Venture Financing Ten3 Business e-Coach at 1000ventures.com Ten3 Business e-Coach at 1000ventures.com Venture Financing Stages Structuring the Deal Structuring the Deal

Ten3 Micro-course

Venture Financing

 

 

 

 

 

 

Venture Financing, Venture Financing, Venture Financing, Venture Financing, Venture Financing, Venture Financing, Venture Financing, Venture Financing, Venture Financing

 

Venture Financing: Structuring the Deal

The Deal and Beyond
Adapted from "How to Write a Great Business Plan" by William A. Sahlman,
New ventures are inherently risky; what can go wrong will. When that happens, unsophisticated investors panic, get angry, and often refuse to advance the company more money. Sophisticated investors, by contrast, roll up their sleeves and help the company solve its problems. Often, they've had lots of experience saving sinking ships. They are typically process literate. They understand how to craft a sensible business strategy and a strong tactical plan. They know how to recruit, compensate, and motivate team members.
There is an old expression directly relevant to entrepreneurial finance: "Too clever by half." Often, deal makers get very creative, crafting all sorts of payoff and option schemes. That usually backfires. Sensible deals have the following characteristics: they are simple, fair, and emphasize trust rather than legal ties. They do not blow apart if actual differs slightly from plan and do not provide perverse incentives that will cause one or both parties to behave destructively. They are written on a pile of papers no greater than one-quarter inch thick. But even these six simple rules miss an important point. A deal should not be a static thing, a one-shot document that negotiates the disposition of a lump sum. Instead, it is incumbent upon entrepreneurs, before they go searching for funding, to think about capital acquisition as a dynamic process - to figure out how much money they will need and when they will need it.
The trick is for the entrepreneurial team to treat the new venture as a series of experiments. Before launching the whole show, launch a little piece of it. Convene a focus group to test the product, build a prototype and watch it perform, conduct a regional or local rollout of a service. Such an exercise reveals the true economics of the business and can help enormously in determining how much money the new venture actually requires and in what stages. Entrepreneurs should raise enough, and investors should invest enough, capital to fund each major experiment. Experiments, of course, can feel expensive and risky. But they prevent disasters and help create successes. They are a prerequisite of putting together a winning deal.