# Venture Capital Raising



## trainspotter (6 July 2009)

Has anyone got any experience at this kind of fund raising or could suggest as to whom I could contact for proactive advice that will not cost a fortune for little result?

I own/lease a parcel of water (104 hectares) for the growing of black lip pearls. (pinctada margaritifera) Currently has been in operation for 7 years and has produced some quality product in the range of pearls suitable for jewellery and such. To take it to the next level requires capital input to progress.

I have an Offer of Information Statement prepared that has been vetted by solicitors and accountants. THIS IS NOT A PROSPECTUS. Very much so blue sky information and is only for SOPHISTICATED INVESTORS.

Requirement of capital is to expand operations to become commercially viable due to economy of scale. ALL assets are unencumbered and management practices is better than industry standards.

Would greatly appreciate SOUND ADVICE and or experienced replies.


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## doctorj (6 July 2009)

How many of the past 7 years have you been profitable?


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## trainspotter (6 July 2009)

Thanks for the reply Doctor J. Like my original post stated. To take it to the next level to become "commercially viable" is the issue. Currently all the infrastructure and labour has been at my expense. It takes EIGHT YEARS for a pearl farm to become profitable due to growout phases of spat/oysters etc. Farming the ocean is subject to the vagrancies of the weather as well. So to answer your question, NONE of the years of trading has seen the black on the ledger sheet. It is in the start up phase to progress beyond neutral cashflow and requires SEED CAPITAL to grow to become profitable.


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## doctorj (6 July 2009)

So you'll be profitable in 2 years with more money or you'll need a further 7 odd years at the larger scale to be profitable?


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## nunthewiser (6 July 2009)

you up in the bay ? or islands area ?

sorry for privacy questions . just makes a difference in reliabilty of product etc apparently


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## trainspotter (6 July 2009)

Doctor J ... Currently will turn profit in it's 8th year. AS in next year will be profitable with the amount of shell that is currently on the farm that will produce pearls. Current asset in excess of 1 million outright. This includes 150k of loose pearls and jewellery. ZERO DEBT. 

Funding is to assist ECONOMY of scale. More panels/ropes/floats/spat/wire etc. it becomes cheaper to purchase in bulk, farm is 104 hectares ONLY 15 hectares under intensive farming.


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## trainspotter (6 July 2009)

nunthewiser said:


> you up in the bay ? or islands area ?
> 
> sorry for privacy questions . just makes a difference in reliabilty of product etc apparently




nunthewiser. Was more interested in obtaining advice as to VENTURE CAPITAL RAISING. If require more info either PM me or email me for exact longs and lats for info as to whereabouts.


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## doctorj (6 July 2009)

The most important thing in any private equity deal (venture capital included) is the exit.  

How will your investors get their money back, plus a fair return?  The time frame I've seen from most PE funds is 3 years, but some as long as 5 years.

So as long as you can demonstrate you have a business (rather than a hobby), you have the skills to run said business and you have an exit, you're well on your way.


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## nunthewiser (6 July 2009)

trainspotter said:


> nunthewiser. Was more interested in obtaining advice as to VENTURE CAPITAL RAISING. If require more info either PM me or email me for exact longs and lats for info as to whereabouts.





no worries , not after exact location, was intrested in region as have contacts and intrests in the same industry 

dont matter 

have a nice evening


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## trainspotter (6 July 2009)

Thank you Doctor J for the sound advice on the exit strategy and timeframe requirements. Will take this onboard and incorporate into working model. Thanks again.


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## trainspotter (6 July 2009)

Thank you nunthewiser for your response. The region is off the coast of Western Australia.

Have a nice evening.


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## skc (6 July 2009)

You can actually contact some venture capitalist firms. Most VC firms have specialties in term of industry and size of deal. So you will need to search for someone who is open to your industry.

When VC firms look to invest they tend to go after:
- A unique offering - in products, technology, patents, market positioning etc
- A scalable business model that can be duplicated
- A clear exit strategy (for them) as pointed out earlier
- A track record in management team

This link has some names for you to research.

http://www.v-capital.com.au/vcdirectory/vcmp_vcf.cfm?y=lsttype&id_type_of_firm=1

AVCAL also has good information.

http://www.avcal.com.au/

In Australia VC funding is extremely competitive. Without knowing too much about your business I am not sure it will attract VC funding. You may consider casting your web wider by looking into private investors and loans.


