Business plan and venture capitalist funding strategies

¶ … atleast 1 page each for question 1-4.

Explain in detail what characteristics an entrepreneur must have in order to get in front of a group of Venture Capitalists and make them fall in love with them. How can an entrepreneur read body and facial expressions to know whether or not they are succeeding in capturing the Venture Capitalists attention?

The nature of this question is dubious. It intimates that Venture Capitalists (VC) are susceptible to all sorts of Hollywood theatrics, i.e. posturing, placating, pandering, etc. When the reality is Venture Capitalists don't fall in love with performers or performances, they fall in love with sound investment opportunities. One can be the prettiest person in the room or the greatest speaker they've ever heard, and yes, this person might have an edge up on the competition because of his/her aesthetic appeal or his/her oration prowess at first, but when the rubber meets the road, and the due diligence is done, neither one of these people will realize any money if his/her ducks aren't in a row, if the details of his/her deal or business plan don't add up. So, by in large, the premise that an entrepreneur can dazzle shrewd businessmen with the theatrics of a polished street performer is untenable.

Moreover, so is the notion that the entrepreneur should be able to read facial tics and/or wiles to decipher whether or not his potential investment partners are interested in the deal. This way of thinking, to be perfectly honest, is taking the easy way out. It's akin to the cliches one hears about professional poker players. One typically hears that the greatest poker players have an uncanny ability to read an opponent's facial expressions to tell whether or not the opponent is bluffing. And while this may be true for a marginal faction, for most pros this "tactic" is a bunch of hogwash. The really great poker players, play the cards, not the people, which is why they tend to be precocious math students, i.e. Chris "Jesus" Ferguson, Stu "The Kid" Ungar. This is the dirty little secret that none of the pros want one to know. They prefer it that the average Joe believe in the pseudo-science of facial tics and body language. This way, when it comes time to play, the average Joe is hyper-focused on everything but the two cards (or four, or five cards) in front of him. Likewise, cheap sales books and hackneyed investment tips tout the virtues of the "personable" and "socially adept" entrepreneur. The one who is amiable and keen on the thoughts and wishes of his future investors. But again, one should consider the archetypal investor or entrepreneur, i.e. Mark Zuckerberg, Michael Burry. Everyone knows Zuckerberg's story, but not everyone knows Burry's story. Burry was the antisocial, one-eyed, Scion Capital, LLC., hedge fund manager who raised millions of dollars not because he had a bubbling personality, but because he worked harder than everyone else, because he knew more than anyone else, and because what he said made money. He was the one, who, more than anyone else, predicted the housing bubble. He also made billions of dollars shorting the market. He won his shareholders over the hard way and the most effective way, by playing the market, not the players involved.

In short, social factors, such as personality, capacity to read facial tics is important if one wants to get a free ice cream cone at the local drive-thru or to convince an old lady not to report a fender -- bender to the insurance company, it's not all that important when it comes making millions of dollars. If one wants to win over Ventura Capitalist, he/she needs to do one thing, provide a sound plan - backed with empirical evidence and irrefutable data - that has a very high probability of making money.

2) Explain, in detail, why it is so important to understand how much money you need before going into a presentation and what you will need the money for. Why do Venture Capitalists want an offer to be made? What does it say about the entrepreneur if they don't have a clear understanding of what is needed to get the business where it needs to go.

After one has a sound business plan or investment proposal in place, he/she can present it to investors. Most investors want to know three basic things right off the bat, how much money is required for the investment? What is the rate of return on the investment? How soon will the investor get his initial investment back? It's critical to know these three things because these are the three things that investors expect an entrepreneur to be honest about. They will be, naturally, skeptical about every point of one's plan. They will expect embellishment regarding the associated risk involved, critical assumptions, market strategies, etc. And the successful Venture Capitalists will, regardless of what one tells them, have their hired lackeys and think tanks do their own evaluation before any money is loaned out. The key is to make sure the plan is airtight with regards to capital needed and financial matters.

