What Should You Divulge When Asking for Investment Capital?
If your startup is the next big thing, but you want venture capital, you can start smiling. Yes, financing has been difficult to obtain in recent years. But entrepreneurs wanting venture capital have reasons for at least a small celebration – the money is starting to flow again after the Great Recession took its toll.
The National Venture Capital Association (NVCA) indicates the trend is upward, ostensibly, for multiple reasons: There’s been an improvement in exit markets and portfolio valuations, and VC performance has been better than the public markets. There are also other positives – indications of an increase in angel funding, and a boom in initial public offerings. NVCA based its conclusions on data from 1,290 VC funds.
For many startups, it makes sense to grow organically. But for others, the answer is to seek capital.
So how do you take advantage of this improvement in financing? Certainly, it’s critical to make the right presentation to investors.
Such entrepreneurs typically ask noted financial strategist Joey Tamer how much information they should reveal for venture or angel capital. They turn to her because she’s a strategic consultant to entrepreneurs in software, Internet, technology and digital media.
Ms. Tamer says entrepreneurs also typically express these concerns:
- “I’m not quite ready for a big investment until I get more early traction.”
- “Will I weaken my position by showing how much I need and how soon I need it?”
- “Will what I’m looking for move around the community to everyone and shouldn’t I be selective in what I say?”
What’s her response?
“The answer is to stand up and lay out your plans and your rationale,” she blogged in explaining how much an entrepreneur should tell investors when pitching for capital. “You must treat all investors as if they will become your partners, starting immediately. If you are taking a pitch meeting, you might as well pitch.”
She astutely reminds clients that investors of all stripes do their due diligence. She warns you risk not getting a second meeting, if you aren’t candid and informative.
“It is acceptable to take a short meeting — 20 minutes maximum – or two with potential investors, to get on their radar about your idea, even before you are ready to approach them for an investment,” she explains. “You can report back on your progress of reaching your benchmarks. This establishes an early relationship with them, and allows them to watch you deliver the benchmarks you promised.”
For an example, she suggests a possible scenario:
“Suppose you are looking for angel capital now, and you are presenting to an early stage boutique venture capitalist, who invests in revenue-generating companies, but who sometimes will step down to a seed round of a few hundred thousand dollars.”
Her recommendation:
“Pitch what you want now: say $250,000, and show what you will use the funds for, and what benchmark you will reach with that seed round,” she says. “Your potential investor might provide it and add a deal structure to his position for the next round, giving him right of first look, or protecting his investment in certain ways, even setting aside all or part of your next round.”
What’s next?
“Next you say you want to raise a Series A round after some specified consecutive months of growth,” she asserts. “You say when you expect that moment to arrive (what Quarter of what year), and what benchmark you will reach in what Quarter of what year with that Series A round.
“You can say that you will look for a growth round following Series A, once you can track the speed of your growth, and can assess competition and market conditions at that time,” she adds.
Ms. Tamer says this illustrates that you understand the big picture – that you fully grasp investors’ concerns about scalability and their likely return on their investment.
“If you look to your investors as long-term partners, this early truth telling and planning sets your relationship on the right path,” she points out.
(Note: I’m very acquainted with Ms. Tamer’s expertise. She and I are members of an organization, Consultants West, www.consultantswest.com.)
From the Coach’s Corner, in addition to Ms. Tamer’s Web site, www.joeytamer.com, here are informative resource links:
What No One Tells You about Raising Investment Capital
Eight Strategies to Consider Before Starting A Tech Business
“If you are beginning your company with Other People’s Money, it is good to have a strong relationship with the Other People and their Money.”
-Joey Tamer
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Terry Corbell is a business-performance consultant and profit professional. Click here to see his management services (many are available online). For a complementary chat about your business situation or to schedule Terry Corbell as a speaker, why don’t you contact him today?
21 Tips on How to Start a Business in a Recession
Conventional wisdom probably indicates a recession is not the best time to start a business. But if you have ever dreamed about it, there might be good reasons why the seed to start a business in a recession was planted in your mind.
Good ideas are worth a lot of money, especially in a recession. Many successful companies were launched in economic downturns. They range from General Electric to Hewlett-Packard.
A recession can be a good time if you have a great idea and have entrepreneurial instincts. Entrepreneurial personalities do not let fear run their lives.
Think of fear as an acronym: Frantic effort to avoid responsibility. Entrepreneur-types see a good idea as a responsibility to act. Plus, a recession motivates them to work harder and smarter on developing and executing their ideas.
True, consumer confidence is down, home foreclosures are increasing and the business climate is tepid.
As many companies cut back, new business opportunities appear. But you’ll have to hustle. Successful entrepreneurs do their homework and work as hard as dedicated athletes who train for high performance. Yes, there are numerous pitfalls for startups, and it will probably be the most difficult undertaking of your life.
Here are the 21 tips on how to start a business in a recession:
1. Pick the right niche. You’ll need to enjoy your work and be passionate about it in order to succeed.
2. Take baby steps. Strategize now while working at your present job. Don’t quit or wait for a layoff. If you’re out-of-work, money is problematic but you might not have a choice. Consider all your options.
