How to Attract an Angel Investor
Now that a University of New Hampshire study indicates early stage financing by angel investors is more advantageous than venture capital money, what now? How do you get the angel funds?
Noted angel investor John B. Dimmer offers seven tips.
The 2009 study – “Initial Public Offerings and Pre-IPO Shareholders: Angels Versus Venture Capitalists” – shows evidence of under-pricing by venture-supported IPO groups in initial public offerings vis-à-vis angel investors. The study was conducted by Professors William C. Johnson and Jeffrey E. Sohl.
So what does it take to land an angel investment? Noted angel investor John B. Dimmer offers seven tips.
Acknowledging the difficulties of entrepreneurship, the successful angel investor in Tacoma, WA, who likes technology, says he looks for tenacity: “I want people with the moral integrity and intestinal fortitude to make the difficult journey through the Valley of the Shadow of Death and come out the other side,” says Mr. Dimmer. “It’s fun to greet them on the other side, hand them a margarita, and toast the success of their achievements.”
In the third installment of my profile of Mr. Dimmer’s insights, he graciously explains his comprehensive approach in how he selects investments:
Q: What mistakes do new companies make in applying for funding?
A: As I indicated, people are the single most important element in making an investment. As such, I generally don’t see business plans unless I know the people who are involved, or I know someone who knows the people involved. I think that to a large extent, most venture investors share this philosophy.
The business plan always comes first. I want to see a compelling market opportunity, and I want to know how the company intends to capture a meaningful share of that market. Mistakes I often see in this segment of the presentation almost always center around unrealistic sales assumptions. Overly aggressive projections relative to the percentage of market share the company will capture is one common mistake. Another mistake is a fundamental lack of understanding of the sales cycle, and the organizational structure required to produce the target revenues.
Q: Preference on projections?
A: Three years worth of financial projections is adequate, but five years is preferred. I would like to see the first year broken down into some detail, but future years can be prepared on a condensed basis. Having been involved with a myriad of start-up companies, I know that the financial projections will not be accurate; however, the forecasts provide valuable insight into the thought process of the people involved.
The most common mistake companies make in this area is a failure to understand and exhibit the financial metrics of their particular business. For example, software companies should normally generate 90 percent gross margins. If you are coming to me with a software investment, and your forecasts show a 55 percent gross margin, unless you have a very good answer as to why you deviate from the norm and how you are going to make money, I will assume that your business will fail because you don’t understand the financial metrics. Likewise, if you present me with an opportunity in the professional services space, which normally generates 50 percent gross margins, and you tell me that you are going to generate an 85 percent gross margin, I will assume you don’t know your financial metrics and pass on the opportunity.
Q: Structuring the deal?
A: Angel investing is risky business, with many of the portfolio companies ultimately failing. Accordingly, angel investors need to see an opportunity for substantial returns in order to offset the losses on bad deals and generate a reasonable return on the entire portfolio. What kind of a return is required? Well, a lot of that depends upon the timeline between the initial investment and exit, but traditional metrics suggest angels are targeting five to ten times their money back from a successful deal. It should be a given that any company approaching me for funding will have established the asking price for my initial investment.
Q: Exit strategy in proposals?
A: This should include the type of exit transaction, which may be a merger, an IPO, or something else, the timing associated with the exit, and the valuation metrics at exit. The mistakes I see here fall into one of two categories, those being an initial valuation that is set too high, or an unrealistic assumption about the exit timing and valuations. As the exit strategy is simply a forecast of a future event, my solution to either of these problems would be to try and negotiate a lower initial valuation.
As an example, I recently looked at a company that had their financing pulled out from under them. They had a big business opportunity ready to go, and needed capital to execute. While I liked their business plan, I felt their valuation was exceptionally high. I compared their valuation metrics with those of similar publicly-traded companies, and found that I could own these public companies for about 20 percent of the price they were asking. I ultimately went back to them with a proposal, but slashed their valuations. They weren’t too happy and so went looking for money elsewhere, presumably under different deal terms.
