We'd like to provide an information brief on the Venture Capital (VC) process here at 3Si Venture Capital (3Si). 3Si provides access to venture capital funding.
However, we are required to screen each proposal for specific criteria and presentation. Should you have a project / product in need of funding, please contact us. All information is handled with the strictest degree of confidentiality.
Venture capital comes in different stages. Early money is sometimes known as "friends and family money" and as the name implies is sourced as such. This is the money usually used to take an idea to formal concept and as well as from concept to business plan. Seed capital or start-up money is that money raised to develop a plan.
The next step "early stage" is the point in time when a proto-type commonly called a "beta unit" is developed. The risk factor for investors at the early stages is extremely high as are the emotional ties to the project. In most cases there is a direct relationship between risk and reward.
Lets look at the typical "life cycle" of a commercial enterprise.
4 - 10+ years to exit.
Founding entrepreneurs are developing and polishing business & operations plan.
Founding entrepreneurs develop the business model, company goals and long-term product strategy.
VC provides startup capital and helps refine the planning process.
3 - 7 years to exit.
Founding entrepreneurs focus on working on product development.
Key managers and technical experts develop product prototypes.
VC funds and supports operating and development efforts.
Initial Expansion Stage
2 - 5 years to exit.
Founding entrepreneurs focus on product refinement.
Company tests, refines and starts initial manufacturing of prototypes to eliminate major technical or product risks.
VC finances operations and provides business expansion expertise.
Secondary Expansion Stage
1 - 4 years to exit.
Founding entrepreneurs focus on scaling marketing efforts.
Management works to increase market presence and develop second generation products.
VC provides funding and consultation to achieve positive cash flow.
0 - 2 years to exit.
Founding entrepreneurs focus on profitablity.
VC and management team position the company for an IPO or acquisition. IPO/Acquisition - Entrepreneurs, management, employees and VCs are rewarded for hard work and investment - cash-out subject to lock-up period and SEC restrictions.
Our experience and consulting is in working with entrepreneurs and business entities in ALL of the above listed phases; "Early - through -Later" stages, where a company's products and services are moving beyond the conceptual / research and development (R&D) stage.
Understanding our collective goal at these various stages of venture capital investments is essential for any business seeking "product to market" capital.
Most venture capitalists (VCs) are emotionally unattached to a deal. Their primary and core issue is simple: "What is the exit strategy and potential internal rate of return (IRR) to the proposed investment."
An "exit strategy" is the point when our VC investment reaps the rewards of our initial and subsequent investments and for taking on the risks of said investment.
Whether the company is acquired or goes public, this is the point when we liquidate our investment. For us to resolve the exit strategy and the IRR requirement, a series of other criteria questions must be reviewed.
Some of the most basic criteria questions are as follows:
Is the proposed investment entity a company or is it a product?
This seems a rather intricate question and it is, but it is basic to understanding our potential for an exit strategy. If the product or service is limited in scope, and specific to only a sub-set of a market whole, then the exit strategy would most likely be limited to an acquisition only.
Remember, like most venture capital firms, we do not have the intention of riding long term with an investment. Traditionally speaking, most venture capital firms are seeking at least a ten times return within an investment life of only 3 - 5 years. Thus, we immediately look to see if the product or service could be folded into one of the existing market's leading entities.
What is the size of the market's annual revenues and what is the projected market share of the investment?
The projection that answers this question is primary to the our determination of the prospective investment's estimated valuation.
Obviously, the miscalculation of this single concern regarding market size was the leading cause of the downfall to many venture capitalist and firms in the dot-com sector.
Projecting and defining the potential size of the Internet market, in which there lies no history has been a disaster for many. The successes, or rather lack of successes regarding "business to consumer" (B2C) dot-com companies has been tremendous.
It is stated that during FY 2001, the heart of the dot-com bubble implosion, one third of the dot-com companies had run out of cash and were forced to close. This scenario is a venture capitalists and VC firm's worst nightmare. Here at Juliet Foxtrot, we aim to learn from this historic and critical miscalculation in order for us to make "smart investments" in the companies we choose to work with.
The vast majority of companies which are expected to fail are the B2C companies. With a historic and measurable market, it is much easier for the us to define and project the size of the 'business to business' (B2B) companies.
However, we are not indicating that we are opposed to any and all B2C companies; however, we are indicating that if this is the supposed business model, the due diligence process will be significantly more intricate and require our highest level of review.
What is the projected burn rate of the investment?
This question is simple and essential to identifying the amount of investment necessary to carry the company to exit. Whether stated per month or per annul, the burn-rate simply identifies the amount of cash necessary for the company to pay its expenses prior to profitability and positive cash flow or exit.
What is the capacity of the management team?
Very rarely does the management team of a company remain the same after start-up. The expertise necessary to develop a product or service is very rarely the same that is required to manage a company to exit. Remember, the VC investment firm is putting their money into the deal with only the exit strategy in mind.
Like traditional VC firms, we want and usually demand a management team in place that has the experience to take the company to exit. This is the one area where those seeking venture capital stub their toes most; founders are usually too attached and unwilling to give up the day to day control of the underlying company's operation.
What most early-stage entrepreneurs don't understand is that the management established by the us and other VC firms, provides the objectivity and disciplined experience necessary to benefit the company, not the cause and emotional ties of the company original founders. This is the foundation as the saying, "It's just business." We are not here to cater to one's emotions and/or connections.
The above statements and points of consideration are the very core elements of understanding the dynamics of sourcing venture capital to a project and/or venture. The perspectives of those seeking the funding and those of venture capitalists must be acknowledged and linked.
As more VCs get burned, as seen in the notorious dot-com bubble, and as markets continue to burst, the criteria is only going to become more stringent and inflexible. The best potential for one seeking venture capital is to appreciate these issues.