For Entrepreneurs

Venture Capital Process


Venture capital on a wide scale is unknown in Argentina. Banks and private financial institution loans are non-existent for the most part for entrepreneurs in Argentina. Many entrepreneurs do not understand the process. We would like to explain how the process works below.

The classic approach is for a venture capital firm to open a fund. A fund is a pool of money that the firm will invest. The firm gathers this money from individuals and from companies that have money they wish to invest. The fund will raise a fixed amount of money in the fund – for example $10 million.

The venture capital firm will then invest the $10 million fund in a number of different companies. For example 10 to 20 different companies. Each fund has an investment profile. For example, a fund might invest in real estate. Or the fund might invest in high-tech companies seeking their second round of financing. Or the fund might try a mix of companies. The profile that the fund chooses has certain risks and rewards that the investors know about when they invest the money.

Typically the Venture Capital firm will invest the entire fund and then anticipate that all of the investments it made will liquidate in 3 to 7 years. That is, the VC firm expects each of the companies it invested in to either "go public" (meaning that the company sells shares on a stock exchange) or to be bought by another company. In either case, the cash that flows in from the sale of stock to the public or to an acquirer lets the VC firm cash out and place the proceeds back into the fund. When the whole process is done, the goal is to have made more money than the $10 million originally invested. The fund is then distributed back to the investors based on the amount each one originally contributed.

Let’s assume that Koh Inversiones invests $10 million in 10 companies ($1 million each). Some of those companies might fail. Some will not really go anywhere. But by being extremely selective in our investments, several will actually go public. When a company goes public, it is often worth tens of millions of dollars. So the VC fund makes a very good return. For one $1 million investment, the fund might receive back $10 million over a 5 year period. So the VC fund is playing the law of averages, hoping that the big wins overshadow the failures and provide a great return on the $10 million originally collected by the fund. The skill of the firm in picking its investments and timing those investments is a big factor in the fund's return. Investors are typically looking for 15% to 30% per year return on investment for the fund.

From an entrepreneur’s standpoint, here is how the whole transaction looks. The entrepreneur starts up and needs money to grow his/her company. The company seeks venture capital firms to invest in the company. The founders of the company create a business plan that shows what they plan to do and what they think will happen to the company over time (how fast it will grow, how much money it will make, etc.). Koh Inversiones looks at the plan, and if we like what we see then we invest money in your company.

The first round of money is called a seed round. Over time a company will typically receive 3 or 4 rounds of funding before going public or getting acquired.
In return for the money it receives, the company gives Koh Inversiones company stock in their company as well as some control over the decisions the company makes. The company, for example, might give Koh Inversiones a seat on its board of directors. The company might agree not to spend more than $X without the VC's approval. The VCs might also need to approve certain people who are hired, loans, and any important decisions that could have a financial impact on the company.

In many cases, a VC firm offers more than just money. For example, it often times has excellent contacts in the industry, connections to governmental agencies, or good legal and financial contacts or it simply might have a lot of experience it can provide to the company.

One big negotiating point that is discussed when a VC invests money in a company is, "How much stock should the VC firm get in return for the money it invests?" This question is answered by choosing a valuation for the company. The VC firm and the people in the company have to agree how much the company is worth. This is the pre-money valuation of the company. Then the VC firm invests the money and this creates a post-money valuation. The percentage increase in the value determines how much stock the VC firm receives. A VC firm might typically receive anywhere from 30% to 60% of the company in return for its investment. More or less is possible, but that's a typical range. The original shareholders are diluted in the process. The shareholders own 100% of the company prior to the VC's investment. If the VC firm gets 50% of the company, then the original shareholders own the remaining 50%.

Entrepreneurs in Argentina desperately need venture capital firms to start up because they money for advertising, equipment, rent, and employees. They need to advertise in order to attract visitors, and they need equipment and employees to create the site. With no other lending options available in Argentina, a great idea is meaningless without the funds to move forward with that idea and vision. We help entrepreneurs fulfill their dreams.


Submitting a plan

We are far more interested in the content of your plan rather than its format. We want to learn about you, your past experiences and accomplishments. And we need to understand the justification for your business idea. We'll look for answers to questions such as:

· What problem will you solve?
· Who currently has the problem?
· How will you solve it?
· How big is the market potential?
· What is your distinct advantage?
· How does the competitive landscape look?
· What are the financial implications?
· How much capital will you need to develop the solution (and the company supporting it)?
· What kinds of volumes and margins are reasonable to expect?
· What are your team's qualifications?


