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VENTURE CAPITAL -- AN OVERVIEW OF THE BASIC ISSUES AND CHALLENGES FOR ENTREPRENEURS

A NETPRENEUR.ORG SPECIAL REPORT AUGUST 2001

PREPARED BY: ANDREW J. SHERMAN, ESQ.

ANDREW J. SHERMAN, ESQ. MCDERMOTT, WILL & EMERY 600 13TH STREET, N.W. WASHINGTON, D.C. 20005 (202) 756-8610 (202) 756-8087 (FAX) AJSHERMAN@MWE.COM (E-MAIL)

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INTRODUCTION
At several recent Netpreneur.org Coffee & DoughNuts events, including the May 23rd program on Ratchets, Cramdowns and Other Scary Venture Capital Terms as well as the recent Startup.com film event on July 17th, many members of our Netpreneur community posed questions on the fundamentals of structuring venture capital transactions, including many that time prevented the
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The investment
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is often structured more like a quasi-joint venture, because corporate venture capital often brings more to the table than just money, such as access to the resources of these large companies. Corporate venture capital efforts typically revolve around the corporation’s goals to incubate future acquisitions; gain access into new technologies; obtain intellectual property licenses; provide work for unused capacity; technology entrepreneur thinking to current corporate staff; final hours for excess cash; and break into new markets.

NARROWING THE FIELD

Preparation is the key to obtaining an initial meeting with the institutional venture capitalist. There are three central components to the preparation process: business and strategic planning; effective networking; and narrowing the field. A well-written business plan and financing proposal is a necessary prerequisite to serious consideration by any sophisticated source of capital. Effective networking means using professional advisers, commercial lenders, investment bankers and consultants who may be able to assist you to get the business plan into the hands of the appropriate venture capitalists. Institutional sources of capital are often flooded with unsolicited, “non-introduced” plans that are more likely to end up in a wastebasket than before an investment committee. Remember that the average venture

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