Part 20/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)

By Laurence K. Hayward

This is the last part of a twenty part series on this topic.

20. What are the probable exit scenarios?

In most cases, VCs are managing other people’s money. The fund(s) they manage comprise investments from a variety of institutions (e.g. pension funds) that put a percentage of their investments into the high­risk/high­return private equity asset class. These institutions obtain diversity by investing in a fund (or funds) that contains a portfolio of companies, managed by private equity investors like VCs. The VC’s responsibility is to acquire and manage the portfolio, and ultimately to generate a return for their investors (the institutions). In order to generate those returns, VCs need liquidity from the assets (companies) in their portfolio, and they most typically achieve this when portfolio companies are subject to a merger, acquisition, buyout or public offering. VCs need to know how they're going to cash in on their investment, hopefully at an ROI of 50 percent or more ­­so the exit strategy after all is where the rubber meets the road. The VCs are not content to “figure out later” how they will exit their investments and generate returns. Before they invest in a company, they like to know the various exit options. As an entrepreneur, VCs will ask you about who would have interest in acquiring your business and why. Be both realistic (particularly on timing and valuation) and creative regarding merger and acquisition possibilities.

I hope you found the preceding series valuable. I welcome your thoughts on this content as well as your experiences raising private equity. Please feel free to contact me with questions and comments.

Laurence K. Hayward 

Founder/Partner 

VentureLab Inc.

lkh@theventurelab.com 

www.theventurelab.com

Part 19/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)

By Laurence K. Hayward

This is part nineteen of a twenty part series on this topic.

19. What is the planned "Use of Proceeds?"

VCs want to know that their money is being put to good use in order to directly accelerate the business opportunity, so that they will receive their ROI in a timely fashion. Generally new investors aren’t interested in paying for the exit of existing investors. They don’t want to see their money going ‘out’ of the business; they want to see it invested in areas that will increase the value of their investment.

You may have heard the saying, “calculate the amount you need and double it” with respect to estimating the amount of capital you should raise in a given round. A better approach is to build a projected cash flow statement and a timeline of milestones. Understand the amount of capital you’ll need to breakeven (depending on the stage of your business this may not be achieved with this particular round of financing) and the amount to finance your business for the next twelve to twenty ­four months. Understand that if you are successful at closing a round, you may need to begin the process of raising the next round of capital shortly thereafter.

Include a breakdown of how the money will be spent and what it will allow you to accomplish. While it is true that estimating capital needs isn’t an exact science (thus the “double it” phrase), estimate “uses of funds” as scientifically as possible and then develop contingency plans.

Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here