Q: Legal controls?
A: I believe that items such as voting rights or preference provisions should be allocated and enjoyed equally between all the parties involved with a company. Periodically I see instances where the founders have preferential rights to voting or liquidation. I’d like to think that we are all on the same team, which means if one person wins, we all win. Preferences then make it possible for one party to win, and another to lose, cause the creation of multiple agendas and ultimately lead to failure.
Q: What are the components of a successful presentation?
A: It’s pretty simple: brevity, clarity, honesty. A quality opportunity should be somewhat self-evident. I might need a little help starting down the path, but if I don’t pick up on it pretty quickly, I’m never going to buy into the deal. So, don’t be too long, don’t get overly complicated, and don’t try to pull a fast one on me.
The other thing I am going to look for in a presentation is the ability of the entrepreneur to think on their feet. If you really know your stuff, this shouldn’t be too hard. I periodically like to ask questions where I already know the answer just to see if the entrepreneur knows what they are talking about. Likewise, I sometimes like to ask questions that are outside the box just to see how the entrepreneur handles obtuse ideas. If you know your stuff, you can digest the inquiry and quickly formulate a meaningful response. If you stumble, you don’t know your stuff, and if you don’t know your stuff, I don’t want to give you any of my money.
Q: What trends would you care to predict?
A: I do not consider myself a visionary, but I’ve certainly worked with visionaries. My strengths come in the form of listening and then determining if there is a realistic opportunity for the vision to be commercially implemented within a reasonable time period. The only prediction I will make is that as our world advances, each advancement creates more opportunities…More opportunities for services, products, and technologies to be developed and delivered to consumers. The world of the entrepreneur is expanding at an ever-increasing rate, and I don’t see this changing any time soon.
The other columns featuring Mr. Dimmer:
Investor: Tips for Increasing Cash Flow, Profits
How Investor Has Fun in Business and Technology
From the Coach’s Corner, see the University of New Hampshire study here.
“If a business does well, the stock eventually follows.”
-Warren Buffett
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Columnist Terry Corbell is also a business-performance consultant and profit professional. Click here to see his management services (many are available online). For a complimentary chat about your business situation or to schedule Terry Corbell as a speaker, why don’t you contact him today?
Angel Investor: Tips for Increasing Cash Flow, Profits
For a growing business, cash flow is crucial for profitability. That’s also true for the biggest companies and sectors traded on Wall Street – airlines, cars, financial services, oil or technology.
Every company is concerned about cash flow; but in 2008, 128 of the Fortune 500 companies in the nation had red ink. They include General Motors, Citigroup, Motorola, AIG, Merrill Lynch, ConocoPhillips, and Time Warner.
Cash flow enables you to make productive decisions to navigate and grow in the competitive marketplace.
No one knows that better than angel investor John B. Dimmer, the managing member in FIRS Management LLC, a private investment firm based in Tacoma, WA. He is also a director at three companies and has extensive management experience.
Here is a sample of his cash-flow solutions:
Q: How do you recommend predicting a cash-flow crunch in time to do something about it?
A: You need monthly income and expense forecasts that are established at the beginning of the business year. These must be realistic numbers that all of the management staff has agreed are reasonable. The second things you need are timely and accurate financial statements.
It is very much like planning a road trip in the car. You are trying to get from point A to point B, so you plot a route. You know that there are landmarks along the way. Every now and then you need to stop and check for these landmarks. If they show up where you expect them, you know you are on the right track. If not, you need to evaluate how far off course you are, and take corrective action.
Q: What strategic process do you recommend to evaluate the causes of cash deficits? What are the most promising solutions?
A: Getting back to our roadmap analogy, if you don’t see a landmark that should be there, or you find a new landmark that wasn’t on the original plan, you need a process for getting back on track. You need to take the time to evaluate where you are, where you should be, and what went wrong.