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## trainspotter (6 July 2009)

Why thank you very much for the links skc. Greatly appreciated. Will source through the info supplied.

After what WKL did to the aquaculture industry everybody has gone weak at the knees on funding. Never mind they had zero experience. Apparently a glossy brochure and some pie graphs speculating a return is all you need to list on the ASX these days? Harumph !


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## Ageo (6 July 2009)

trainspotter as an investor i would be asking the following:

* how liquid are pearls (well being in the jewellery industry they are like diamonds, unless someone wants them for the right price they can stay there for long periods)

* If things go bad what will i come out with? and how long will it take to receive it? how liquid are the assets your capital was used to purchase?

* Whats the return on risk ill be looking at?

Anywayz dont let these be issues but id thought i would give you a perspective from a potential investor.

If you have the right answers for them then you will be on the right track to raise capital.

Enjoy!


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## trainspotter (7 July 2009)

Thanks for the reply Ageo. 

All of the issues you have raised are covered in the OIS. 8 year table of program. Statement of Position. Risk management. The only thing I cannot place in the document is a rate of return. The moment this happens it becomes a PROSPECTUS. This kind of documentation has too many restrictive requirements for medium size companies to raise capital. And bloody expensive too ! To evidence a ROI would require too many assumptions in regards to variable outcomes. It is possible to commit to % return but would not be an accurate figure. It could be more or less depending on harvest/climactic conditions/sale of product etc.


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## Beej (7 July 2009)

The other BIG issue that has not yet been directly mentioned is: How much equity are you willing to provide in return for the VC investment??? This is obviously of extreme importance to any deal, and is based usually on the sort of current/future valuation that might be placed on the business, relative to the funds being provided. Remember VC funds don't work on the basis of a bank, where they just "lend" you money! They want an equity stake in your business - you are in effect selling them a large part, possibly even a controlling interest in your business in return for their $$$.

Think carefully about this as usually the VC will only be interested if their stake is generous relative to the invested funds in order to make the risk worthwhile.

Cheers,

Beej


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## trainspotter (7 July 2009)

Thans for the insight on this one Beej. 

Fully aware that the VC provider will want equity and a directional control of the business. Company is set up to deal with this structure. Whether they become directors of the company with "ordinary" shares affording them voting rights or "A" class shares which supply them with dividends and NO voting rights BUT gives them majority control of profit (if any).

Might be worth breaking down ratios to smaller parcels and selling to punters?


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## skc (7 July 2009)

trainspotter said:


> Thans for the insight on this one Beej.
> 
> Fully aware that the VC provider will want equity and a directional control of the business. Company is set up to deal with this structure. Whether they become directors of the company with "ordinary" shares affording them voting rights or "A" class shares which supply them with dividends and NO voting rights BUT gives them majority control of profit (if any).
> 
> Might be worth breaking down ratios to smaller parcels and selling to punters?




I can assure you that no VC firm is insterested in dividends. They are interested in selling the company for a profit.


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## trainspotter (7 July 2009)

So rumping and pumping the existing board of directors and wiping out any semblance of the corporate structure is their game? Waltz in with a fist full of cash, takeover management practices and flog the lifeless carcass to the highest bidder is what they are all about, eh?

No thank you, not on my watch they wont be. Would sooner offer 10k parcels of "A" class shares with the fringe benefits of jewellery and loose pearls PLUS % return as well as free trips to the pearl farm before I will let that happen!


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## doctorj (7 July 2009)

trainspotter said:


> Might be worth breaking down ratios to smaller parcels and selling to punters?



You think the process is expensive now, try offering it to the great unwashed masses...

If I were structuring this from the PE side (assuming there's a deal to do, my concern is that it's been a hobby so far, not a business), I'd be including some sort of ratchet to protect my returns and to hold you to your projections.

The way it would basically work is that, on exit, if I don't make, say 35% p.a., some of your shares would be transferred to me for 0 consideration to build my return to that mark.

This links back in to my comments about exit - either by a put back to you in a few years, or a compulsary drag along after say 4 years if I've not divested through other means.

