Equity Club
Issue No. 62 - December/January 2011
Facing the capital raising challenge
by Larry Lopez
Raising venture capital in today’s market is a huge challenge. Even in good times, the probability of successfully raising money is lower than most companies expect.
This is not a problem that is unique or limited to Australia. Even on Sand Hill Road, the Silicon Valley mecca for venture capital, only a very few deals end up with the dosh.
Venture capitalists, or VCs as they are commonly known, are value-add investors. They believe they bring a lot more to the table than just money. Not only are companies competing for their money, they are also competing for their time. Due to several factors, the Australian venture capital industry is experiencing a slowdown in new investments as a result of shortages of available capital and time.
Of the hundreds of companies seeking first time investment from VCs only a handful will get financed in 2011 and 2012.
In the best of times, raising money from professional investors is difficult. VCs have limited bandwidth and, in Australian capital markets, relatively limited access to funds.
The least understood factor is the amount of time individual VCs can allocate to work with new investments.
As a rule of thumb the optimum number of active companies any individual VC can manage is five to eight. Bearing in mind that over the years most VCs have accumulated a certain amount of ‘baggage’ in the form of individual portfolio investments, existing commitments don’t leave much time to take on new ones. Most established VCs can add only one or two new investments per year.
What does it take to become one of the select few that get funded? In the simplest terms, the key to getting investors excited is how the following components of success are addressed:
People
• Can a company build the right team?
• Can the team deliver on expectations?
• Does the team have the necessary experience and skills?
• Can the team attract the right people?...