When you are off plan, there are some fundamental questions that need to be asked: Was the original plan flawed? Has there been a fundamental shift in the business such that the original plan is no longer applicable? Did we make an execution error? When, where, and what was it? Can it be corrected? What are the critical variables with respect to getting back on plan?
Usually this involves one primary variable, which is money. Whatever solution you take, you need to make sure you have enough money to fund it through implementation.
Q: How do you recommend finding creative ways to keep the business alive until sales pick up?
A: One of the mistakes I often see are entrepreneurs who staff their organizations under the assumption of optimum activity. The truth is that there are cycles to business. While not all business can use contract help, I like to try and have my companies staffed to a smoothed-average that is just above the troughs and just below the peaks. In this fashion, you can quickly and effectively reduce your labor costs in times of a slowdown without causing a morale-crisis with your permanent employees. I would also use slower times to beef up on training in preparation for when the good times return.
Finally, encourage your staff to make things happen. When we hit a slowdown in the car business, we ask our sales staff to get on the phone and start calling people. This usually starts with former customers and takes the form of a friendly call simply to inquire how everything is going with their car. Often times, you discover that they love their car, and they have a friend who is interested in buying a new car. Sometimes you find that they love their car and they want to buy another. And sometimes you find that there is a problem. Problems, however, create opportunities. If you invite them to come in, and then solve their problem, they will remember that you were proactive. They will tell their friends about their experience, and their friend will come and see you for their car needs.
Q: What about negotiating with investors or other financial supporters until cash flows increase?
A: Investors hate bad surprises, especially when the surprise is accompanied by an emergency need for funds. Assuming you created the roadmap, and are tracking your progress, you should be able to see the bump in the road well before you actually hit the bump. Most investors are business people who have been down the road before and know that everything is not smooth sailing. They will appreciate the fact that you have a plan, that you are tracking your results against the plan, and that you have foreseen a problem before it hits.
Generally cash flow problems mean you need to borrow more money or raise more equity. If such is the case, have your presentation for raising new money ready to go so that you can transition from the communication stage to the pitch. Be humble, because the last thing I really want to hear as an investor is how smart you are and how great everything is going when, in fact, you are off plan and running out of money.
Part of the negotiation is an acknowledgement of the problem, a rational analysis and a well-crafted solution. You, as the owner, may need to take a bit of a hit in order to implement a solution. This might come in the form of a down round of fundraising where you are force to make up the dilution to the other shareholders out of your own holdings. Know what you are and are not willing to do. If you are forced to give up something to keep the company alive, figure out how to get it back, perhaps via options, if your revised plan was the proper call and the company comes roaring back.
Q: How do you know when it’s time to close or sell the business?
A: I always want to stay in the game, even when it is two outs in the bottom of the ninth inning, you are down by five runs, and the count is full, there is still a chance you can pull off a win. Nonetheless, I try to keep entrepreneurs from getting in so deep that if their company fails, they are wiped out. I’ve been involved with two companies where I had to tell the entrepreneur that they shouldn’t put any more money into the operation.
In one of those instances, we were able to locate a buyer for the company. The purchaser was a publicly traded entity that, since the purchase, has taken a bit of a down-turn, so the jury is still out as to whether the entrepreneur will come out whole. Nonetheless, it was a better option than closing the doors. With the other company, we have what we feel is great technology; we just can’t seem to get a revenue stream developed. We are in the process of procuring a patent, and think that it will have good commercial value once the patent is issued. Accordingly, we have put the operational aspect of the company in suspense, and are pursuing acquisition opportunities. The biggest risk on this strategy is a failure to cut a deal followed by an impotent patent.
I never advocate simply closing the doors. If you are doing proper planning, you should see the problem coming down the road. There should always be something saleable about your company, even if it is less than a full recovery.
