Ask an Expert
The Quest for Venture Capital
Expert: Karen Grant
Nilkanth asked:
I have just started on a business plan with the idea of providing services using the internet as the primary tool. The site would mostly be informational, bringing clients and vendors together. The research so far shows this to be a viable market place (national as well as international potential). However, this would require a fair amount of startup capital. I have heard of venture capital firms that would not only commit the funds to a viable business idea but would also commit some of their consultants to take it to "the next step". Would you be able to point me in the direction of such firms with national/international exposure? What do these firms require in return?
Karen Grant answered:
Traditionally there is a normal cycle for the start-up and growth of a business. Most often it begins when the owner/entrepreneur funds their business in one of three ways. They often self-finance by taking out a second mortgage or maximizing their credit cards. Many choose to secure love money by borrowing the start up capital they need from a relative. Sometimes they can fund with proceeds, that is, the sale of someone else's product until theirs is ready.
After a successful start-up phase, an entrepreneur may decide to seek an outside investor. This person might be found up or down the company's supply chain. They could be a vendor or a customer who has become excited about the new product or service.
While most people think investment is made in the technology, the reality is that investors, whether private equity or venture capitalists, invest more in the people or team in place to take the product to market and have the determination to make it a success.
You have mentioned venture capital firms that provide funds and consultants to help a company get up and running. These are usually referred to as incubators or accelerators. In addition to investing in your company, and providing mentoring and advice in growing the company, incubators can also offer support in the form of office space or, in the case of Internet Incubators, programmers and technical experts to help build Internet products and services.
Most Internet Incubators do not require a full-blown business plan. Typically they are looking for an overview of your idea. They are particularly interested in who your team is and what stage the development is at concept or is it already operational? They will want to determine if you have really spotted an empty field that represents an opportunity.
The next challenge in this process is to determine how much equity you are willing to give to the investor/incubator that will fund the creation of your company, develop the product or provide office space and advise on getting the product/service to market. Valuation (the act or process of determining the value or price of something) is usually the biggest hurdle to completing a financing deal, especially with a start-up company where the actual value of a company is highly subjective.
Generally the higher the risk in creating a company and bringing a product to market, the higher the equity share required by the investor. In your case, 50 70 percent would not come as a surprise.
I would recommend that before you go any further that you might want to engage an organization like the Canadian Innovation Centre to provide a third party reference for market viability. The Innovation Centre conducts technology assessment and due diligence studies for companies assessing potential products and/or investment opportunities. This can be added to your documentation when approaching a potential investor. You can find more information at: http://www.innovationcentre.ca.
If you wish to investigate some Internet Incubator and business accelerator web sites, I would direct you to the Incubator web sites of BrightSpark at www.bspark.com and The NRG Group at www.thenrggroup.com; and for business accelerators, you might want to look at www.equityengine.com and www.VentureDrive.com.
About the author
Karen is the executive director of the Toronto Venture Group, http://www.tvg.org, a Toronto based network of equity investors that works at bridging the gap between entrepreneurs and capital.