Book Review
Finding the Money - How to Raise Venture Capital
Tom McKaskill
ISBN: 978-1-875889-99-X; 2006; 208 pages; Wilkinson Publishing, Melbourne;
Leonore Ryan
Business Development Manager (IT), Monash Commercial Pty Ltd; Inaugural Commercialisation Intern, Starfish Ventures Pty Ltd, Melbourne VIC
Finding the Money - How to Raise Venture Capital is written by Tom McKaskill a successful entrepreneur and the foundation professor for the Richard Pratt Chair in Entrepreneurship at the Australian Graduate School of Entrepreneurship, Swinburne University of Technology. It is one of a series of books he's written about the process of funding, valuing, and selling entrepreneurial businesses. All the books have been published by Wilkinson.
The book is written in two parts, with an appendix. Part One discusses the Venture Capital and Private Equity industry and the characteristics a business proposal requires to increase the probability of successful VC funding. This section is followed by the Appendix which lists 'Investment Parameters for a Venture Capital Firm'. This assists with choosing the most appropriate venture capital firm for the business opportunity. Part Two leads the reader through the completion of the 'Venture Capital Ready Index', a self assessment tool which provides a measure of preparedness for VC investment.
The book is sprinkled with examples, including those from McKaskill's own experience of raising venture capital. In the opening chapter McKaskill states -
The purpose of this book is to educate the entrepreneur on how VC firms work, what they seek in an investment and how they manage that investment through to an exit transaction. It will help the entrepreneur judge whether they have a venture suitable for VC investment and whether they wish to be part of such an activity. It also lays out a comprehensive process the entrepreneur can follow that will assist them in raising VC funding.
This book delivers on all counts. It is full of practical and pragmatic advice on what Venture Capital 'is' and what an entrepreneur needs to consider when seeking venture capital funding.
A 'Useful Links' section at the end of the book that lists the organisations and websites mentioned in throughout part one would be a useful addition, enabling ease of future reference.
Part One: Finding the Money
The term Venture Capital is defined, for the purposes of the book, as 'the form of private equity most often raised by emerging enterprises, that is, those seeking funds to develop their business concept or to support the initial growth phase'.
The first concept covered is the 'The Structure of Private Equity Market', Chapter 2. A discussion of the attributes of large publicly traded corporations vs. private ventures eg liquidity, reporting, risk, access to finance etc, highlights the differences between publicly traded investments and private equity investments, and illustrates the nature of the private equity environment. The book quickly progresses to outline a range of possible sources of finance for early stage ventures:
- Personal Savings and Borrowings
- Family, Friends and Fools
- Angel Investors
- Venture Capital
- Corporate Investor
Under the Venture Capital heading, the role of the VC, the concepts of Limited Partners, General Partners and exit events are introduced, along with the sources of VC funds. The size of the venture capital sector in Australia, the US and the UK is also briefly discussed. The statistics presented here can be a little confusing to the uninitiated given the differing definitions of VC and measures applied by different organisations.
This Chapter also presents two lists of definitions of the stages at private investment (VC or PE) may occur, and concludes with a list of questions for entrepreneurs who think that VC might be the appropriate source of funding to consider.
Chapter Three 'Sources of Funds' goes on to discuss each of the sources outlined in Chapter Two in more detail, raising issues and posing further questions for the entrepreneur to consider. The bulk of this chapter is dedicated to the discussion of Venture Capital as would be expected. There is a more detailed discussion of the structure of Venture Capital and Private Equity funds, and the role of General Partners. A variety of common VC terms are defined. Australian statistics on the number of investments vs. the number of opportunities reviewed are presented, as are breakdowns of investments by stage and by exit path in Australia, the US and the UK. This information is then developed into a discussion that leads the reader to understand the needs of, and obligations on, a VC fund, and how this impacts the VC firm's view of an investment opportunity.
This theme is continued in Chapter Four 'The Compelling Business Concept', where the factors the VC firm evaluates in examining an investment opportunity are discussed in detail. Likely questions a VC firm will ask of an entrepreneur and checklists of characteristics the VC is looking for are presented to help the entrepreneur shape their proposal to better address the needs of the VC. These include:
- Product / Market Evaluation
- The customer
- Compelling need to buy
- Size of the market
- Competitive analysis
- Barriers to Entry
- Business Structure
- Operations
- Product development
- The Business Plan
- Where are you now?
- What is the exit strategy?
- How are you going to get there?
- What business plan layout?
Chapter 5 'Getting the Money' opens with a reiteration of much of the information from previous chapters, followed by an outline of the process undertaken by the VC when examining proposals from initial contact through to payment. Common term sheets clauses and due diligence are discussed in more depth.
The first part of Chapter 6 'Valuation and exit strategies' discusses the concept of valuation, outlines a number of valuation models and examines when to use each of the models. The second half of the chapter describes in detail the two major paths to exit ie Initial Public Offering (IPO) and Trade sale, and discusses when each of these strategies is appropriate.
In Chapter 7 'Building Relationships' McKaskill outlines the role of professional advisors (ie professional services firms and legal firms) in assisting the entrepreneur to raise venture capital. This includes legal and taxation advice, advice on business plans, financial structuring and valuation. The chapter concludes with a discussion on the importance of selecting a venture capital firm that fits with the opportunity, and what to consider when selecting a VC. This is supported by the Appendix to Part One, which provides lists of criteria that should be examined when searching for an appropriate VC.
Part Two: Venture Capital Ready Index
The Venture Capital Ready Index is a set of attributes against which the entrepreneur can map a venture and gauge preparedness for investment by a Venture Capital fund. There are 49 attributes grouped under the headings of: Awareness and Alignment, Business Concept, Strategy and Execution.
This section leads the reader through the attributes and the scoring of these attributes on a scale from 1-5 (where 1 = nothing done and 5 = fully attained). Each attribute is briefly discussed and followed with 5 short descriptions of readiness. The reader is invited to make a self assessment by selecting the option that best describes their situation and recording this number in the Index table at the back of the book.
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