The implications of this include:
- you have to be willing to risk losing control of the investment via the ratchet
- your shares may be sold out from under you via the drag
- the business would need to be sufficient forecasted size to be relevent for an acquisition by neighbouring businesses or strategic or there is no deal


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## gordon2007 (7 July 2009)

I have nothing contructive to add to this thread (do I ever?). 

I'm just writing to say I'm finding it quite interesting though. I'd love to know how you go with this though.


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## trainspotter (7 July 2009)

Thanks for the rhetoric doctorj.

If a million dollars equity of my own money is a hobby to anyone, then I am guilty. Like I have stated previously, there are no projections. NONE, ZERO, NIL. It is all bluesky stuff. Ratchet levers with 35% / annum with share options is not what I was asking for.

I originally asked if anyone has experience in this kind of funding and could point me in the right direction of someone with the knowledge to further the company in this direction. Either by a website or by first hand knowledge.

I can theorise and soothsay all you like on % return and exit strategies and hostile takeovers of the board via 10% share blocking etc. etc. et al ad infinitum but it would not be the correct information. I have watched many a company raise capital either by ASX listing or dragging in partners with plenty of capital input but no managerial skills previously and quietly chuckled to myself as they resembled a bug on a windscreen. The first thing to go through their brains was their rectums.

To also timeframe a 4 year programme after I have advised that it takes 8 years to return a profit due to the nature of pearl farms(growout of spat/oysters/seeding/farming practices to not stress the bivalve mollusc) is a little exorbitant on the scale of clock watching at best.


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## doctorj (7 July 2009)

Guilty as charged - I don't know the first thing about pearl farming.  I do however know a little about private equity and was hoping to give you a brief on the issues you may face going forward.

I also don't know what the market is like for financing pearl farms, but I do know the days of really easy money in any industry (except perhaps renewables) are long gone.  No longer are PE firms desperate for a place to park their cash and willing to sacrifice on structuring to make it happen.

To put it in comparison, I've just completed a PE deal where the company will not be profitable for 7-8 years, but there's an exit mechanism that kicks in after 3 and more complex drags that will kick in after 5 in certain conditions.  So it can be and is done.

Expect it to cost you no less than 3% to raise money.


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## doctorj (7 July 2009)

trainspotter said:


> So rumping and pumping the existing board of directors and wiping out any semblance of the corporate structure is their game? Waltz in with a fist full of cash, takeover management practices and flog the lifeless carcass to the highest bidder is what they are all about, eh?
> 
> No thank you, not on my watch they wont be. Would sooner offer 10k parcels of "A" class shares with the fringe benefits of jewellery and loose pearls PLUS % return as well as free trips to the pearl farm before I will let that happen!



And yes, PE is interested in selling the business for a profit.  It's how they make their money.  They're not pearl farmers, but professional investors.


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## trainspotter (7 July 2009)

Now we are talking my lingo doctorj !

That is what I am more looking forward to reading. Now that I have a little of your knowledge divulged when and if I do approach a PE firm I can brace myself with the jar of Vaseline and reach for my toes EXPECTING these kinds of mechanisms to be thrust upon me.

Current market for funding pearl farms (or any kind of aquaculture) is meagre at best due to the mob of FATHER RAPERS who have polluted and corrupted the waters before me.

3% is within guidelines of expectancy for capital raising of this kind.


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## trainspotter (7 July 2009)

gordon2007 said:


> I have nothing contructive to add to this thread (do I ever?).
> 
> I'm just writing to say I'm finding it quite interesting though. I'd love to know how you go with this though.




Pull up a chair, put your slippers on and warm your soul agains the fire, brother. I will advise all and sundry once motion of discovery has been extrapolated.


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## doctorj (7 July 2009)

3% is pretty cheap.  Given the amount of money is small, it wouldn't surprise me if it was 8-10%.

The key thing to realise is that PE don't want dividends and they don't want to own a pearl farm.  They want to generate a return on equity to their investors in a relatively short time frame. As they have the money, it's fair they impose things like ratchets and drags on you to ensure they have the stick to hold you to your own forecasts and to ensure they can get out.

If you want someone to hold for 8-10+ years and be happy to receive dividends, get a pearl farmer to invest.


