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Venture capital

Discussion in 'Other Off Topic Forum' started by justynb, Dec 8, 2003.

  1. justynb

    justynb Rookie

    Nov 17, 2003
    10
    I'm hoping that someone here knows something about venture capital!

    If I were to borrow £1m from a venture capitalist / business angel with the aim of repaying it in 12-24 months, what percentage would the lender expect to make as a profit themselves?

    Does it depend on the profit you forecast that you will make overall or is it normally a fixed percentage of the money they lend you, for example 10% or 20%?

    I want to borrow approximately £1m and expect a return of about £1.8m within 2 years.

    Thanks for any advice you can give me.

    Justyn.
     
  2. Doody

    Doody F1 Veteran

    Nov 16, 2001
    6,099
    MA USA
    Full Name:
    Mr. Doody
    "venture capitalists" don't tend to "lend" money. they purchase a chunk of the company.

    if you're business is well underway and profitable, you can get financing through a wide variety of sources.

    if you're business is not yet started, i'd be surprised if anybody would lend you a million pounds. how do you plan to collateralize it - with your good looks? :)

    you can always borrow and back it up with cars, home equity, bank accounts, etc.

    what type of business is it? is it a going concern or a new company? what space is it in? is the money for capital expenditures (then you could talk to venture leasing people) or for salaries and operating expenses?

    doody.
     
  3. Doody

    Doody F1 Veteran

    Nov 16, 2001
    6,099
    MA USA
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    Mr. Doody
    OTOH, if you're willing to guarantee me an 80% return in 24 months, lots of people would be happy to take you up on that deal!

    of course, if you fail to make good on the 800K pound return, you'd likely end up in jail or at the bottom of some deep lake, so be careful who you get into bed with ;)

    doody.
     
  4. WCH

    WCH F1 Veteran
    Rossa Subscribed Owner

    Mar 16, 2003
    5,179
    Justyn - return depends on risk, no? Which is I suppose a way of saying, more info is needed to answer the question. Industry? Product? What stage business? Current sales/customers? Assets? Who are your/what is your background? Etc. Certainly understand if you don't want to share anything on a public forum, and I am not encouraging you to do so. For a startup, the possibility of 1.8 on 1 invested, in 2 years, doesn't necessarily make me excited. I am not a venture capitalist nor an angel, but have worked extensively with both. I'm sure both are represented here, and will leave further replies to them.

    Good luck!
     
  5. adamr

    adamr Formula Junior

    Aug 16, 2002
    720
    Chicago
    Take it to Vegas baby!
     
  6. justynb

    justynb Rookie

    Nov 17, 2003
    10
    Doody,

    thank you for your reply.

    This will be an entirely new business, and the concept is very simple. I want to build 12 new appartments, the cost to build these including the land purchase is just over £1m and the value when they are completed around £1.8m

    The "exit strategy" for the investor is simple, when the properties are sold the investor gets paid back. I was just trying to work out what amount of money the investor might expect back so I can factor it into my plan.

    I work with 3 multi millionaires, two of whom have just become very wealthy through the recent sale of their current company and one of whom built a large hotel with venture capital a few years ago. They are always seeking businesses to invest in so I'm hoping that I won't have any problems raising the capital.

    However, before I approach them I need to work out how much profit would be in it for me. If they would expect £2m back for their £1m investment then obviously the whole idea is no good. That's why I was wondering if there is a "rule of thumb" for this kind of thing?

    Kind regards,

    Justyn.
     
  7. Doody

    Doody F1 Veteran

    Nov 16, 2001
    6,099
    MA USA
    Full Name:
    Mr. Doody
    commercial real estate ventures and financing are well-understood, time-tested, mother-approved exercises.

    though i know nothing about them though :).

    painfully common stuff. relatively easy too - you've always got the property to collateralize the loans.

    talk to your larger local banks - they'll clue you in on what's what as a starting point.

    doody.
     
