Venture Capitalists
By William Cate
Published March 1998
[http://home.earthlink.net/~beowulfinvestments/] [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
They invest in less than 1% of the companies they review. Your odds
of raising money at the race track or in Las Vegas are better than your
odds of finding a venture capitalist. I don't believe that it's worth your
time and money to seek their investment in your company.
Venture Capitalists aren't Fairy Godmothers. If you won't give up
60%-70% of your company for the venture capital investment, you'll never
interest a Venture Capitalist in your company. For most business owners, a
contract with a Venture Capitalist is a deal with the devil.
Let's assume that your company is a winner of the Venture Capital
Lottery. You'll become a minority shareholder in your company. Your job
will be to make your company a business success.
The Venture Capitalist's first goal is to recover their investment
in your company. The VC expects to recover their risk capital within twelve
months. They'll do it by appointing several financial sales people to top
management positions. This VC management group will prepare your company
for its IPO. They'll encourage accredited investors to buy half the VC
stock in your company at double the price paid by the VC. Within a year,
the VC has recovered their risk capital and still owns 30%-35% of your
company. It takes between 25% and 40% of the VC's investment in your
company to allow the VC to breakeven on their investment.
No one risks money to break even. The VC's goal is to do an Initial
Public Offering and take your company public. Once your company starts to
trade, they'll sell their 30%+ stock in your company. The good news is the
IPO will raise more money for your company. The bad news is the IPO shares
will further dilute your ownership of your company. As a public company,
you'll probably now only own 10% to 15% of your company.
It costs money to do a successful IPO. You'll find that those VC
Financial Managers will divert your advertising budget into general
advertising that acquaints potential stock buyers with your company. It
doesn't bother the VC that none of the potential stock buyers are buyers of
your product or service. The axiom is that when investors recognize the
name of your company, they'll buy your stock. It's the VC's stock, not the
company's product or service that is being sold.
It costs money to do an IPO. That money comes from your company's
cash flow. Until you receive the proceeds from the IPO, you won't have the
money to expand your business. If the cash flow isn't adequate to pay the
IPO costs, expect the VC to issue more stock and dilute your ownership
further.
You can invest in a search to find a Venture Capitalist. I don't
think your VC strategy is sound. You are betting against the odds that
you'll find a VC. If you find a VC, you'll lose control of your company.
When your company goes public, you could find that your insider group owns less than 15% of your company's stock. If you think that a VC strategy is a winning strategy, I wish you luck.
To contact the author: Visit the Beowulf Investments website: [http://home.earthlink.net/~beowulfinvestments/] Or, visit the Global Village Investment Club Website:
[http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
About the Author
He has been the Managing Director of Beowulf Investments [http://home.earthlink.net/~beowulfinvestments/] since 1981 and is the Executive Director of the Global Village Investment Club [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]