3. Develop your vision. Write a one-page vision, which explains where you will want to be. Then, consider a business plan for a roadmap. Do your research and become an expert in your industry. Know your competition.
To determine where you are business-wise, conduct a SWOT analysis to assess your strengths, weaknesses, opportunities and threats. Some firms then develop and implement a strategic plan. A business plan is a management tool vis-a-vis a strategic plan, which is a leadership tool.
This also means learning accounting techniques, forecasting your cash flow, and considering buying good bookkeeping software.
4. Seek expertise. Read about successful entrepreneurs. Look for a mentor and a qualified sounding board.
Also, contact a Small Business Development Center. The organization has countless offices throughout the country.
Here’s the link: http://www.sba.gov/aboutsba/sbaprograms/sbdc/index.html
5. Get a head start on marketing and selling. Line up customers before you launch. Always remember: Cash flow is paramount.
You might want to read my column, “The Seven Steps to Higher Sales,” http://www.bizcoachinfo.com/archives/27
6. Market and sell every day. Establish a marketing budget and stay with it. Many companies lose market share by cutting advertising and promotion. Implement strong public relations.
Make yourself known to your local public officials and news media. Suggest to reporters that they consider interviewing you when they want an authority in your niche. Look for ways to multiple sales with your customers.
Consider networking with larger companies – many outsource to micro-businesses.
7. Make customer service a priority. When customers take their businesses elsewhere, my research shows 7o percent of the time it is because they feel taken for granted.
Practice great customer service for referrals and repeat business. Survey your customers. When a customer pays you a compliment, ask a question such as this: “What are the names of two people just like you who might appreciate my company’s services.” Be sure to follow-up with the referrals.
If you plan to free-lance or become a consultant, consider my “60 Ground Rules for Effective Client Service,” http://www.bizcoachinfo.com/archives/106
8. Harness the power of the Internet. Learn blogging and search engine optimization techniques, and how to develop online press releases. A strong Web presence is paramount.
9. Line up your resources. Seek references from trusted associates for a good accountant and lawyer. Plan your policies and procedures. Learn to manage your books.
10. Arrange your financing. You’re unlikely to get a bank loan without a track record. Besides, it’s more economical to use your own resources and start from scratch. Avoid reliance on credit cards and home equity.
If you are seeking investors, consider another column I wrote: “What No One Tells You about Raising Investment Capital” in an interview with leading consultant Joey Tamer: http://www.bizcoachinfo.com/archives/1177
11. Appearances matter. Look professional – pick a good business name, logo, memorable tagline, and a branding-benefit statement that adequately tell your story. That also means quality business cards and stationery, a Web site, and email address using your domain name.
12. Understand legal requirements. That includes business license and taxes at the local, state and IRS. If you’re planning to hire employees, check with your appropriate state agency.
13. Consider buying a micro business. Avoid buying a company that’s losing money unless you’re certain you’ll succeed. Consider proposing owner-financing in a leveraged buyout. But do your due diligence. Walk away from a prospective seller who shows even a hint of bad practices.
14. Develop backup plans for equipment and operations. You’ll never know when bad weather or misfortune will strike. Fortune favors a prepared mind and business.
15. If you plan to hire employees, learn best practices in human resources. Hire the best workers, who demonstrate the 3 A’s – attitude, appearance and ability. (Note a good attitude is most important.)
Motivate them to be productive and to make your business look good in the marketplace.
16. Location. Just as in buying a home, there are key points to remember about where to locate (scroll down to the last paragraph for a link).
17. Keep sources of inspiration handy. Bone up on slogans and quotations to keep you motivated.
18. Community service. In addition to your regular routine of hard work, recreation and exercise, you’ll find it gratifying to devote time, talent and/or money to a worthy cause to lessen the misery in your community.
19. Network and join your local chamber and industry associations. Develop relationships and become a spokesperson for your industry. Become known as the “go-to” person.
And get involved in public policy when events adversely affect your industry. Government agencies are not known for enhancing or even protecting entrepreneurs’ economic and political liberties.
20. Budget time for continuous improvement. It’s vital to regularly reflect on your business and how to evolve in the marketplace. Review your SWOT analysis annually, and fine-tune your planning.
21. Remember to play and rejuvenate your mind. That means you should exercise, engage in your hobbies and do whatever works for you to stay mentally healthy.
Again, if you start a business, it will be the hardest thing you will ever do.
Yes, it’s a lot of footwork. But if you start with these rules, you’ll enjoy a competitive edge.
From the Coach’s Corner, to help you determine your entrepreneurial capabilities, here’s a link to a Small Business Administration site:
http://www.sba.gov/assessmenttool/index.html
For more insights on starting a business, I was honored when New York Times columnist Brent Bowers featured me.
Here are links to the columns:
- ”Been There… Done That… Here’s How” http://www.nytimes.com/2008/02/26/business/smallbusiness/26hunt.html? _r=1
- “Advice on Taking an Entrepreneurial Leap” (including tips on where to locate a business) http://www.nytimes.com/2008/03/26/business/smallbusiness/26hunt.html
