through your idea and company in great detail and found everything to be on the up and up and likely to be profitable. What you need is a lead investor to do the due diligence. They are going to visit the place, meet with people, check everything out.

One thing to consider is that the venture capitalists are not going to do all this for a small portion of the company. They're going to want most of the company. The better the financial shape and prospects your company has, the less risky the investment is to them and they may take less. I suspect the best situation is when your company is profitable and basically needs additional capital to expand to meet established growth requirements, you have a much better chance.

Venture capital is not cheap.

By the way, once the venture capitalists consider your company and turn you down, they're not going to want to look at it again unless things have change substantially. If you go to them two years later still looking for your first round of venture capital, they're not at all likely to even consider it.

There is one kind of "venture capitalist" you should be very careful of. There are a few that are extraordinarily predatory. They don't really think that the company will survive and they don't care. What they want to do is to take advantage of the fact a small, established company is really hungry for cash in order to stay in business.

One thing they will want is control of your board of directors. Of course, real venture capitalists will want at least a member or two on the board and may want control. But in this case, they want control so they can steal you blind. They'll order equipment for the company. It comes in the front door and out the back door, leaving the company to pay for it. These kind of vermin will work with relatively small sums. They'll put in maybe $200,000 and leave you a half million in debt. You can file lawsuits against them, but they know it will take years for it to go to court and you are going to have to come up with money to pay your lawyers. If you had money for that, you wouldn't have given them control of the company for such a small sum.

So, once you find a venture capitalist that is willing to invest, check them out, too. No matter how much your company needs the cash, you cannot need it bad enough to try to deal with people who are experienced at robbing companies like that. Talk to the people at other companies they are backing and make sure that they are on the level.

Disclaimer. I'm not a lawyer. My dealings with venture capitalists were in the late 1980s and early 1990s and were from the side of a small company looking for venture capital. So some things may have changed, but in general, I think that I am largely correct.

At one point, it looked pretty good for some intermediary venture capital until we checked them out. It really hurt to turn down their money, but the inevitable results would have been much, much worse.

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