Simply put, there are no hard and fast rules for attracting private capital into a new venture as each set of angels, individuals, business segment, and market potential vary. However, The Vermont Department of Economic Development offers this general sense of what one might expect to experience during the new venture development process in Vermont.

IS OUTSIDE CAPITAL RIGHT FOR ME?

The first step is to ask if the founding team is ready to accept the involvement and conditions of outside equity investors. Entrepreneurs must recognize that there is a "price" to new investment other than how much of the company is sold. Some of the significant changes that one should be prepared to discuss and accept are:

• Equity investors as new business partners or a first partner. Key decisions on strategic directions, products, prices, and timing are now shared decisions with your investors. Some entrepreneurs find it difficult to adjust to this cooperative approach to decision-making.
   
• An obligation to grow the business for mutual "financial return", not just as a lifestyle or better income source for the founders. Outside capital is backing you for financial return first and foremost.
   
• A Board of Directors for reporting operating results and setting annual salary and bonus levels for the executives. Loss of control over salary and benefits, and removing personal expenses from the business are often difficult changes that result from outside equity being accepted.
   
• Managing and growing your business subject to formal operating budgets where planned versus actual results are the Board's focus and drive accountability of management.

HOW LONG IS THE NEW CAPITAL PROCESS?

It depends. For some capital seekers, the venture capital process is an endless and fruitless search while for others the money flows in with great ease in less than 30 days. In Vermont, there are stories of both. Some guidelines for timing and process steps are provided below as a general reference:
 

• Business plan preparation and market research: 1-3 months
   
• Legal document preparation: 1 month
   
• Team identification and commitment: 2-6 months
   
• Presentation to accredited angel investors and institutions: 1 month to several years
• Closing investment round where funds are paid-in: 1-3 months

HOW WILL MY BUSINESS BE EVALUATED?

New ventures seeking private investment capital are generally evaluated by prospective investors around three basic criteria. Capital seekers should focus their business plan and presentation development around the following:

1. The Business Opportunity presented.
2. The credibility and experience of the Management and Founding Team.
3. The Required Resources for business opportunity capture.

WHAT TYPE OF BUSINESS OPPORTUNITY IS MOST ATTRACTIVE?

A Business Opportunity is more than just an neat idea when:

• There is evidence that the market is growing at least 25% per year, offers an accelerating growth rate, and contains few, if any, established market leaders in the segment defined.
   
• Gross product margins are substantial (>70%) in a market segment where competition or substitute products/services do not compete principally on price of the product offering.
   
• A business or mass consumer problem is uniquely and compellingly solved by the introduction of your product or service. Identify and discuss what problems are uniquely and compellingly solved by your business, and quantify the estimated spending power of the target market. Business and people alike tend to "pay for problems".
   
• The market opportunity is described with concrete and referenced data. Third party research, government data, commissioned market research, industry trade association publications, sales literature of competitors, etc. are examples of credible and verifiable market opportunity sources. Proxy information is acceptable for market niches that are ill defined, too new for historical trend information to be available, or for leap technology opportunities.

WHAT ABOUT THE MANAGEMENT AND FOUNDING TEAM?

Team of founders and management is more credible for backing when:

• Their experience, enthusiasm and commitment to the project/firm are detailed in the plan. Executives have direct segment experience, have managed high sales growth before, have deep business segment contacts, and ideally have built and sold a business with similar attributes, as this new venture. Moreover, each must come across as honest, opportunity obsessed and respectful of utilizing someone else's money.
   
• The key missing personnel are noted as contingent or subsequent to finance. It is helpful to have prospective candidates in the pipeline for generic description to prospective investors. This sometimes includes the willingness for the founders to hire executives to whom they would report in the interest of building the business.
   
• The founders and management have evidence of skin-in-the-game in the form of start-up cash provided, personal sacrifice to develop the product/plan thus far, and an unwavering incentive for equity success.
   