Once one's plan is airtight, he/she has all the information needed to satisfy inquires from scrupulous Venture Capitalists. It's extremely important that if a business plan or an investment proposal requires a certain price / initial investment (x) that the entrepreneur stay firm on that price. In other words, if one's restaurant proposal requires an initial investment of $100,000, he/she should stay firm on that number. VC love to haggle on the initial investment price. For example, if one says he/she needs $100,000 to open a restaurant and the VC say, "can you do it with $50,000?" And the person says, "Yes, I think so." Then, in most cases, he/she has probably just shot himself/herself in the foot.

Ventura Capitalists want to know that one's numbers are not plucked from thin air, that the numbers, the initial investment needed, are projections that are based on true costs (or acceptable projections). Knowing the numbers (and knowing that the numbers are accurate) is critical to raising money. There's an old saying, "numbers don't lie, people do." And this is a maxim that VC use to determine the difference between the good deals from the bad deals.

3) Venture Capitalists invest money in return for an equity stake in the company. Why is this equity state so important? Why does it mean? What kind of turn around are the venture capitalists expecting to make?

An equity stake is important because it means one is not alone, that to some extent there is a bond or a partnership being formed (partnership, not in the strict business sense of the word). When a VC firm has an equity stake in a company it normally means they are in it for the long haul and are not going to "cut and run" if the going gets tough. This is because their money is now at risk too, hence the term "stake," and unlike other forms of investment that are structured in a low-risk way (money or cash injections that are formed on a "last in, first out" basis and collateralized by a company's assets), an equity stake is considered high-risk.

VC can expect a whole array of different terms and conditions after taking an equity stake in a new and/or burgeoning company. But in general, VC will want to reap benefits that are disproportional to their investment. That is to say, they will want more for putting in less. Most VC firms will not play a passive role in the company, they will demand that they have oversight and influence and sometimes a majority voice in company matters. They will want a larger piece of the pie, as far as stock, revenue, and company ownership. Essentially, they will ask for everything, including the kitchen sink. In a sense VC operate by that old sales aphorism, "if one only asks for $10, what's the chances of he/she getting $20?" VC make sure that they ask for everything. It's the entrepreneur's job to make sure they come up short.

Lastly, IPOs or trade sales are the goals for the VC firm. They would like to either take the company public on the stock exchange and/or sell the company off at a profit to a larger competitor. This way, in either scenario, they can recoup that initial investment and even turn a profit. For a VC firm, the shorter length of time their money is tied up in an investment, the better. The ideal cycle for a VC firm is to invest, recoup initial investment, make a profit on the investment, and still retain ownership and/or stock in the company (playing with house money).

4) The cost of getting money from a Venture Capitalist goes significantly down once you have that first customer. What does this mean? State some examples.

When Mike Burry retired from neurosurgery and decided to play the stock market full-time he was tracked down and solicited by hedge fund managers who were familiar with his stock tips and investment strategies. Why? Because his stock tips and investments strategies worked. People made money off his (free) advice. So, when he incorporated Scion Capital, LLC, he had a number of enthusiastic investors willing to give him millions of dollars with few strings attached. In fact, he had enough leverage over his investors to dictate terms to them. One particular term he made his investors sign off on was a long-term commitment policy. Investors who agreed to invest with Scion Capital had to be willing to commit to a long-term investment policy that prevented them from pulling money out on a whim. This long-term commitment policy would serve him well when he started pitching the idea of shorting CDOs to his fellow investors. Most of his investors had never heard of credit-default swaps or collateralized debt obligations, or if they had heard of them, they had only a cursory knowledge of how they worked. Additionally, many of them did not share his sentiments that the housing market was going to crash. When Burry started investing hundreds of millions of dollars into these credit-default swaps, many of his investors became uneasy and restless. Some may have even considered trying to withdraw fund from Scion Capital, LLC. But due to the long-term investment policy, their money was tied up long enough for them to realize Burry was right, once again.