Where to Find Investors
Published February 26, 2009 | 
Finding an investor is as much a people process as it is a business process, with your success ultimately boiled down to how many contacts you have or how many you are willing to establish, and if your rolodex is not that big, then you have to accept the fact that your odds are longer and the time it will take to find an investor will be increased.
Most angels and venture firms target certain industries, so you obviously stand a much better chance of making a match if your business fits into their categories of interest, and you need to also talk to some of their portfolio companies to see how much control the firm wanted and how supportive they were when the business experienced any problems.
Most investors and venture capital firms invest their funds within their local market territory, they do this so they can effectively monitor and assist the businesses they have invested in, so therefore seek out firms that are closest to your business, and use your proximity to your advantage when profiling your business to any investors.
Talk to professional services providers you know such as accountants, brokers, financial advisors, consultants, Small Business Development Centers, and attorneys, since these professionals should have many high net-worth individuals and investors spread throughout their client-base, if it does not break any confidentiality policies ask the professionals for an introduction, and if it does break such policy, provide the executive summary of your plan to the professional and see if they could pass it on to potential investors, thereby maintaining their anonymity.
Statistics show that only one in a thousand business plans that show up “cold” on a venture capitalist door ever get funded, but on the other hand, there is a one in five chance of getting funded if the investor has an established relationship with you and your business, so talk to investors way before you ever start raising the money, approximately two to three months prior, and provide them with a short plan which could be your executive summary and keep them up to date on your progress.
Angel investors many times self-organize themselves into regional clubs or groups, in general these clubs tend to cluster around major metropolitan areas or broad regional clusters, so be sure to ask your local economic development director, chamber president, or Small Business Development Center director for the existence of such clubs or groups. The directory at Inc. Magazine Directory of Angel Capital Networks is a collection of regional angel investment clubs.
There are many websites that provide directories of venture capital firms, but remember you will probably have the best luck with firms closest to you, so try keyword searching the Internet for “venture capital” along with the name of the largest city in your regional area, and also visit http://www.vfinance.com for a comprehensive listing of venture capital firms.
How to Make Investor Presentations and Pitches
Published February 26, 2009 | 
An investor pitch is the formal presentation of your business and prospective deal you are offering, it gives the investor an interactive forum to get to know you and ask questions beyond those covered in your business plan, as there is no second chance to make a first-impression, and most investors make up their mind whether or not they want to do the “due diligence” behind your deal in the first ten minutes or less of your presentation.
Though investors have their unique styles and preferred formats for how information is relayed, there were four common themes in a recent survey which asked investors what they look for in a pitch including in 100% of the cases they wanted to hear about the management team and its experience in the industry and with starting similar ventures, the second most sought after information (70%) was the market opportunity as it relates to size, growth and demand, and next, 60% wanted information about the competitive environment including advantages, differentiators, and barriers to entry. Lastly, the most typical request (50%) was for a profitability model that showed customers willing to pay and investor returns.
Your business plan should be brief with a maximum of 20 slides, and you should talk for a maximum of 20 minutes and answer questions for 30 minutes, the presentation must cover all of the key business issues and this means it should not dwell on the technology or the product too much. Some of the key points it should make include large market, clear customer need, protectable product, clear benefit over competitors, and sound commercial case.
Your name may be on the door, but there’s no way you can do everything yourself and still build a company big enough to attract investors. There is an old adage that says, “a good idea with a bad team is destined to fail, but a mediocre idea with a great team is destined to succeed”, so you should demonstrate why your team, research, technology, and knowledge are the best mix for this business, and you don’t have to bring the entire team with you to your first meeting, but you should offer to make them available later.
Show the investors that you either have sales or can get them, since the longer it will take you to get your product into the marketplace, the longer it will be until the investors get their money back, and all things being equal, investors would rather have their cash out sooner than later.
Sum up each slide (each area of the presentation) into 3-4 main points, don’t overload your presentation with technical “facts” and complicated flow charts, avoid jargon, acronyms, and other industry “catch-terms”, and appeal to your audience as though they were your family, if they can understand your message, so can the investors.
Practice questions and answers with colleagues and advisors beforehand, master the supporting facts, figures and arguments to prepare you for any scenario, and pick the main points you want investors to leave with and answer each question within those main points as a context, and most importantly, select the person on your team with the best presentation skills.
Do your homework, know who will be listening to your presentation, understand their “hot-buttons” and tailor your presentation to them, introduce yourself beforehand and call each person by name when they ask questions, and maintain eye contact when possible and establish a rapport.
