Venture Capitalists and Angel Investors © Paul Wetton

In the United States alone  there are more than 6500 venture firms, SBICs, etc.  There's a total of $200 billion venture capital available and worldwide there's five times that amount available. 

FACT: Venture capital returns average 20 percent per year, which is the highest of all investments.

Even with all that venture capital available, eighty percent of start up companies are funded by angel investors and/or friends and family.  During the start up/early stage the funding amounts are usually between $25K - $250K.  And, of course, the investor brings much more than money to the table.  Part of the reason venture capitalists earn 20 percent per year is because they become partners in the company and bring their expertise as they assist in choosing managers and other employees.

Before looking at the stages of investing, let's look at the seven areas where you need to be prepared, whether you are approaching an angel investor or a VC firm:

1.   Study the feasibility of your venture to see if it should even be attempted (known as a "feasibility study.")
2.   If the business is feasible, prepare a business plan.  Make appropriate changes to your business plan with each round of financing.
3.   Develop a financial plan and calculate the debt and equity ratio.
4.   Develop an operational plan so that your project can get launched.
5.   Research potential VC and/or angel investors or other funding sources.  It is important that you find out what the investor will bring to the table, the types of investments that have been successful for them in the past, the amount of money available, etc.
6.   Develop project evaluations for the pre and post-investment stages.
7.   Plan exit strategies for the investor and the owners (IPO, acquisition, leveraged buyout, etc.)

Now let's look at the stages of investing.  There are two types of early stage funding and it is here where angel investors are involved:

• Seed capital.  Funds used for researching the market and developing the product.
• Start-up capital.  After it has been determined that there is a viable market and a business plan has been prepared.  There have been no sales yet.

The next financing stage expansion financing. 

The funds here range from $500K - to $5 million. 

This is venture capital territory and is broken into four stages:

First stage.  Financing for the manufacturing and sales of the product. 

Second stage.  Financing for inventory and accounts receivable and accounts payable.  The business isn't usually showing a profit at this stage. 

Third stage (mezzanine financing).  Financing for new products and greater expansion.  The business isn't usually profitable yet. 

Fourth stage (bridge financing).  The company is ready for an IPO at this stage.  This financing is paid back with the sales of the IPO. 

The final financing stage is acquisition/buyout and the funds her range from $3 million to $20 million.

• Acquisition.  Funds for acquiring another company or a product line.  Bank loans and junk bonds may be used. 

• Leveraged Buyout.  When a company is bought out using borrowed money.  The company is used as collateral and there is a tax shield (interest isn't taxed), which makes it possible to borrow larger sums of money. 

5 Australian Venture Capital Firms © Paul Wetton

Australia's VCLP (Venture Capital Limited Partnership) legislation - which enables investors to receive a tax deduction on profits - puts private equity (venture capital) firms on equal footing with the United States.  The strength of the Australian dollar, the political stability and strong economy contribute to the favorable investment atmosphere in Australia.  Here are some successful Australian firms and the types of businesses they have helped create:

1. Starfish.   Created in 2001 to fund early to middle stage investments in a variety of high growth areas such as IT, life sciences and communications.  They look for companies that have new technology that can create a new market.  They also fund companies that can provide services to an existing market. "We don't invest in technology, we invest in businesses," says fund manager Michael Panaccio

Starfish was previously JAFCO.  JAFCO invested $1 million in ResCo in 1993.  ResCo is the manufacturer of a sleep apnea device.  By 1998 JAFCO had realized a 98 percent internal rate of return.  The company is now traded on the New York and Australian stock exchanges.

Another company that was a success for Starfish was SIRTeX Medical Limited, which produces a liver cancer therapy.  The initial investment was $3 million and the Starfish partners sold its shares for a 13 times return.  The internal rate of return was more than 100 percent.  Starfish typically invests $3 to $5 million in first round financing and looks for Australian companies with technologies that enable the managers to build an international business with an Australian base.

2. Tech Venture Partners.  TVP began in 1997 and is one of the largest specialist technology venture capital firms in Australia.  General partner John Murray says Australia has performed "far better" than other countries because of its strong economy.  "We've had low interest rates and inflation, a very stable political climate, and we are increasing our expertise in penetrating Asia Pacific markets."

The company focuses on technology companies and invests at any stage of the investment cycle from startup to IPO.  They look for companies with strong managers and the potential to expand globally.  TVP invested in Cap-XX, which manufacturers super capacitors.

TVP funds four businesses a year and accepts only one out of every 100 applications.  Their areas of specialty are wireless infrastructure, nanotechnology, security technology, and bioinformatics.

"Australia has a history of innovation, a skilled workforce, very good educational institutions and a history of being able to innovate, particularly in areas like software.  There is also a lot of quality research work taking place in public research institutions and universities. There is definitely a
sustainable industry sector for our investment strategies," says Murray.

3. Catalyst.  Started in 1989, Catalyst isn't as high tech focused on as some venture capital firms.  They've funded businesses that manufacture garage doors (B&D), jeans (Just Jeans), hotels (Taverner Hotel Group) and underwear (Pacific Brands).

Catalyst was involved in one of the largest leveraged buyouts in Australian history when Pacific Brands (makes of underwear and sports equipment) was acquired by Pacific Dunlop for $780 million in 2001.  Pacific Brands has since greatly increased their profitability, making the buyout a success.  A buyout only happens to mature companies with steady cash flow who are ready for the next stage of growth.

B&D acquired a small garage door company through Catalyst and is on target to earn $27 million a year and maybe go public soon.  Just Jeans was a public company that Catalyst privatized.  According to manager Gordon Windeyer it was the first time in Australia that a public company was privatized in a leveraged transaction.  Windeyer says the Australian private equity industry is less developed in Australia than in other countries but it's "much easier to exit on the public markets than in either the US or UK."

