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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   August 2009

Follow Protocol for Venture-Capital Success

Seeking a firm's funding? Know its 'strike zone'

In this credit-crunched economy, commercial mortgage brokers who seek funding for their clients' deals must look beyond traditional loan sources. Nontraditional sources differ in their funding requirements, but one type of source -- venture capital -- has perhaps the most simple of all guidelines in the commercial mortgage industry:

  1. There are no universal rules, but the project must be unique and extremely profitable.
  2. Follow protocol, and when confused, see rule No. 1.

The average venture-capital firm has one to six decisionmakers. It also has specific niches within the market.

In general, these firms prefer special-purpose or sector-specific commercial real estate. A firm, for example, only may be interested in commercial real estate projects in Latin America that deal with agriculture, biotechnology and waste-to-energy. Others may seek anything in Eastern Europe or India.

But no venture-capital firm will try to be all things to all property-developers. It's simply not an efficient business model.

It's important that you know a particular venture-capital firm's "strike zone" before you send it a project and loan request. If your client's project is not within that zone, ask about the firm's "funding footprint." With this information, you'll make a new connection for future venture-capital fundings.

That said, it is important to understand the protocol for doing business within the venture-capital space. Venture-capital firms get many projects that could be viable but that they dismiss because the broker did not follow proper protocol:

  • Submit an executive summary. The executive summary should be seven pages or less and should explain the project and how individualized it is to the market, define the market potential, and state the specific dollar amount that the developer wants.
  • Be prepared to wait 14 days -- sometimes longer -- for a response. If the firm likes your project, it will request the entire package. Most likely, you should submit the information as word-processing and spreadsheet-software files to reduce any unnecessary work during the due-diligence period.
    At this time, the firm also will ask your client to sign a non-circumvention and nondisclosure agreement. It also will ask your client's permission to hire a due-diligence firm to evaluate the project.
  • Be patient during the due-diligence process. A venture-capital firm will pay $100,000 to $400,000 to a due-diligence firm to review the project before investing millions of dollars in it. Few firms do this in-house. And the firm, not your client, pays for the due diligence. Many of these firms believe that paying for proper due diligence is money well-spent. Remember that the due-diligence period can last as long as six months. In addition, beware of venture-capital firms that require your client to pay for the due diligence. Run away if they do.
  • Know when to say no because of a low internal rate of return (IRR). If your client's IRR is less than 35 percent over a five-year period, it's probably a good idea to pass on the project. It doesn't matter if your client's project involves packaging carrots or is a manufacturing business. The project with the highest IRR is the one that will be funded.

Other things venture-capital firms look for include: 

  • Patented or patent-pending technology.
  • Opportunities that allow them to enter the market with a relatively small amount of cash (e.g., $1 million to $10 million), but that have infinite potential.
  • Management muscle. Venture-capital firms like to know they are lending to and partnering with a client with experience running similar projects and who knows the business. Often, the project's management can make or break a marginal transaction. Make sure you spend your time in the venture-capital space wisely and understand firms' rules and protocol. Doing so, you and your clients will have a better chance at finding funding for their projects while the traditional channels are not performing.

 


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