Investors are inherently left brain thinkers and therefore look for facts to justify your plan. While an initial pitch is not the place to layout all the detail, it is the place to allude that you have the detail, investors are looking for a few juicy facts to wet their appetite and convince them you possess a real business opportunity worthy of further consideration, since every investor has to justify the deal, and don’t overwhelm your audience with slides full of words and numbers. Less is more, so use graphs, pictures and charts whenever possible to illustrate your point and tell your story.
When you pitch your business to investors you are undertaking one of the most difficult tasks known, which is asking people to part with their money, a lot of money in most cases, and as most investors will tell you, they aren’t investing in the business, they are investing in you. Remember, people do business with individuals they like and trust, and emotion closes the deal because no matter how great your concept, no one will invest if they don’t trust and believe in you, which can only happen if they feel they know you.
Remember, tailor your presentation to each investor, and many entrepreneurs jump right into the presentation when the investor may have just wanted to talk about a few very specific items, so be prepared with the presentation, but find out what the individual investor wants first.
How to Create the Business Plan for Investors
Published February 24, 2009 | 
A business plan is required to gain entry for investor capital, as it’s the future story of your business, and many entrepreneurs have a great story that are not sure how to tell it. If you’re unsure get help, but since no one can create your story for you, experienced advisors can show you how to structure your plan to present your story effectively.
The minimum information your business plan must contain includes a statement of the strategic direction the business is to follow and why that strategy makes sense within the company’s market or industry environment, a detailed description of the products or services to be provided with special emphasis on their proprietary nature, profiles or resumes of the key managers, a brief analysis of the markets served and their outlook, and financial projections on where the business can be taken in sales and profits over three to five years.
A business plan is one, at heart, a story that explains how a business works, and when a business plan doesn’t work, it’s because it fails in either the narrative test or the numbers test, with the narrative test asking “does a story make sense”, and the numbers test asking “does the story at up?”
A business plan is therefore usually broken down into these two test sections, a written section typically called the plan narrative, and a numbers section typically referred to as the financial projections. The projections are simply a numerical representation of the business itself and its marketing strategy that is presented in the plan narrative, and the two sections must be completely entwined.
The narrative of a business plan is usually broken down into three major sections including the business description section, the marketing strategy section, and the management and operations section.
The financial projections section of the plan should be thought of as simply quantifying the effects of what was presented in the plan narrative, although the projections are concerned with the future don’t think of the projections as merely a prediction, instead the projections should be thought of as goal setting with respect to revenues and expenses. We cannot predict the future, precisely why our planning is necessary, but we can make plans, set expectations, and set goals. Projections should include a list of required funds and their uses, a sales forecast with the least monthly for the first year and quarterly for additional years, a variable cost of sales analysis, a fixed expenses operating budget, a projected profit and loss statement, and possibly a projected cash flow statements, a balance sheet, and the breakeven analysis.
If you are trying to secure equity, you cannot spend enough time on the executive summary of your business plan, as this is the first thing, if not the only thing, that gets read by an equity investor. The executive summary is your business plan in miniature, and it should contain the scope of the opportunity and the essence of the plan in less than the page.
After reading the executive summary and making the decision to read on, equity investors look to one section of the plan more than the rest, the management team, and savvy investors know that an experienced and well rounded management team can make all the difference when it comes to success of the business. Your management team section should be very comprehensive citing the background, education, experience, skill sets, and responsibilities for every member of the team, and also you should include all of the outside professionals that you will utilize such as your attorney, accountant, management consultants, etc.
Even well put together plans can flounder because of the failure to appreciate the crucial difference between entrepreneurs and investors, and entrepreneurs focus on the potential of an idea, while investors focused on its risks, which makes the key to raising capital lowering risk, not hyping the upside, and entrepreneurs who say how they’ll reduce risk are the ones who get the capital.
It should be noted that investors in growing companies understand risk is part of the equation, but they want to see evidence that an entrepreneur recognizes the risk factors facing the business and has taken steps to control them, which means addressing questions about market risk, financial risk, and the technological risk, stressing not the dazzling upside, but the return investors can reasonably expect, weighted against a limited and carefully chosen and defined set of risks.
If an investor likes what they see in the management team section, they will usually proceed to the financial projections, and it goes without saying that one of the most important things an investor wants to see is what potential return there might be, and for this they turn to the projected profits of the business, and while your business plan need not discuss the amount of ownership you were willing to give up, it should give the investor some idea of what returns they might receive from their investment in your business.
Finally, your business plan should indicate some exit strategy for the investor. An exit strategy is how the investor will get their original capital back and convert their ownership back to the business, and an exit strategy might include converting equity to debt by getting a bank loan to pay off the investor, or it can also include selling the business, buying out the investor, bringing in other investors to take their place, or even taking the business public.
