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.
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.
posted by ABA at 2:36 PM
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