Do-It-Yerself Capital: Raising Your Own Capital and Avoiding the Venture Capitalists

Sometimes, the best way to raise capital is to do the job yourself.

Thomas E. Vass, BusinessCapitalAdvice.com

What Happens When The VCs Think That Your Baby is Ugly?

In the past year or so, I have had several solid technology companies describe to me their experiences in seeking growth capital with venture capital firms. The common theme that emerges is that the VCs told the companies that their business model or technology “did not fit.”

The words “did not fit” is code language that the VCs use that means the same thing as “your baby is ugly.”

I usually tell the company’s executives not to worry about what the VCs think. Very few deals are ever funded by the VCs to begin with, and most of the ones that are funded end up in the Dr. Kervorkian assisted suicide statistics.

The entire direction of causation for capital markets is all wrong for established, operational high tech companies when the go to the VCs for funding. A better business model is to stand the process on its head and have the investors seek out the companies.

The Direct Corporate Private Offering (DCPO) Business Model

One reason the DCPO alternative to the VC model is never mentioned in the venture capital and angel community is that they generally can not make much money on it. In other words, there is no vested financial special interest group that promotes the DCPO like there is for the venture capitalist model.

The venture capital community is well organized for public relations and has a whole coterie of non-profit agencies that sing from the VC hymnal. No one is organized to sing the praises of small high tech companies, or is actively promoting the long-term financial viability of small businesses.

The DCPO model requires the company to manage the entire process of issuing securities in a process called self-underwriting.

Part of the complexity of the management involves coordination of the tasks among outside professional advisors, including:

DCPO Tasks for The Securities Attorney

1. Drafts Term Sheet, Private Placement Memo and Subscription documents.
2. Conducts legal due diligence on company.
3. Files Form D and obtains Blue-Sky registration approval.
4. Reviews language in business plan, and power point presentation and coordinates that language with the legal requirements of all offering documents.
5. Drafts NASAA Attorney’s Opinion Letter for posting on password protected web page.
6. Advises corporation on how to make uniform and fair responses to inquiries from potential investors.
7. Reviews all responses for “Frequently Asked Questions” for full disclosure and fairness.
8. Receives and reviews all subscription documents from potential investors.

9. Prepares and mails stock certificates to investors after the date of closing

DCPO Tasks for CPA

1. Prepares, when required, the audited financial statements for inclusion in the business plan in accordance with SEC regulations of a private offering.
2. Assists client in preparation of future revenue projections for use in power point presentations and business plan documents.
3. Prepares valuation of company for posting for business plan and Term Sheet, using standardized, uniform methodology that will be replicated annually in on-going financial reporting to investors.
4. Prepares semi-annual reviews and annual audited statements of income, balance sheet and cash for placement on the investor relations portal on the company web site.

DCPO Tasks for Third Party Transfer/Clearing Agent

1. Provides uniform new account registration procedures and documents for both investors and corporation’s new account.
2. Provides standard letter of authorization by investor to transfer cash on day of closing. Forwards letter of authorization to corporation for approval by corporation to accept investor’s cash into corporate account.
3. Provides list of all investors names and addresses to the securities attorney to coordinate mailing of stock certificates by attorney.

DCPO Tasks for Independent Third Party Technology and Marketing Verification Vendor

1. Prepares Technology and Marketing Verification Report, pursuant to consulting specifications.
2. Signs letter of authorization from company CEO to discuss, when required, the contents of the verification report with approved accredited investors.

Reducing The Management Complexity of the DCPO

Most small high tech companies do not have extensive staff to help manage the process of a self-underwriting, and most CEOs are so busy trying to stay alive, that the extra burden of managing the capital raise is too burdensome.

It often makes sense for the small company to outsource the management of the DCPO to a licensed professional investment advisor who represents the fiduciary interests of the company, not the investors.

Prior to the offering the DCPO investment advisor would help the company with the following tasks:

1. Provide advice to the company as to the type and the value of the securities it may issue or the valuation of the company before and after the issuance of securities.
2. Prepare 215-C “Tombstone” announcement of the offering.
3. Consult with the officers and employees of the company concerning matters relating to the financial condition, management and organization of the company, their financial policies, the terms and conditions of employment, the market for the client’s products, and generally any matter arising out of the business affairs of the company in order to advise the client on appropriate documents and materials.
4. Prepare other documents to place on pass-word protected area of company’s website, including the Quick Deal Overview (QDO). The QDO is the main workhorse document that explains the technology and the market of the company to potential investors.
5. Assist the securities attorney in preparing the Term Sheet, private placement memorandum, and subscription agreements, pursuant to Reg D 506 regulations.
6. Determines scope of independent third party technological and marketing independent verification report. Retain vendor for report preparation.
7. Assist the attorney with the “Frequently Asked Questions” section of company’s website. Company establishes on-going reporting format for investors, similar to the same function served by Edgar for public reporting companies.
8. Assist the company in opening securities account at 3^rd Party investment firm to escrow and hold capital from investors.
9. Identify and contract with outside sub-agents to conduct a search for commercial financing and commercial loans to complement the funds raised in the direct corporate private offering.

During the Offering, the DCPO investment advisor would:

1. Review and screen potential investor credentials and qualifications prior to authorizing access to company’s investor relations portal.
2. Conduct telephone survey with potential investors and record the investor qualifications, including the documentation of how the investor established the “pre-existing relationship” with the company.
3. Coordinate with attorney responses on the FAQ part of the website to insure uniform, fair treatment of all potential investors. All questions and answers remain on password protected portal of company website during offering for registered investor users to investigate during the offering period.
4. Manage the preparation of reports and presentation materials to potential funding agents or funding events, on behalf of the client.
5. Manage the calendar of events for company presentations to sources of capital, including venture capital firms, institutional investors, investment banks, accredited investors, and/or potential strategic and/or synergistic partners.

When Your Ugly Baby Grows Up To Become A Beautiful Company

The upfront work and added costs of the DCPO may work out for the best for your ugly baby. When the company controls all the terms and conditions of the offering, it is unlikely that the company will end up on the Dr. Kervorkian list.

By raising the capital yourself, you set the conditions of future success to letting your company be a big happy baby with lots of opportunities for success.

Which is exactly the outcome we would wish for all of our small high tech companies.