By Hal Turner
Published Oct. 27, 2015
From the Sept. 28 – Oct. 11 issue of the Columbia Regional Business Report
A colleague recently observed that in situations where entrepreneurs are presenting their companies to prospective investors, the most often asked questions revolve around “how to find investors” and “what you have to do to sell your idea or product to attract investment.”
In the very earliest stages of your business (idea, proof of concept, etc.), bootstrapping is often the way to get started. This means using your own resources and the revenues generated by the business to grow.
Having worked with a number of angel and VCs, many of them receive dozens of pitch decks daily. I have seen situations, particularly with first-time entrepreneurs, where it is not uncommon for the startup team to speak with 50 or more investors before closing a round of funding.
My recommendation to your business is that you must be prepared to identify scores of well-qualified investors, advisors, and mentors who could potentially be interested in your company. In South Carolina, I recommend starting your outreach with Capital Angels. This affiliate of the SC Angel Network (SCAN) can provide access to hundreds of qualified investors. This group holds monthly meetings around the state. The presenting companies have been prescreened, assuring that their pitch is interesting to the motivated angel investors. Some of these investors and sponsors of Capital Angels are interested in assisting startups as an advisor or mentor. Capital Angels is also a great source of introduction to larger tier VCs that may be viable options for later growth stage rounds of capital.
How to sell your idea
Once contact has been established with investors, the need to professionally present your business is paramount to attracting investment. Potential investors care about management, markets, and products.
Also having an ownership stake sufficient enough, and, at a reasonable valuation is an investor’s key to determining “is your deal worthwhile.” All of these points are wrapped up in the forward progress demonstrated over time by your business.
Examining this more closely, I like to look at the “reasons for failure” the VCs have observed in their portfolio companies over the life of their various funds. If you know why other businesses have not made it and can bring comfort to the VC that you have addressed these things, it could turn out very positively for you and your company. Here follows a favorite short list of reasons for failure that entrepreneurs have attributed to their early startups in looking back with a lessons learned view:
· We were naive idiots;
· Lack of problem-solution fit, no real team, too much ego;
· No clear or predictable way to sustainability;
· Not something people wanted;
· Lack of financial and operational controls paired w/inexperienced management;
· We didn't solve for sales and distribution.
Well prepared entrepreneurs will assure their startup team doesn’t fall victim to these, or similar reasons, for startup failure. In your pitch, here are key questions investors want you to address:
· What is the problem/opportunity you are addressing? Investors are asking if this is an important problem, is it meaningful and worth solving.
· What is your solution to this? Specifically: what is your idea or product, and how does it solve the problem? How big is the potential market for your solution? Presenting this aspect will entail clear unambiguous language with examples, testimonials, and feedback from early users.
· Business model: how will you generate revenue and profit? Investors want a detailed understanding of your target markets, the fit of the product/solution and market specific sales strategies. Clear demonstration that you can scale the business and maintain cost to provide the solution that does not exceed cost to acquire customers is a must.
· Underlying technology: your secret sauce, IP barriers to entry? This will require that you explain in detail how your solution compares to the competition and the basis of its sustainable differentiation.
· Management Team and their strengths: This is not just your resume. It is establishing a trustful relationship that the capability is evident in you and your team. Investors will also want to understand if there are there gaps to be filled and how you intend to fill them.
· Achievements to date and key future milestones: This point is very much about management/leadership rigor, accountability, and transparency. Investors will determine “can you operate the business” from this section.
· Financial Projections (3-year forecast aligned with milestones) and Deal Terms (how much do you want and what are you offering in exchange?): You must build a financial model that demonstrates your experiences in the business, the assumptions you have made, and your rationale for choices made. From your model (inclusive of milestones and assumptions) you will need to defend valuation, address shareholder and board control, as well as a deal structure, along with a vast array of important items. Experienced legal counsel to assist in these areas is highly advisable.
Angels and VCs can be difficult customers … they have generally seen it all. Everything in startups is on a case-by-case basis. Prospective investors must understand what your company is, its growth prospects, potential for an eventual exit, and your reasonableness as an entrepreneur for what you are asking. You will hear “Nos.” At some point if you persevere, learn and adapt, you will hear “Yes” … that makes it all worthwhile.
If you’d like to further discuss your current business’s plans, please contact me.
Hal Turner may be reached at Hal@TurnerTelecom.com . Twitter:@TurnerHal