4. CHAMP.  CHAMP helped Austral Ships acquire $15 million in 2003 so that it could expand to become the leading manufacturer of high speed ferries in the world.  Austral Ships had received a contract from the Australian Navy to build a new fleet of boats.  Also, Austral Ships wanted to be able to build ferries with jet engines and this funding allowed for that expansion.

CHAMP has invested in 42 businesses for more than $400 million over the last 15 years.  "We have made investments in most
sectors of the Australian economy and invest in both high growth and mature companies," says Su-Ming Wong, managing director.

"Since the introduction of VCLP, off shore investors are willing to revisit Australia. We are confident that they will now make investments to
take advantage of the many opportunities our market has to offer," said Wong.  Australia is able to benefit from the economic expansion that's happening in the Asian countries.  Australia has the fourth largest economy (behind Japan, Korea and China).

5. CVC Asia Pacific specializes in buyouts of businesses in Asian countries and Australia.  They only invest in high growth businesses and don't invest in start ups.  They make 2-3 investments per year.  Because they make so few investments it's crucial that every investment make a return.

"We buy businesses, run them for three to five years then exit. A logical exit for us is to float the company on the share market. Australia has a liquid and developed public market and hence we are seeing a lot of exit opportunities," says Adrian Warner, director of CVC Asia Pacific.

‘What we occasionally try to do is strengthen the management team by bringing in particular skills that we think would be complementary
to the current team. If they have been part of a larger company then often they don’t have the level of experience or a background in, for
example, treasury functions and cash management because they have had the support of the parent company. When they become a
standalone business they need to develop those skills and so occasionally we will give them boost in that area," says Warner.

CVC has had the largest management buyouts in Australia.  The Amatek (a home building supply company) buyout was close to $1 billion and they were involved with Pacific Brands deal and Tech Pacific.

What Venture Capitalists Look For When Evaluating Deals © Paul Wetton

When putting together your business plan it's wise to put yourself in the venture capitalist's shoes and anticipate the types of things that they ask and the materials that they expect to see. 

Here is a List of Six Questions That You Should Ponder:

1.    How much will the venture capitalist make?  A 40 percent ROI is standard.

2.    How much can the venture capitalist lose?

3.    What other investors, bankers, etc. are involved with the deal?

4.    Who are all the managers and who is in charge?

5.    What's the exit strategy and when will it happen?

The Venture Capitalist Will Also Look for Certain Documents.  Make Absolutely Sure You Have These:

1. Executive Summary  (3 - 7 pages)

2. Business Plan  (not to exceed 50 pages)

3. Due Diligence  (Market research, patents info, etc.)

4. Business Valuations  (anticipated value of the business before and after the investment)

5. Deal Structures  (the number of shares that will be sold)

There are other elements a venture capitalist will make your business plan more appealing to the venture capitalist:

• Do you have an appealing management team and market?

• Will the venture capitalist get their capital back from the top?
 
• What is the potential?  Stocks, possible IPO, buyouts, etc.

• Assurances that you will actually follow the business plan and execute it.

• What role will the venture capitalist have in your company?

• Are there other business opportunities more appealing than yours? 

NOTE: Venture capitalists constantly compare one investment against another and sort them into categories.

Want to talk?

You can contact us nationwide in Australia on 1300 30 42 62 Ask for Paul Wetton

Venture Capital Funds in India:  A Flourishing Market © Chris Bloor

When you think about venture capital you probably automatically think of high tech, bio-tech, life sciences companies and the like.  But recent news reports indicate that niche retail companies are becoming popular among venture capitalists, especially in India.

The Indian retail market is flourishing and growing each year and is expected to have more than $400 billion in revenue by the year 2010.  For the last three years India has been the top retail investment market according A.T. Kearney, Ltd.

Niche retail stores are good candidates for a takeover by a larger company.  An example of this is Kinko's.  They were bought out by FedEx or are in a good position to offer shares through an Initial Public Offering (IPO) if they franchise and become a chain and have enough stores.

Real estate is much cheaper in India, which keeps costs low.  The opportunity for retail start-ups in India is so good that it's not unrealistic to expect to have a franchise of 300 stores in a short period of time.  Coffee shops, printing shops, pizza shops, confectionery stores, luxury good retailers and furniture retailers are examples of niche markets in India that do particularly well.

About the Author: Chris Bloor is one of Australia's Leading Internet Marketers. Visit his website www.SalesLeadSecrets.com

Australian Venture Capital Basics - Due Diligence © Paul Wetton

1. Investors conduct "due diligence" before investing in a company.  That is, they research every aspect of the business plan thoroughly to find any weaknesses.  They tend to focus on areas where they have had problems in the past with previous businesses.

2. It is important that your records be accurate, organized and easily accessible so that you don't appear unprofessional.  Your lawyer and accountant will have to answer many of the investors' questions.  It is an expensive process as well as time consuming.  If your legal affairs are not organized it will be a sign to the investors that your business is not sound.

3. Get your ducks in a row before you begin the financing process.  Write down oral agreements and any agreements with third parties.  Organize your paperwork and records.  Assign one person on your business team to be responsible for due diligence paperwork.

Here are other areas that require attention as you prepare for due diligence:

• Anyone who has given permission for licensing or helped develop intellectual property should sign agreements stating that the work belongs to your business.  The founders of the business should also similar agreements.

• Make sure your employees have non-compete agreements with their previous employers and study their work history thoroughly so that there aren't any surprises.

• If you promise equity to employees make sure you document this to prevent a difference of opinion. Keep records of stock purchases.

• Have customers sign contracts.

Want to talk?

You can contact us nationwide in Australia on 1300 30 42 62 Ask for Paul Wetton