From the Coach’s Corner, for more on Mr. Dimmer:
How to Attract an Angel Investor
How Investor Has Fun in Business and Technology
“I buy expensive suits. They just look cheap on me.”
-Warren Buffett
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Columnist Terry Corbell is also a business-performance consultant and profit professional. Click here to see his management services (many are available online). For a complimentary chat about your business situation or to schedule Terry Corbell as a speaker, why don’t you contact him today?
How Investor Has Fun in Business and Technology
When John B. Dimmer talks, people listen. Mr. Dimmer is the managing member in a Tacoma, Washington-based private investment company, FIRS Management LLC.
He also serves on the board of directors at three companies:
- Idaho Trust Bancorp, a bank holding company based in Boise, Idaho
- Konnects Software, a firm that provides business networking applications harnessing internet technologies
- PBJ Holdings, an automobile dealership holding company
His community service includes the Business Advisory Council for the Lundquist College of Business at the University of Oregon and he serves as the Entrepreneur on Campus at the school’s Business Center for Entrepreneurship.
At FIRS, he’s invested in projects for the last nine years with his father, John C. Dimmer, who is also well-regarded. He has served as a director at KeyCorp, Multicare Health System, Stellar Industrial Supply Company, and others. He’s also a Trustee for the Museum of Flight, and a member of the Advisory Board for the University of Washington Tacoma.
The younger Dimmer is also a co-founder of the Tacoma Angel Network, www.tacomaangelnetwork.com, a non-profit organization that brings together accredited investors with companies seeking to raise private equity capital.
Mr. Dimmer had a rich background prior to FIRS. He was a director of two technology companies and was president of Free Range Media, a successful internet company.
He was the manager of commercial surety at Reliance Surety Company, where he worked for nine years. “It was quite an education in financial analysis, management analysis and legal – I learned how to read contracts.”
Right out of college and armed with a B.S. in Finance from the University of Oregon, Dimmer began learning his craft at Puget Sound Bank, which included consumer lending and credit collection.
At Clover Park High School in Lakewood, WA, he was an All American in golf
Today, as a scratch golfer, he plans his putts like intricate business deals. But his passion is racing. He races in international historic racing events in his “ex-Jackie Stewart 1971 Tyrrell Ford 004 Formula 1 car.” The circuit’s vintage 1966-1983 models reach 200 miles per hour, www.historicgrandprix.com/home.htm.
So Mr. Dimmer, married with three children, is an interesting businessperson. Here’s an excerpt of some of his answers to other questions:
Q: What business philosophies drive you?
A: I’ve always believed that if you want something badly enough, with hard work and commitment you can achieve your objective.
I believe that integrity is everything. You must be honest and deal fairly with your customers as they are your lifeblood. You must also be honest and deal fairly with your employees. If you try to spin certain situations your employees will immediately recognize it and you will slowly erode their trust and thus lose your ability to lead.
We get involved with a lot of different activities at FIRS, but the overriding requirement is that it has got to be fun.
Q: What’s been the key to success for you?
A: Hmm, well, I certainly feel that I’ve worked hard, and I also feel that I’ve been lucky. I really think the key, however, is that I have always had an objective and a plan for meeting that objective. It is very difficult to achieve success when you don’t know where you are going, or know where you want to be but don’t have any idea how to get there.
Q: What, if any, are your favorite business quotes?
A: My favorite quote actually comes from a fortune cookie I got at lunch one day when I was deep in the throes of trying to build Free Range Media into a successful business. It said, “The greatest joy in life is doing what others say you cannot do.” I am a very competitive person and like it when people underestimate my capabilities. Proving them wrong is such fun!
Q: What were your family’s underwater ventures involving the salvaging of historic shipwrecks?
