The Guarded SECRETS that Most Investor Fund's and VC’s Don’t Want YOU to know

When you do a “CSI” type investigation into why a savvy investor or fund did not do your deal, there are many clues. These clues when strung together give the behind the scenes view of the “drivers” behind a final decision.

The key “drivers” generally are:

Did the company have a unique business model in a market that was expanding?

Did the company have a series of Sustainable Unfair Advantage's?

Did the company have a strong Capital Efficiency Sweep?

Did the company inoculate against the Gremlins?

Did the company excite the investors in a emotionally electrifying way?

In addition, consider also that if we are just looking at private investor funds and VC funds they are managed by ex- entrepreneurs and investment pro’s. Consider that they may, depending on the size of the funds, invest out of their own pockets anywhere from 7-11% of the total size of the fund they manage. Now do the math, in a fifty million dollar fund, a individual is putting up from three to five million dollars of their own money.

To give some further background, compensation for these managers of the fund occur from a management fee of 1-2 percent of the funds assets per year and also a percentage of the fund’s appreciation due to savvy investments. A lot of the 1-2 percent goes to overhead with some going to salaries. The real earning potential for the manager is from the appreciation of the fund as the fund manager can make up to 25% of the funds appreciation. If the fund doubles to one hundred million dollars, the managers can score 25% of the additional fifty million dollars in appreciation. The flip side is when the fund does not appreciate at all. The reality is that with the carrying fees, the fund could lose money after 3-5 years. Thus the managers would lose money including a part of their investment and potentially their reputation.

The Real Power

Now consider the institutions who invest in venture funds as a way to hedge their other investments because of the life cycle of their other investments. The reality is that the investor or VC funds need to “kick butt” to score a great return on investment for the institutions. Why? Well, consider again that the managers get a hefty fee plus a large percentage of the upside (up to 25%) so when you sharpen the pencil, a fund must achieve a 40% to 55% compounded rate of return in order for the institutional investors to realize a 30% compounded rate of return on their investment. If things go sour, institutions many times inquire into underbelly of the fund to determine whether the fund's managers "went along with the same 'lemmings' or crowd thinking as others did”. This means more times than not much of the institutional money gets put in “hot” areas that are in vogue with other investor funds. Sounds a little like Hollywood doesn’t it? Can you recall how many horror movies followed the hit film "The Blair Witch Project"? And what happens if you don’t follow the flock and want to tackle a obvious burgeoning aren? You risk becoming ostracized and potentially face litigation from the institution. Now you can see why so many VC’s seem to continue to focus in the same arenas.

So How As An Entrepreneur Do You Maneuver Effectively Given These Facts?

Devour as much information as possible on the fund's Web site for facts and clues as to investment goals and anything else relevant.

Investigate the fund's sensitivity to risk. Also, it is a first round, second round or mezzanine funder?

Tackle VC and investor funds that are new and have not yet deployed their capital. Remember, after a couple years managers are more likely to have invested it so they can get their returns within their five to seven year window.

Go after managers who are attracted to what you are about and then blow them away with a world-class FundedPlans business plan.

Align your company into a hot trend because that is where the flock will go.

Find an expert who can assist you navigate the ins and out of finding the right qualifed investors.

Bottom line, understanding the hidden mindset and the background of VC and Investor funds will go a long way in unlocking your investment dollars into your new company.

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