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  Chapman Spira & Carson, LLC.

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clutch.gif (2504 bytes)Funding - The Criteria

The transactions that we handle run the gambit from the ultra-safe U.S. Government Bills to the ideals in an inventor's mind that he believes could make an economic impact with the proper financing. The cost of money is encompasses the rate of interest that can be garnered by investing in government securities, anywhere from 5 to 8 percent based on maturity, to ran speculations which could necessitate a payment of over 50% of the projects equity, if the moneys is needed available at any price. By virtue of the fact that the variables are so substantial in the speculative end of the lending market, the elements making up the risk become more substantial.

For every successful deal that a venture capitalist has in his portfolio, there are probably three or four times that number that either fail or do not achieve their goals. Experience is only beneficial in creating the disciplines that tell you under what circumstances not "to reach" in a transaction. In other words, for the most part, all of us in the industry know that there are certain elements that should be present within a transaction to make it attractive. These elements include: an exceptional concept, top-flight management, an excellent business plan and a proven track record. In the real world, not all of the elements seem to come together in one deal very often. Only in academia, pre-set concepts attempting to quantify who is capable of world class innovation has not been possible in the past and it is just as unlikely now. Thus even people that have been in the business of evaluating these transactions for many years fall victim to nuances that are unique, time and time again.

A Fairy Tale -- or a Hypothetical Example

So the process begins. Our people evaluate the concept and it turns out that the implications of the proposed project are indeed global. In our internal conference on the subject we keep coming back to the key issue: Why didn't someone do this earlier? This has now become an intellectual challenge, which is the life's blood of venture capital. If the idea was trotted around earlier, why was it rejected? Why did other lenders deep six the proposal that we think is so intriguing? What have other capitalists seen in the project that we are missing? Where have you been before and what did they tell you was wrong with your contraption? These questions leap out. The answer generally is, they have been to the source that recommended us and nowhere else. CSC historically receives most of its projects from friends running brokerage firms on Wall Street who have liked the concept and sent it to us for early stage financing. In effect what they are saying is, here is a deal that looks pretty good on the surface. If it is as good in practice as it is in principle, we will take it public. CSC, you do the hard stuff, the analysis, and take the early money risk. If everything is OK at that point we will take you out and everyone will make money. Thus, we usually find ourselves back at square one.

As venture capitalists, if we had a choice, we would rather deal with poor management that will accept guidance, than get in bed with a brilliant partner who is constantly concerned that someone is attempting to pilfer his idea. Protective instincts can be overblown, they also take people's eyes off the ball. We are in the business of building companies, not walls. We will do everything within our power to protect the projects proprietary aspects, but we have found that the best intellectual property insurance is good management. Wall manufacturers can be found in the yellow pages.

How has he fared before? What are his ethical standards? Knowledge of the entrepreneur's track record in previous dealings is extremely important.

How realistic are his ideas? For the most part, our core professionals are unable to evaluate the schemes of brilliant people who practice the art, in domains that are alien to financial people. Additionally, the world has been metamorphosing so exponentially that even our technical staff is practically unable to keep pace with everything that is going on. Consistently we are obliged to call upon consultants that are experts within the particular discipline to support us in making our product evaluations.

Time has passed and the project continues to look good. We were forced to tackle the nuances ourselves because the concept was so new, nobody on the outside was able to evaluate it. Our guys still believe that this thing has a lot of promise. The next and most important issue now must be addressed: can the inventor or conceptualizer run his own company? Having a great idea is only the start. Without the ability to bring it to fruition, funding it will be a waste of time and money. The product may be world class on the drawing board but doomed to failure in production due to a lack of experience on the part of management. Can these people handle marketing, banking, hiring, setting up production lines, working out transportation, making deals with regional governments for tax abatements or credits? Can they relate to the investment community when they are public? Are they dedicated and willing to put in the hours necessary to make the thing work? If the answers are yes, we have a go.

Not so many years ago, the average person did not travel over fifty miles from his home in his lifetime. Today, we can sit in our living rooms and watch the universe, pick up the phone and talk with someone on the other side of the globe, or hop on a plane and be in Europe in a matter of hours. The world has become a much smaller place. In yesterday's world, news could only travel as fast as a horse could gallop. Macroeconomics was what was happening over five miles from your home. In those days if someone fifty miles away was manufacturing the same item you were, he was not a competitor.

 

Today electronic transmissions carry knowledge at the speed of light to all points of the globe. Products that are only regional in nature often cannot be produced in large enough quantities to make them either competitive or economical. Because of these evolutionary changes, new concepts must be conceived in the context of the global community. It costs more and more money to bring new products to market. Furthermore, the products intellectual property must be preserved, despite the terrible state of flux of trademark and copyright laws around the world.

Has the company ever raised money previously? If so, on what basis? Did the company hire securities counsel and were all of the relevant "Blue Sky Laws" complied with? In many cases in which seed money was raised internally, the concept was, that it was just a bunch of friends getting together to pool their funds in an attempt to get rich. In doing that, they could have severely violated various regulations. Although no regulator would forever hold the company hostage to "good faith" efforts made in an attempt to get the project rolling, these problems would have to be addressed.

 

Because both the securities and intellectual property laws raise key issues, it is important that competent legal counsel join the team once the decision to proceed is reached.

Do we want the product manufactured by historic mass producers in Taiwan or Korea? Do we want the distribution to be handled by a multinational through a licensing arrangement? Are we more comfortable setting up our own facilities at a much higher cost, taking more time to get to market, and keeping the process a secret? Reverse engineering must be considered. The global neighborhood is full of people that can virtually look at something and figure out how it was made or how it can be made better, faster and cheaper.

When all is said and done, looking at new ideas and meeting new people is an exciting business. I am at my desk seven days a week, as I have been for forty years, reading the next business plan and hoping that it will be the one to change the world. Our family turned down Ray Kroc when he started McDonalds in spite of the fact that he was only looking for an insubstantial amount of funding.  And once again, we were the folks that thought a seasonal business like Baskin Robbins would not work, and we certainly could not figure out why anybody would want to fund Federal Express which seems to fly half way across the country just to deliver something on the other side of town. However, we have been on-the-street long enough that we have had our share of the good ones as well. Once in a while that occurred when we broke our own rules and became attached to bright young guys with lots of smarts and boundless enthusiasm.

Somewhere between the next Microsoft and a government bond sits a load of good stuff. Those are the deals that pay the freight while we wait for the second coming of Leonardo DaVinci. No matter what the transaction, it is our feeling that the entrepreneur, or entrepreneur to be, should take the time to make a well thought out presentation. If he can't explain what he wants to do within a reasonably short time frame, the idea either won't work or we're not going to understand it.

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