August is Venture Capital Month at Anthill and today we’re launching a new series written by San Francisco-based Steve Anderson focusing on the capital raising cultures in Australia and the US. Today, Anderson discusses the pros, cons, illusion and reality of raising capital in the US.
In 2008, US venture capitalists invested $28.3 billion in 3,800 deals – a down year for the first time since “post-bubble” 2003, but still a lot of capital looking for potentially great companies.
Is this an opportunity for Australian or New Zealand companies seeking a US venture capital cash infusion?
Yes! However, there are barriers to entry. If a company has the right stuff, the barriers go down. And then, success requires serious preparation for that opportunity.
The benefits do not begin with the money. The money matters, of course, but the benefits of having the right venture capital firm invest in a company have more to do with business execution. Execution is the engine. The money is the fuel.
Choosing the right venture firms to invest in a company is the most important decision. It is Darwinian in this respect. The venture capital partner with the best characteristics (their DNA) for a company results in a much higher probability of success.
Specifically, the right venture firm will have partners that know everything about your business and key people in the industry. They will provide knowledge gained from experience and will open access to businesses that will contribute to success and customers.
Given the degree of difficulty, why undertake pursuing US venture investment?
1. There are more VCs in the US than any other country in the world.
2. They invest more money in a year than any other country’s VCs.
3. The US VC investment exit objective is 3-5 years.
It is extremely important to look at your company from the VC’s perspective right from the start. They only want to make an investment that will significantly increase in value.
Australian and New Zealand companies make mistakes in entering the US marketplace for investment capital and for business in general. That can be Holy Hell. The mistakes are primarily due to assuming that what worked in Australia and New Zealand works in the US.
The belief that the US is as homogeneous as Australia or New Zealand is a significant misperception from both a personal and business point of view. Significant differences exist that, if missed, can be costly and painful to the business.
Preparing to seek US venture capital, in the current economic environment, begins with making sure that the business has proven commercially that customers will buy it for any of the possible reasons, and the more reasons there are the better. The best (but not only) proof of that is two years of continuous, significant revenue growth.
The company needs to have nailed down, in place and working, business policies that enable management to focus on building the business and not be distracted by hourly decision-making about fundamentals.
Next is the preparation of the “Due Diligence” files, or what will become known as the Due Diligence Package. This consists of a long list of audited documents that cover every aspect of the business, its management and its pre-venture investors. This is your business laundry. It better be clean. Put it on a secure website.
Research all the venture capital firms to determine those that invest in the company’s sector, have partners that understand the business and that have sufficient funds to invest. All VCs have websites, but the website describes only how they see themselves. Talking to their portfolio companies is important on a founder to founder level and provides invaluable insight into how the venture firm really works.
The initial presentation is a short (10 frames), compelling PowerPoint that explains:
- what the product or service does
- how it makes a difference to customers
- how the business model works
- who the customers are
- revenue history
- capital amount requested and what it will be used for
- the management team that will execute.
Be prepared to be on the road pitching the company over and over, seeking the second meeting with the venture firm of your choice. Sound like Holy Hell yet?
Setting a valuation on the company is a mistake. The market will decide what the valuation should be. Having more than one interested venture firm with investment offerings enables the company to have at least two metrics to rely on for valuation.
Keeping a level playing field between the company and the venture capitalist firm is very important. Keep in mind that if the company is as good as it needs to be to obtain an investment, the venture firm needs the company as much as the company needs in capital.
Negotiating the “deal” is best done by someone other than the principals of the company. A US lawyer who has negotiated a lot of deals with venture firms is able to read the agreement and recognise elements that are not in the best interests of the founders.
All of this is positioning the company for either another round of capital investment within the next 18-24 months and starting this process all over again, usually with the original venture firm, or the sale of the company to a strategic buyer.
Oh, yes, and plan to move the company to the United States, close to the customers and the venture investors.
Steve Anderson started as a journalist, working first at The New York Times and the next 30 years interpreting business to investors. He is now Managing Partner, Marquis Advisory Group (San Francisco and Sydney).
It’s Venture Capital Month at Anthill. Click the image below to attend the event!