What To Include

We ask that you submit an executive summary along with your plan, via email, and include contact information so we can follow up.

How to Contact us

Many approach us through an intermediary - a bank, accountant, law firm or other third party who may have had dealings with us in the past. This approach is helpful as the intermediary is often able to guide the entrepreneur through the investment process.

We also receive a large number of unsolicited business plans every year. Many represent good business opportunities - but only a very small number are appropriate for venture capital funding.

We wish all entrepreneurs great success.

If you are interested in submitting a business plan or have an interest in investing with our company please contact us via email.


www.kohinversiones.com

How we Partner

We are an entrepreneurial firm. Those we partner with around Argentina and the rest of the world- private individual investors & financial institutions and outstanding entrepreneurs - share our enterprising vision. We are growing because we understand the entrepreneurial spirit and culture and because we operate professionally within a framework of uncompromising ethical integrity.

Clearly viewing your success as our success, we remain steadfastly focused on breaking through the obvious to foster truly successful business innovation.


What can a company seeking venture capital expect from Koh Inversiones?

- Honest, unbiased advice based on our shared financial objectives.
- Assistance with the formation of major advisory relationships.
- Support in the recruitment of talented, influential non-executive and executive directors.
- Support and guidance in expansion through strategic alliances, acquisitions or other means.
- An experienced, well connected team committed to your success.


What does Koh Inversiones look for in a venture capital investment?

- We are primarily interested in the scale and exclusivity of the commercial opportunity that the company is seeking to exploit.
- We look for entrepreneurs and management teams that have the maturity and stamina to build outstanding companies within short periods of time, people with whom we can both negotiate effectively and build a rewarding long standing relationship.
- We are extremely selective in our venture capital investments. Of all the companies we see, we are likely to invest in a very small proportion of those that we have researched in depth.

How we Partner with Management

We pursue only growth opportunities. We know that a strong management team with powerful equity incentives will create a dynamic, challenging and enterprising spirit within established companies, enabling them to achieve even greater success.

We are a long term partner. But inevitably we will exit the company in order to return funds to our own investors. When we exit we strive do so at the optimum time for all concerned and through a mechanism, whether it is a financial restructuring, an IPO or a merger that satisfies the strategic goals of the company and our mutual financial targets.

We do not run companies. A successful management buyout delivers freedom to management that generally results in increased operational speed and reduced levels of bureaucracy - enhancing performance.

We do participate actively on the boards of all our buyout companies. Our role is to provide expert resource, either from within our firm or from its network of advisors to deliver to the company the greatest possible chance of success.

Investment Criteria

Typically Koh Inversiones will commit funds to a venture capital enterprise as a sole or lead investor. To make investments, we are looking for significant evidence to back up the likely success of the business, such as established technology, or proof of take-up among potential suppliers/buyers. However we will make exceptions and invest venture capital in businesses that we believe have the potential to be a valuable enterprise in the future.


We prefer to invest in businesses with:

- Experienced management
- A clear business plan
- Innovative technology with profitable application potential
- Strong intellectual property
- International expansion opportunities

We are also attracted to businesses that have a potential for a strong brand name or propriety assets.

Huge Potential in Argentina

The economy here in Argentina is undergoing a strong recovery. Although the business environment in Argentina is less to be desired, the country is actively promoting foreign investments within the country. As a foreigner that moved to Argentina last year, it is quite clear to me that any dramatic improvement in the business environment here in Argentina will be a result of foreigners primarily from the United States, Europe and Asia.

In fact, Argentina is taking major steps to bring in foreign investment from countries like China. I believe China will invest heavily here. China attaches importance to developing economic and trade relations with Argentina and takes Argentina as one of the important economic and trade partners in Latin America. The Chinese government encourages Chinese businesses to invest in Argentina and also welcomes Argentine entrepreneurs to go to China to discuss business cooperation. The two countries should further strengthen exchanges of the business community, support businesses in actively exploring each other's markets, conduct cooperation in various forms, expand mutual investment and push China-Argentina cooperation to new levels.

Argentina has a tremendous number of entrepreneurs with amazing ideas and business plans. Unfortunately for them, the banks and private financial institutions aren't willing to take a chance and invest in them and their ideas. A great idea cannot go very far without the funding to carry their business plan from the "seed stage". The government every year talks about getting involved and supporting these wonderful ideas but in the end, it is just talk. Like most people in Argentina, everyone wants to make tremendous amounts of money without risking anything. That is impossible.