• The business plan narrative, financial statements and presentation packages are concise and high quality in appearance, error free and resonate business opportunity. This product reflects on the entire management team's attention to detail, knowledge of the marketplace and skills as stewards of an investor's capital.
   
• A Board of Directors or Advisory Board already is established to assist the firm and management in business decisions, strategic partnerships and networking, professional services, and market segment credibility. Advisors and Directors are effective in plugging gaps in the existing management team and generally will provide their time and credibility for equity options or warrants.

The Request for Resources is more reasonable for new investment when:

• A personal presentation and review can be arranged. A meeting with a capital provider is the primary goal of an Executive Summary and Business Plan. Investments are made in people so it is to the capital seeker's benefit to create meeting opportunities.
   
• A summary of where and when new investment proceeds will be utilized upon financing.
   
• The desired valuation of the firm is based on market comparables, discounts to recent acquisitions of like businesses, and has reasonable underlying financial model and earnings projections.
   
• A Private Placement Memorandum prepared by Vermont legal counsel exists for accredited private investors to review and make an investment commitment. This also benefits the capital seeker as the terms and conditions for investment are not presented by the investor.
   
• A management plan is in place to address any accrued payables, expenses, deferred compensation, and other pre-existing cash liabilities. This seeks to convert to equity, pay-off partially or wholly any existing liabilities from pre-investment days. Often times, new investors will attach conditions so that new investment proceeds will not pay off old debts in order to keep new proceeds for growing the business.
   
• A due diligence book is assembled and ready where customer contracts, financials, product literature, customer remarks, employment agreements, Intellectual Property items, etc. are categorized for easy review by prospective investors and/or their legal counsel. This can speed the investment decision-making process substantially and add credibility to organization of management team.
   
• Credible and well-known legal and financial accounting firms are involved.
   
• The business segment is in an "in favor" or, at minimum, not in an "out of favor" business niche.

Some Tips For Negotiations with Capital Providers:

• Recognize and accept that you are in a negotiation with capital providers first and foremost.
• Valuation is an exercise that is part luck (Stock market condition, personality fit, product timing), part qualitative (team credibility, presentation quality, % willing to sell), and part quantitative (expected investor returns, market multiples, comparable transactions) in nature. Quite simply, it is the intersection of where a seller is willing to give up (ownership) and where a buyer is willing to put up (investment). There are no hard and fast rules in determining value. Let "reasonableness" guide your parameters for valuation presentation and discussion with capital providers.
   
• Resonate business opportunity, capability of the team and unique attributes of your business in written and oral presentations.
   
• Generate options for other financial backers so that you can obtain the best, if any investment scenario for your firm. Caution: It is not always the backer who requires the least equity, but the one who can best help you grow and sell the firm along the way. This is the often sought: value-added investors with expertise and contacts within your industry, a record of IPO and merger success, a network of later stage finance sources, and access to managerial talent.
   
• Present credible, referenced and undisputable data wherever possible that supports the market opportunity, proposed valuation parameters, and rate of industry growth.
   
• Subscribe to the free online version of www.venturewire.com for daily reports of venture financings around the U.S. From this, you can infer valuations for new investments in a business of your stage and industry.
   
• General parameters for ownership desired by new investors for a seed round are 15%-40% and for a first round another 10%-25% ownership. Caution: Entrepreneurs should pro forma the ownership structure for at least two rounds of outside finance to assess the likely ownership dilution that the founders might experience.
   
• Focus valuation debate on the opportunity and team presented and have prepared as supporting evidence a cash flow model, comparable market multiples on sales and EBITDA, comparable exit valuations and an appropriate discount factor (25%-40% is often the minimum rate of expected annual return) for the capital providers at the early stage of investment.
   
• Highlight recent market success stories in growth, sales, IPO, or product reception to demonstrate exit/liquidity multiples to prospective investors.
   
• Utilize an experienced attorney and accountant to review the final investment and tax implications prior to acceptance so that experienced capital providers know that a professional will review the terms and conditions of an investment memorandum.