After over two decades of being an entrepreneur, and advising other entrepreneurs and growing companies, I have found one recurrent theme running through all of these businesses: Capital is the lifeblood of a growing business. In an environment where cash is king, no entrepreneur I have ever worked with seems to have enough of it. One irony is that the creativity entrepreneurs typically show in starting and building their businesses seems to fall apart when it comes to the business planning and capital-formation process. Most entrepreneurs start their search without really understanding the process and, to paraphrase the old country song, waste a lot of time and resources “lookin’ for love (money) in all the wrong places.”
Virtually all capital-formation strategies revolve around balancing four critical factors: risk, reward, control and capital. You and your investors will each have your own ideas as to how these factors should be weighted and balanced. Once a meeting of the minds takes place on these key elements, you’ll be able to do the deal.
Risk. The venture investor wants to mitigate its risk, which you can do with a strong management team, a well-written business plan and the leadership to execute the plan.
Reward. Each type of venture investor may want a different reward. Your objective is to preserve your right to a significant share of the growth in your company’s value, as well as any subsequent proceeds from the sale or public offering of your business.
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Control. It’s often said that the art of venture investing is “structuring the deal to have 20 percent of the equity with 80 percent of the control.” But control is an elusive goal that’s often overplayed by entrepreneurs. Venture investors have many tools to help them exercise control and mitigate risk. Only you can dictate which levels and types of controls may be acceptable. Remember that higher-risk deals are likely to come with higher degrees of control.