I believe there is a huge potential for being extremely selective and choosing the best business plans to invest in. There are tremendous opportunities in areas like real estate as well as other areas such as high technology. I will continue to make extremely selective investments in Argentina and I truly believe they will have a high reward pay off.

International and Global Investing

The concept of international and global investing has revolutionized the thinking of American investors. We have been challenged with the idea of investing outside the United States thereby directly supporting foreign companies and other governments. Regardless of how you may feel about that, globalization is spreading in every sense of the word. Now is the time to capitalize on international developments by placing your money in foreign markets. Patriotism is fine, but in matters of finance, it is better to keep the two separated. The tide of change has arrived.

With the advent of the global economy and emerging world markets, the insightful investor should understand the concept of offshore investing and learn how sophisticated investors worldwide are scoring greater financial gains than their homebound counterparts. The super rich have practiced offshore investing for decades, but only now is it proving to be a viable option for every investor.

Use of foreign bank accounts has been widely discussed in investment books over the past two decades. However, the practice of true offshore investing has been largely overlooked. Probably the reason for this oversight is that most investment advisors concern themselves with financial aspects such as investments and markets and less with the legal aspects of structuring personal and business affairs. This void may also be a result of the lack of demand for the need to know. Rich, internationally diversified individuals have long exercised the offshore angle, but only now does it truly make sense for smaller investors with less capital and less diversified portfolios to consider the same possibilities.

Here are some of the numerous reasons and benefits why an investor today needs to consider investing from offshore. Each individual will recognize advantages that will fit their own circumstance.


Investment Opportunities

International investing is more than purchasing shares in an international mutual fund. Americans often diversify their portfolio internationally by simply investing in an American managed mutual fund that invests in foreign or foreign and U.S. companies. A small investor can benefit from international investments in this way and rest well, knowing that professional managers with knowledge of foreign opportunities and risks are at the helm of their investment.

These funds are well publicized in the United States and include names such as Dean Witter World Wide Investment Trust; Fidelity Overseas Fund; Financial Group Pacific Fund; Kemper International Fund; Keystone International Fund; T. Rowe Price International Recovery Fund; Prudential-Bache Global Fund; Putnam Global Growth Fund; Scudder International; and Templeton World Fund. Returns fluctuate with the economy, but 6 percent to 15 percent annually are common, or double to better what U.S. banks are paying American CD holders.

There are funds located and managed from all over the world. Some of these funds produce returns upwards of 60 percent and more per annum. Most Americans have probably never heard of these funds. Why? As stated previously, there are three strong reasons.

1. It is not worth the trouble and expense for foreign companies to expand operations into the U.S. market due to heavy regulations.

2. They cannot meet strict SEC and other U.S. governmental regulatory bodies to offer their investments in the states. This does not mean these are not good investments, but they do not meet the United States government's idea of acceptable standards.

3. If more Americans realized that greater returns are possible, in some cases sizeable annual returns, whether investing in CDs, stocks, bonds, or whatever, they would likely be inclined to move their money out of fragile U.S. banks and U.S. systems that Americans are forced to accept. Therefore, many of these foreign investment opportunities are not legally permitted to advertise in the United States and are not promoted here. That is why, for example, you only hear about USA managed international and global investment funds.


Confidentiality and Secrecy

In the U.S., there is no financial privacy. Scores of records are maintained on every American by computers. This information is seldom used by others to your benefit. The offshore investor is immediately protected from prying eyes, information snoops, government intrusion and other unwarranted and unwelcome invasion of your privacy. Total confidentiality is secured in numerous ways with the use of an offshore corporation and foreign bank account.

Tax Reduction

Although every U.S. citizen is obligated to file a tax return with the U.S. government regardless of where they live or where the income or profit is derived, they can substantially reduce their tax liability through international tax planning. One interesting note to ponder is that U.S. citizens living abroad are exempt from tax on the first $80,000 of personal income.

Avoid Unnecessary Government Bureaucracy

Citizens are usually the subjects of their own government's regulations, taxes, bureaucracy, dwindling liberties, and more. Every reader is capable of making their own list of inherent drawbacks. But, the offshore investor, even if physically living in the United States as a U.S. citizen, can attain greater freedom, privacy and control over their business, financial and investment sides of life by simply choosing to manage these aspects through one of a handful of excellent offshore bases.

These are just a few of the more significant reasons for going offshore. Other motivating factors include capitalizing on international developments, profit from emerging business opportunities, experiencing foreign cultures, justify international travel, exposure to new ideas, minimize risks to shaky financial institutions and governments, and comfortably prepare for the future.