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## skc (7 July 2009)

trainspotter said:


> So rumping and pumping the existing board of directors and wiping out any semblance of the corporate structure is their game? Waltz in with a fist full of cash, takeover management practices and flog the lifeless carcass to the highest bidder is what they are all about, eh?
> 
> No thank you, not on my watch they wont be. Would sooner offer 10k parcels of "A" class shares with the fringe benefits of jewellery and loose pearls PLUS % return as well as free trips to the pearl farm before I will let that happen!




That is too dim a view. A lot of VC firms are run by ex-entrepreneurs and love to see people succeed. The last thing VCs want is a demotivated owner. VCs offer much more than money - they bring in management expertise and connections in the industry. Basically they show and open doors for businesses that are otherwise not available.

I don't know much about peral farming but my guess is it is like a Managed Investment Scheme. Big capital cost up front, wait for your product to grow, and at harvest time sell at profit. 

The VC deals I am familiar with have fairly different characteristics. A good deal is one which is scalable, or has a unique proposition. A new potential drug, a new industrial process, Boost Juice are examples where the business is readily scalable and has a clear exit strategy. 

May be it's my lack of understanding but I don't see how the pearl farm fits in. Unless you have a unique practice that can be rolled out across the industry? Or you see the pearl farm industry ripe for consolidation?

If not, I truely don't think VCs would be interested, regardless of how good a business it is. 

A VC once told me that, for every 10 deals, 1 will be a star, 2 will be OK, 3 will go no where and the rest are living dead or actually dead. So they really need the star to pay for the dead ones. Just like trading.

P.S. If you don't mind sharing how much investment are you looking for?


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## skc (7 July 2009)

doctorj said:


> 3% is pretty cheap.  Given the amount of money is small, it wouldn't surprise me if it was 8-10%.




Never forget the real cost is the equity in the business you are selling.

Early money is the most expensive.


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## trainspotter (7 July 2009)

skc wrote "I don't know much about peral farming but my guess is it is like a Managed Investment Scheme. Big capital cost up front, wait for your product to grow, and at harvest time sell at profit.

Pretty much sums it up. The pearl farm I own is not offering any "new" techniques that will revolutionise the industry. There is no "best practice" that I can roll out across the existing corporations. The "unique" quality that we have is the PRISTINE environment that the pearl farm is located in. Without giving too much away it is one of only two places in the world. The other place does not grow pearls, by the way. The second stage is not only to grow pearls but to develop tourism. Similar to the Great Barrier Reef in it's model.

You can PM me and I would only be too glad to provide you with the information on $ amount required.


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## trainspotter (7 July 2009)

Thanks doctorj for the advice.

I will buy me a larger jar of Vaseline if fund raising is going to cost 10% initially !


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## skc (7 July 2009)

It is completely clear to me that the VC line of thought is just red herring. What you need is a MIS manager who can structure a scheme for you. This link provide some names for your research. 

http://www.agrifundsonline.com.au/articles/aag_manager_ratings.pdf

If this is too much, there may be certain brokers out there who has a regular network of investors who seek alternate investment. Not sure what the right search term or keyword is, however.

To be even less sophisticated, just host a tupperware-party type function with a bunch of doctors / lawyers / bankers and get their credit card details on the spot.


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## trainspotter (7 July 2009)

skc - Not sure VC is a red herring. Maybe the terminology I am looking for is incorrect? Thanks for the link and will follow up on the referral. Thank you.

Will google rummage for the brokers with alternate investor clients.

The tupperware party idea is not what I had in mind. Too many people wanting a slice and no coherent direction. Suddenly EVERYONE would want to have a say in management and how THEY could do it better. No thanks.


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## doctorj (7 July 2009)

skc said:


> It is completely clear to me that the VC line of thought is just red herring.



I would tend to agree.  PE isn't a free lunch and it's aimed at people looking to grow businesses much faster than they otherwise would.

Before even thinking about what form of financing to get, if I were you, I'd be paying for some advice about the costs/benefits/availability of each.  Paying for advice to construct an information memorandum is putting the cart before the horse...


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## trainspotter (7 July 2009)

Thank you doctorj again for the advice.

Will endeavour to find that certain individual who can give me such advice as to what kind of funding is going to be more suitable than the other in my given situation. Thanks again.


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