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contain certain key clauses that could be non-negotiable from the VCsstandpoint. Your prior awareness about such agreements would help youto formulate your negotiating strategy and close the deal speedily.

The Importance of Being Well PreparedVCs are busy people who receive hundreds of funding requests everyday. As they cannot go very deep into every business proposition, theycreate their filters, or specific criteria, to help them short-list the busi-nesses they could invest in. Therefore, it is important for you to under-stand these filters in order to focus your efforts and improve yourchances obtaining venture capital funding. We will discuss more aboutthis in Chapter 20.

The statistics below, highlight the importance of being well preparedif you are to succeed in raising venture capital.

Typically, this is what happens to business plans presented to VCs:

65% are rejected after the first reading. 20% are rejected after a thorough review. 10% are rejected after due diligence. 3% are rejected following failed negotiations.

2% succeed in raising funds.

As you can see, the odds are stacked against the entrepreneur. There isa lot of competition for VC money. Only the best, and the best-prepared, businesses succeed in obtaining VC funding.

Timing of Raising Venture CapitalThe process of raising venture capital is very time-consuming. It de-mands a lot of your time, in spite of the fact that you will have hired pro-fessionals to guide you through the entire process. Once you start thisprocess, you will find that it will need your complete attention and a lot

of your time. Therefore, you should start this process when you have thetime to focus on it for the next 6 to 12 months. This means that youshould be in a position in your business such that there are no missioncritical activities happening to distract you from the process. Ironically,

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the best time to initiate the VC funding activities is when you least needthe money in a hurry.

Secondly, if you have had a good year financially, then the end of thefiscal year and the sign-off of the audited financials would be a good op-portunity for raising venture capital. You would be flushed with the fi-nancial success of the previous year and that will show in your confi-dence while dealing with the VC. You would also be ready with yourcurrent years forecast after completing your budgeting exercise for theyear. The data will be fresh in your mind, as will be the future directionof business, so you will spend less time preparing the documents the VCrequires for making his decision regarding funding your company.

Thirdly, any major event (in your business) that has a positive impacton the future of your business is a good inflexion point to consider rais-ing venture capital. This event could be the completion of your productstrial run, acquisition of a new customer or a big order, and the like. Anysuch event would indicate that you are ready to move to the next stage ofgrowth of your businesss lifecycle. And raising venture capital at thispoint would facilitate your moving into the next stage of growth.

The last point regarding timing relates to the external environment.When capital markets are booming, you are likely to get a higher valua-tion for your business. Also, when stock markets do well, VCs are able

to raise more and more money for investment. As there is competitionamong investors to find the best opportunities to invest, your negotiat-ing position is likely to be better and your chances of getting funding willbe much higher when the capital markets are doing well.

Tab le 9 .1

Pitfalls in Raising Venture Capital What Can Go Wrong

General

Underestimating the length of time taken to obtain funding.

Underestimating the management time taken to prepare.

Not having a scalable growth business.

Not using experienced advisers.

Inappropriate timing of fund raising.

Contd . . .

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Targeting Stage

Inexperienced advisers or incorrect advice.

Badly made business plan, executive summary and elevator pitch.

Selecting wrong VC in terms of industry focus, investment size, investment amount

and return expectation.

Portfolio needs of the VC preclude investment.

IRR not good enough.

Timing and mode of exit is unsuitable.

Screening stage

Business plan not well drafted.

Management lacking in credibility.

Lack of integrity selective disclosure, false statements, partial truth, etc.

Lack of chemistry between the founders and the VC.

Valuation not agreed upon, or considered too high by the VC.

Equity stake required by the VC is too high for the entrepreneur.

Funding amount is too high or too low.

No syndicate VCs available.

Due Diligence Stage

Shareholder issues.

Legal cases or other contingent liabilities.

Employees issues.

Valuation adjustments post due diligence not agreed to by the entrepreneur.

Legal Agreements Stage

Control issues.

Anti-dilution issues.

Share transfer issues.