  8. dwood1969

    dwood1969 Karting

    Nov 1, 2003
    67
    Charlotte, NC
    Full Name:
    David Wood
    Justyn,

    I would agree with Doody - it sounds like the banks is where you should start. The last company that I started was backed by VCs. The rule of thumb at that time (2 years ago) was that they wanted to see projected revenue of $100 million within 5 years (based on a starting point of scratch). Anything less than that was not worth their time. I work in the technology area so these figures are probably different per industry. It sounds like you are looking for private money (angels, family and friends) that would interested in a good, quick return at some reasonable rates, rather than a VC that is looking for the possibility of some HUGE returns. Frankly, VCs today (in the technology arena) won't back anyone who doesn't already have a profitable company with extensive customers - due to the fact that they have taken such a beating over the last few years. Anyway, my recommendation would be to steer well clear of VCs. They don't call them "Vulture Capitalists" for nothing :)....and I am talking from experience!!!

    Good luck to you....
     
  9. TCM

    TCM Formula Junior

    Nov 10, 2003
    552
    Tyngsborough, MA
    I agree with the others. The first area to try and get financing should be from your bank and family. VCs are about the last place to get money from unless you want to be bought out of the business within 3 years. They only lend their money for a very large percentage of the company and usually have different ideas for it then what the original owner did. Try to secure financing through the banks first, especially at today's low rates. And then go from there. Hopefully, some more people who actually are VCs can chime in on this.
     
  10. Juice It

    Juice It F1 Rookie
    Silver Subscribed

    Sep 22, 2002
    3,233
    Maryland (DC Suburb)
    Full Name:
    Jeff
    Your best bet would be to talk with your bank and see how much of your own funds you would need to put in to secure a loan for the project and then try to come up with this smaller amount from personal sources. Or, you could purchase the land with some cash down and use the land as collateral for a construction loan. If you don't have any access to cash you will probably have trouble financing any of it. Do you have any building experience?
     
  11. bobafett

    bobafett F1 Veteran

    Sep 28, 2002
    9,193
    Perhaps one idea is this: come up with your expected returns (800k over two years) and determine what profit sharing arrangement makes the most sense. You can do it very simply (a management fee), or you take a percentage of profit in excess of some basic return you offer them, etc.

    Like Doody set, it is well established and there are myriad ways to go about it.

    I would say that anywhere from 20-30% of the profits is fair for you. If you can finagle more, go for it. Don't expect a 50/50 sharing plan, though.

    --Dan
     
  12. Tpup

    Tpup Rookie

    Nov 2, 2003
    32
    Roswell, GA
    Full Name:
    Roy
    I have done a few deals similar to what you are asking.

    1. One guy needed 600K to complete a housing project, he did not want me on any documents that might impact is debt/equity ratio with the banks. I loaned him the money at 13.59% interest, interest was paid monthly, principal was repaid in 12 months (it took him closer to 18). Basically, I was borrowing the money at 3.59 and charging him 10% interest, I took a 2nd on his house and he had the equity to cover the loss if he defaulted. I would not have done the deal without the 2nd on his house...

    2. I sometimes provide capital to Developers that need help funding projects. They go to a bank, borrow say 3M against a 3.6M project. They have to put down 20% or $600K. I'll put up $300K or more depending on the deal. They carry the personal guarantees for the project with the bank, my losses are limited to the cash I put in up front. I have a payback schedule in place based on when they sell the lots in the development, most of my profit comes on the back end after the bank is paid off. I have a flat return agreed to up front on my money. The last deal I did was 52%. If all lots sold in 12 months, then I would have a 52% return on my investment (a little over $450K on a $300K deal), if it took 24 months, my return drops to 26% etc (I still get the $450K+, it just took longer due to slower than planned sales). I like these deals because I get a fat return and have no personal guarantees if the developer goes under.

    If you want more details on structuring these deals let me know. For #2 I do these with other guys, sometimes as individuals, sometimes as LLCs. The title company sends us the checks as the deals close, I don't really even have to track it...

    You should be able to get a deal done based on the limited info you gave. Good luck.

    Roy

    ps. Get a good attorney who does these kind of deals. He/she should know a lot of people (individuals) that will do those kinds of deals. Don't look at VC, I just sat through a current VC outlook presentation and the bottom line is investment is down 98% from 2001 (I used to own/run software companies).
     

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