3 Simple Steps to Venture Financing—Step 1: Get Real (#2 of 4-part series)
by Cassie Hoag, Equity Architects, LLC

In the world of venture financing you need to know the lay of the land, and you need to be absolutely candid and objective about your company. It’s much easier to meet the first of these needs (pick up any dictionary of financial terms) than the second. As for an honest assessment of your company, the best approach is to think like a potential investor, and here are the questions that typically swirl through their heads:

• Does this company have a breakthrough product, technology or service that no one else has?
• What will keep other companies from doing exactly what this company is doing?
• Has the principal managed the company well to date, and--more importantly—can he or she handle rapid growth and take it to the next level?
• Is the business growing (or have clear potential for growth)?
• Is the business profitable (or have a very high potential to be profitable in the short term, and very far into the future)?
• Are the gross margins and profit margins better than the industry average? If not, is there clear potential for better than average gross and profit margins?
• Is it foreseeable that the company will be cash positive in the near future?
• Does the owner appreciate the risks and rewards of venture capital? Are they ready to give up more than half their company to secure the capital that will take them to a much higher level?
• What does the Company intend to do with the cash from the financing? Will they spend it wisely, on a well-defined strategy?
• What is the exit strategy? (e.g., how and when can investors cash out?)
• What multiple can be expected on the investment at exit?
• Will an investment in this company make ME (the investor) look good?

If you can articulate answers to all of the above, and if your answers are fact-based and mostly positive, then your company is indeed a candidate for venture financing.

© 2006 M. Cassandra Hoag, Equity Architects, LLC

Cassie Hoag is the founder and managing director of Equity Architects™, LLC, a financial advisory firm that helps small businesses realize their potential through equity or debt financings, mergers and acquisitions or reorganizations. You can reach her by email or call 949-388-7375.

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