Raising Venture Capital For The Serious Entrepreneur..

Silicon Cape
12 Nov 2009

I have been reading the book Raising Venture Capital for the Serious Entrepreneur – written by Dermot Berkery, it is a really good read and describes the fundraising process and general description of early-stage businesses a lot differently to other books that I’ve read, and in my opinion, the book does so better than the others.

*This book was mentioned here on SiliconCape, thats how I heard of it..

On my blog I will be posting the key lessons that I learnt and took from each of the 5 parts of the book, but for this first blog I have given more of an angle as to what the book mentions rather than just the key lessons that I learnt and took per chapter. Hopefully this will help you gauge whether or not you would enjoy reading the book and what value you would draw from reading it.

I must admit though, that when I ordered the book from loot.co.za (who were by far the cheapest @ R365), I was expecting a bigger book. Doing commerce honors at UCT – we use several text books published by McGraw Hill and they are all a lot more in-depth and have greater content than this book..But I guess the book is intended for a broader audience.

The book kicks off with a case study of one of the best takeoff software company ‘Creditica Software Inc’ – what is nice is that they refer back to this case study throughout the book, which makes it easier for the reader to apply lessons learnt to one company, and you can see how each new chapter fits in and how the different aspects can be applied to one business.

Part 1: Understanding the basics of the Venture Capital method

Part 1 of the book serves to educate the reader with the basics of the venture capital method, though, in my opinion these ‘basics’ entail a certain level of technical understanding, but for a reader that does not have a finance background many of the principals are explained, and if not, or if you have difficulty with some of the terms they use, Wikipedia is a fast and effective solution.

Chapter 1 goes about developing a financial map, which is essentially a set of ‘stepping-stones’ that businesses intend to achieve. Each stepping-stone represents a key milestone and provides an integrated perspective on the progress (and potential value) of the company.

Chapter 2 then elaborates on getting to the first stepping-stone and explains why it is important to follow stepping-stones and request new rounds of funding at each step (as apposed to getting funding for the entire project) – as an entrepreneur you will realise more value from your idea if you raise funding in stages and after key milestones have been met as you will incur less dilution. A lot of emphasis is also placed on the Chief Financial Officer, whose role in an early-stage company differs to that of an established one; primarily because of the limited finance available, the CFO becomes integral to strategy formulation and needs to be asking the hard questions that the CEO may not be addressing.

Chapter 3 is quite a heavy chapter, and explains the unique cash flow and risk dynamics of early-stage ventures, a pertinent observation made is that the costs are known but the revenues are not, and even deciding on what revenue estimations to use, seems to be an art in itself – there are just too many variables, risks and pitfalls to take into account.

Secondly, early stage investors want to know how many months the company has, in a downside scenario, to achieve some basic milestones. Also, investors inject realism and prior experience into the projection and tend to be obsessively focussed on the short term 1-2yrs and long term 5-7yrs or more, when the venture may be exited. They then discuss in fair detail the J curve (or more commonly known as the ‘hockey-stick’) which is a graphical illustration of the cash-flow profile of the venture over its life. There is also a link between peak cash need and exit value – most investors are looking for at least 10 times their money (this was taken from the book which is based on the US market, so it’s probably best to find out from local VC’s what kind of expected multiples they accept – hopefully some members on here can clarify this for us?)
The authors then describe the link between the size of the VC fund and project peak cash need of the business – a fund will not over expose themselves’ to one particular project. The final round of milestone funding generally occurs at the lowest point of the J curve: Milestone funding – it matches the risk-reward profile to the stage of the investment – early-stage implies riskiest point in the cycle. Lastly, VC investors generally look for gross margins of 80-100% as it serves as a buffer against strain on working capital. The book gives an overview of working capital and it’s impact on cash-flow and businesses, however, it is not always an easy concept to grasp so I would have a look at this link if you are unsure about working capital.

The remaining parts to the book address the following:
Part 2 – raising the finance
Part 3 – valuing the early-stage venture
Part 4- negotiating the deal: term sheets
Part 5 – excercizes

I would encourage other aspiring entrepreneurs to read the book – it breaks down the process in an easy to understand manner but still retains the technical detail behind the process and train of thought; and hopefully it will help you understand how the VC funding process works, but more importantly, why VC’s do it the way they do..

If you have any questions on the above I’d be more than happy to help explain to the best of my ability.