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Venture Capital Lawyers walk entrepreneurs through VC process

It is no revelation that entrepreneurs and early-stage companies are finding the fund-raising process difficult these days.

Venture capitalists, having awakened after indulging in a year or more of excessive investment exuberance, are only beginning to recover from their dot-com hangovers. For them, it is time to clean up the mess and focus on the remaining portfolio companies that still have a chance to succeed.

With the possible exception of the life sciences sector, venture capitalists have substantially slowed, if not suspended, all new investment activity. This is not good news for entrepreneurs seeking funds, but it is the reality today , and one that is likely to continue for the near term.

I expect that after most of their messes are under control, order has been restored to their surviving portfolio companies, and the U.S. capital markets demonstrate the bottom has been reached, venture capitalists will return to the task of expanding the size of their portfolios.

At the same time they are retrenching, so are the lawyers who serve the venture capital market. This retrenchment creates an opportunity for entrepreneurs.


– Lawyers Screen Business Plans

Last year we were turning away business because of the strenuous efforts to adequately serve our existing clients; there was no time or personnel available to serve new clients. This year we are returning to the spadework of finding fundable companies and putting them in a position to raise capital.

Even in this current slowdown, a typical venture capital firm might receive more than 100 business plans a week. There is no possible way for the venture capitalist to look at all these plans. So they rely extensively on venture capital lawyers and other service providers to screen plans first and walk in only those they have scrubbed and believe merit consideration.

The screening function works because the venture capital lawyer only makes “real money” providing services to companies which get funded. Such an experienced lawyer has a good sense of what kind of companies will be funded, having negotiated a host of venture deals and sat in on many presentations to venture capital firms over the years.

Moreover, the venture capital lawyer understands his or her relationship and reputation with the venture capitalist are critical to his clients being considered for investment. The smart venture capital lawyer ensures any company he or she recommends is ready to be presented and has a good chance of being funded.

Experienced entrepreneurs seek out a venture capital lawyer to help them at the idea or formation stage of the company. Typically, the entrepreneur , and his team , will meet with the lawyer for a couple of hours to talk about the entrepreneur’s concept and business plan.

This meeting is usually the “no charge” part of the venture capital lawyer’s business development efforts and results in the entrepreneur receiving a short, practical education on what it takes to be financed in the current venture capital environment as well as a realistic initial assessment of the fundability of the concept and the company.

Using his or her experience of living in the venture world, the lawyer also helps the entrepreneur set realistic expectations, especially regarding how much money can be raised at the current stage of the company and at what valuation, or, said another way, at what amount of dilution.


– An Education In Legal Issues

Sometimes at that first meeting, sometimes at a follow-up meeting when the clock is running, the lawyer will educate the entrepreneur on both legal and business topics such as:

o The best structure for the company.

o The initial capitalization of the company.

o The number of shares that should go to the founders or be set aside in an equity incentive plan for future members of the management team and other employees.

o Whether options or shares would be better under the plan.

o The advisability or need for shareholder agreements.

o The structure of the next round of financing.

o Compliance with the securities law.

Venture capital lawyers know the structure and capitalization that angel investors and venture capitalists expect to find when they invest in a company.

Getting the structure and setup right from the start eliminates funding headaches later. The last thing an entrepreneur wants or needs is a financing round failing or being postponed because the structure does not meet the expectations and requirements of the angel or venture capitalist.

The goal of the entrepreneur seeking angel or venture capital funding should be to eliminate as many issues as possible so that the discussion with the venture capitalist, once he’s interested, revolves around valuation of the company and size of investment, not structure.

While the short-term investment picture looks bleak for most, but not all, entrepreneurs, the long-term view for venture investments in U.S. technology companies remains bright. There is a tremendous amount of risk capital sitting on the sidelines today , capital that needs a home , including investment dollars from overseas.


– Opportunities In Technology

The U.S.-based technology sector remains a fruitful ground for high-risk investment and reward. Angel investors and venture capitalists will continue to focus on this sector.

While it is foolish to expect the investment environment to return to the dot-com exuberance of 1999 and 2000, significant venture investment in this sector will return. New companies will be funded and entrepreneurs will be given the means to turn their creative ideas into products and dollars.

Now is the time for the entrepreneur to find and meet with a venture capital lawyer to ensure he or she is taking all steps possible to be ready the moment the venture capital environment shifts back to healthy, not indulgent, consideration of and investment in companies which need outside funds to grow to the next level.

Fraunces is a venture capital lawyer and partner in Luce Forward’s Business Practice Group in the Carmel Valley/Del Mar office.

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