Investment & Financial Articles
Title: Venture Capitalists
Author: William Cate
Article:
Venture Capitalists By William Cate Published March 1998
[http://home.earthlink.net/~beowulfinvestments/]
[http://home.earthlink.net/~beowulfinvestments/globalvillageinves
tmentclubwelcome/]
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/globalvillageinves
tmentclubwelcome/]
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/globalvillageinves
tmentclubwelcome/]
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