What is the Criteria for Starting a New Company?
Published February 23, 2009 | 
Start with a terrific idea/concept that should be big enough to make a difference, small enough to be achievable and something you believe in, something you’re willing to dedicate your life to, and it should be something that will attract the interest and energy of others.
Next consider the market size and whether the market is large and growing and does the market have a demonstrable need for the product or service, and will the company be market driven, or basically will anyone care about the product and the fact that it is available.
Understand the competition and how crowded the spaces, are you in the market first, how many people are doing the same thing and how far ahead are they, does your idea have a competitive advantage and is the advantage sustainable, and what lessons can be learned from the competition?
What is the core product one, do you have a proprietary position, is it really a “break-through” product or a “me-to” product, how far have you developed it, is the advantage clearly defined and understood by you and your team, and what can you do to stay competitive once the competition responds?
What is the business model, can you make money and, if so how much, what are your sales channels, can you manage the margins of the business and how sensitive are they to competition, and is the business workable over a long time frame based on only one opportunity?
Can you assemble the right team, since your management team needs to be world class, and does your management team have startup experience, domain or industry experience, and sales experience, who will sit on the board of directors, and who will be your professional service providers and outside advisors?
Can the team conquer adversity, how will the team react to the first major hiccup, has the team proven it can think outside of the box, can you demonstrate that you have learned from past failures, and can the team to find solutions that are creative and not destructive?
Can the business raise money, how much money will be needed for a successful exit of the investors, what sources of capital are likely for each stage of growth, and how much will the initial investors ownership be diluted by bringing in more owners and their money?
What about the legal aspects since savvy investors are always on the lookout for potential legal snags your plan may have such as was the product developed while you were employed somewhere else, are there any employment contracts or non-compete agreements, is there any possible patent or trademark infringement, is there clear ownership of your product or service, and full disclosure of any of these issues is a must to avoid larger problems later on. Be sure and consult with an attorney if you need advice on any such issues.
Are you prepared, can you accept someone else owning your business, will you be able to let someone else take over the management of the business as it grows, are you prepared to begin delegating task that you have performed in the past, and how big and how fast do you want your business to grow?
How to Obtain Venture Capital – Part 2
Published February 22, 2009 | 
Venture capital can be divided into three distinct stages which include early stage, expansion, and acquisition/buyout financing. Early stage or “seed financing” is a relatively small amount of capital provided to an inventor or entrepreneur to prove a concept and to qualify for “startup” capital, and startup financing is provided to companies completing product or service development and initial marketing. These companies are generally in business for less than one year, and have not yet sold their product or service commercially, while “first stage” financing is provided to companies that have expended their initial capital and require funds to initiate full scale manufacturing or servicing.
“Second stage” financing is working capital for the initial expansion of the company that is providing services, or is producing and shipping product, and has growing accounts receivable and inventories, and “third stage” financing or “mezzanine” financing is provided for major expansion of the company whose sales volume is increasing and that is breaking even or profitable, and “bridge” financing helps IPO driven companies to obtain short-term financing that will be repaid when the IPO occurs.
“Acquisition” financing provides funds to finance an acquisition of all, or a portion of another company, and “management/leveraged buyout” financing enables an operating management group to acquire a product line or business, from either a private or public company, and the acquisition maybe for the purchase of selected assets or stock.
The venture capital process roughly breaks down into six phases and they include the qualification of the deal (1 to 2 weeks), performing due diligence (2 weeks to 4 months), deal structure and negotiation (2 weeks to 2 months), approval process (2 to 6 weeks), monitoring (2 to 6 years), and the exit.
The results of the negotiations is documented in what is called a “term sheet”, which is a document summarizing the details of a potential venture capital investment which serves as the basis for a final business agreement, and it usually takes a few weeks to negotiate a term sheet, after which an attorney then takes the term sheet and turns it into a 50 to 100 page legal document.
The approval process involves a full partner review and documentation creation, and the documents then go through two to three draft revisions to get it right over a four to six week period, which can cost about $10,000 to $25,000 to complete a basic set of documents.
A partner of the venture capital firm is usually assigned to monitor your company’s performance and achievement of milestones, and they usually will take a seat on your Board of Directors and will request certain visitation rights, and in addition they will usually request a copy of your financial statements and define other information rights that they deem necessary.
A venture capital firm will usually want to exit out of your business around the fifth year if not sooner, and there are three ways they can get out including your company been sold, where the investors get their money out when the assets are sold off, your company can be taken public when there is a market to sell their ownership shares, and your company can be re-capitalized, where you buy out the investors using the cash flow from your business or with debt financing.