Mortgage broker 2000: Making money with venture capital transactionsFred Steinbergventure capital, qualifications, transactions
Since entering the venture capital arena, many transactions have
come across my desk. A great number of them often lack a minimum
amount of information with which to decipher what the "deal" is all
about. Brokers often know very little about what venture capital
is, who qualifies for it, and the mechanics of transacting this
income stream. Certainly, it is worth trying to accomplish, since
the financial rewards are astronomical.
There are many types of transactions that may qualify for
venture capital, but the most important thing to know about this
income stream is what does not qualify. Inventors with products are
a long shot. The client with three dry cleaning stores in Ohio who
would like to open three more in Michigan, or the company that
provides janitorial services nationwide and wants to grow, may be
potential deals to some people in the arena, but they too are long
shots. Venture capitalists look for high-tech, medical, or a
proprietary interest in a trademark, license, or patent. Usually, a
proprietary interest in intelligentsia. For instance, a
radar-tracking device for opthalmological lasers to enhance lasik
surgery, or a microwave wand that can be used in a gynecologist's
office to cortorize the interior of the uterus, thereby eliminating
a hysterectomy. There are also transactions such as Internet
companies and specialized high-tech devices in aerospace or
computers. It can even be more specialized and become an investment
in a company on the cusp of growth, poised to go public. The
venture capitalist is looking for an existing income stream, with
tremendous potential to become an even larger income stream. Most
importantly, it is the potential a company has for great returns on
investment that attracts the capital.
Mechanically, these transactions begin with an executive
summary, a short document detailing all the players, the company
mission, something about the product or service, and the amount
that the company is looking to raise. If the parties are interested
in further pursuing the transaction, they will request a full,
detailed business plan.
The business plans are not the type where a client goes to
Costco or Best Buy and purchases a computer program to put together
his own plan. The plans that get attention are professionally
detailed, and very often a consultant is hired over a period of
time to actually construct the plan.
It is important to note that this is an equity financial tool. A
company must give up a portion of its stock so that the investor
becomes a part-owner. Some owners don't like the idea of trading
portions of their company for the funds, especially since the
venture capitalist is considering an "exit" plan. The plan is
typically to take the company public, thus liquidating further
ownership. The alternative is borrowing the money, which is a debt
instrument. In most cases, the companies needing venture capital do
not have the assets, or the finances, to borrow the large sum of
money they require. In some cases, the company has a burn rate, in
which they are expending funds without income, and need an
investment to cover the expense. For instance, a medical tool being
tested by the FDA incurring costs will spend money while waiting to
bring their product to market.
Why should you enter this arena? The commissions are very high,
one-time payoffs. A $5 million transaction-one of the more common
sized transactions-can pay a point or two of the $5 million. It
pays for the frogs you kissed until the prince appeared. Secondly,
the only thing a broker has to do is request and submit an
executive summary or full-blown business plan. No licenses are
necessary, and the broker has nothing else they are required to do.
Personally, I would not rely on this as my only income stream, but
as for diversification, I wouldnt want to eliminate it either.
Fred Steinberg is President of Express Business Funding. He
may be reached by phone at (941) 945-3863 or by fax at (941)
945-2853.
