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How to get venture capital

Very few start-up aspirants survive the rigorous scrutiny venture capital investors apply to their business plans. In this report the Polish Private Equity Association gives a comprehensive overview of the process from an entrepreneurial perspective, providing private equity fund investors with a useful insight into the challenges faced by a formative business from the entrepreneur's point of view.

The beginning of the path to venture capital is to clearly define your company's potential, market environment and investment needs. The proposal you submit to the VC investor should be well prepared. Some entrepreneurs and managers spend long weeks on preparing sales presentations for their clients, but neglect to prepare well for talks with investors even though the stakes are much higher.

The basis for talks with a potential investor is a detailed description of the company. In most cases, VC funds expect a business plan, though some are willing to consider a simpler document and some may require additional financial projections, business models, etc. In each case, however, the document should present the company, its history, ownership, products, position in the market, major competitors, development strategy, financial results and needs, as well as the professional experience of the key shareholders and management. More details on the information requirements can be obtained from VC/PE firms.

VC investors are careful readers of business plans. Their initial critical approach is the first and most discerning judgment all submitted proposals must withstand. Many projects are rejected at this point. One VC fund gives the following example: out of 100 submitted business plans, over half were rejected after the first reading, the next 25 after a few hours of a more detailed approach, and another 10 business plans could not withstand deeper analysis. From the initial one hundred, only several companies managed to reach the more advanced stages of analysis, yet only a few will successfully pass through the negotiations related to contract conditions and finally receive capital. Therefore, it is worthwhile to carefully prepare a good business plan. Nobody wants to forfeit a chance to get much-needed capital and waste several weeks of work only because the plan was poorly written and the investor rejected it at first reading.

We do not have enough space here to describe what a business plan should include, how to create necessary forecasts, etc. Relevant and handy hints are available in a variety of publications and on the web, for example at: www.firma.onet.pl, http://republika.pl/roplan/, http://biznes.elfin.pl/?id=biznes/twojafirma//twojafirma.html

When working on a business plan, one can hire a consultant. However, persons who will then be responsible for carrying out the plan, especially members of the board, should get involved in the work and, take full ownership of it and show their competence. Before submitting the plan, it is advisable to put it to the test by having it reviewed by impartial and knowledgeable persons not directly involved in your company, such as an accountant, auditor, legal advisor, a reliable consultant or just a business friend. They can pinpoint possible errors, defects or weak points.

When your proposal has passed through the initial stages of analysis, the investor usually asks further questions and requests additional information. Next, the time comes for the fund's representatives and the company's management board to meet. When the project is provisionally accepted, it is time to work on more details. At this stage, the investor carries out an in-depth analysis of the company known as due diligence, which includes a business analysis, financial and legal audits, organizational analysis, and possibly technical and environmental investigations. It requires a great deal of detailed information whose confidentiality is guaranteed by the fund. As venture capitalists make many investments and have a long perspective, they treat confidentiality highly seriously.

If the VC/PE fund is satisfied that the business is ready for investing and the future plans for the company are agreeable between the parties, then the fund will engage in negotiations to establish the conditions of the investment. The negotiations focus mostly on determining the shareholders' rights and duties, representation on the supervisory board, possible managerial options, and - the most difficult part of the negotiations - the price at which the investor purchases a specified amount of shares in the company. These negotiations typically go on in parallel to the investors due diligence activities. When the negotiations and due diligence are successfully completed, it is now time to approve the decisions made. Investment funds usually have a special body - the Investment Committee, which makes the final decision on investments. On the basis of this decision, the parties sign an agreement and the equity reaches the company. The investment process presented above - from the moment a company files basic documents and data until the time the money is transferred to the company's account - usually takes a few months. The information about the initial acceptance or rejection of the project can be obtained after just a few weeks. Obviously, the tempo of the process depends on the parties involved. An active attitude of the company's owners and management board and efficient cooperation with the investor can accelerate the process.

With the signed agreement, the VC/PE fund makes the investment but its support to the company does not end. For the fund, the decision to engage capital in a company means the beginning of long-term cooperation based on mutual trust and respect of each other's interests. The fund is typically represented in the company through its designated member(s) of the supervisory board, and it monitors the company's current activities and results as well as supports the company in strategic matters. As a rule, it does not get involved in the everyday running of the company but supports the management with its expertise and experience or provides reliable experts in the fields of finance, strategy, marketing, human resources and other areas. After a few years, when the company has grown as expected, the VC/PE fund starts the process of divestment. Depending on the fund's policy, the company's industry and character, and the situation on the market, this usually takes place after 3 to 7 years, however, longer and shorter investments happen as well. As already mentioned, the manner of the divestment is agreed upon during the initial negotiations and may take the form of an IPO, a trade sale, buyout by the remaining shareholders or the company's management, sale to another financial institution or other means. This can happen in several stages or at one-time. The fund exits the company and realizes its profit. The remaining partners can also assess how the value of their company's shares has increased. In fact, they often exit with the VC/PE fund, and reap the at least the same and usually better returns and rewards than the fund. The venture capitalist makes money if you make money. The increase in a company's value can be substantial, even multiple. In Poland, well-known examples of companies that multiplied their value with the support of venture capital are Computerland, Budimex, Euronet, Lukas and @Entertainment. In this way a few dozens of Polish entrepreneurs and managers have already become millionaires.

Polish Private Equity Association (PPEA) gathers private equity/venture capital investors active in Poland. Associate Membership is also available for other persons, companies and institutions interested in development of the private equity/venture capital industry in Poland. For further information please visit www.ppea.org.pl