A: The short version is that my dad got involved in funding a treasure hunting expedition off the coast of Uruguay. After a few years of operations, with little in the way of results, my dad asked me to go check everything out. I can promise you that there was more than enough sunken treasure to make a salver very, very wealthy. Unfortunately, Uruguay would not let us export our recoveries. Without the ability to export and sell the recoveries, we had no way to make a return on our investment or fund future operations. So I shut the whole thing down.
We had a salvage vessel that was specifically built for our operation that we were returning to the U.S. for sale. During the return voyage, it ran into a hurricane off the coast of Columbia. The bad news is that the vessel sank (no loss of life in the sinking). The good news is that we had it insured for twice the value, so we almost recovered all of the money we put into the whole operation. In terms of what was accomplished, our operation discovered the wreck of the Agamemnon in Maldonado Bay in Punta del Este, Uruguay.
The Agamemnon was Lord Nelson’s first ship-of-the-line command, and participated in the Battle of Trafalgar. We recovered a cannon that has been documented as the only cannon known to be in existence that was fired at the Battle of Trafalgar. Needless to say, the British were very interested in acquiring the cannon. Unfortunately, given Uruguay’s refusal to allow us to export the cannon, it is sitting in some warehouse in Montevideo.
Q: How did you get involved in racing?
A: I first became involved as a result of the Tacoma Grand Prix held in 1986. I met a driver by the name of Parker Johnstone, and we became friends. I was interested in driving cars, and he helped me navigate the requirements for licensing.
Q: Who is your car-dealer partner in Oregon?
A: My partner in the Honda dealership is Parker Johnstone, which is probably a good thing since the dealership is called, ‘Parker Johnstone’s Wilsonville Honda!’ Parker and I have continued to remain good friends since that chance meeting at the 1986 Tacoma Grand Prix. Parker went on to have a very successful professional racing career with Honda during which time I was his business manager. He is an individual of the highest moral character, and is doing a terrific job of running the dealership.
Q: What do you read or what are your favorite sources of information?
A: I spend a bit of time surfing the web, and pick up quite a bit of information there. I subscribe to BusinessWeek and The Wall Street Journal. And I talk to a lot of folks. I enjoy getting different people’s insights into companies and opportunities.
From the Coach’s Corner, here are more tips from Mr. Dimmer:
How to Attract an Angel Investor
Investor: Tips for Increasing Cash Flow, Profits
“Be careful the environment you choose for it will shape you; be careful the friends you choose for you will become like them.”
-W. Clement Stone
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Columnist Terry Corbell is also a business-performance consultant and profit professional. Click here to see his management services (many are available online). For a complimentary chat about your business situation or to schedule Terry Corbell as a speaker, why don’t you contact him today?
Why Women Receive Less Angel Funding Than Men
You’re a woman with a great business idea, but you’re short on funds. You’ve also heard that it’s tough for female entrepreneurs to get financing from an angel investor – someone who funds early-stage companies.
Ironically, female entrepreneurs receive less angel funding than men, even though they launch more businesses, according to a study co-authored by a finance professor, Dr. John Becker-Blease, at Washington State University, Vancouver, www.vancouver.wsu.edu.
The study is entitled: “Do women-owned businesses have equal access to angel capital?”
Dr. Becker-Blease conducted the study with Dr. Jeffrey E. Sohl, who directs The Center for Venture Research at the University of New Hampshire, www.wsbe.unh.edu/cvr, in 2007. Dr. Becker-Blease formerly worked at the center prior to joining WSU where he researches entrepreneurship, corporate governance and women in business.
What is their study’s first insight on why women receive less angel capital? Fewer women than men actually apply for angel funds.
For those who do apply, Dr. Becker-Blease reminds us that investors aren’t interested in backing small retail-type micro-businesses.
“We found that women entrepreneurs submitted an average of nine percent of proposals received by our angel groups during the sample,” he said. “Indeed, of the proposals received, both women and men had an equal chance of receiving funding (about a 14 percent chance).”
Here is an excerpt of the interview with Dr. Becker-Blease:
Q: At what rates do women start business vs. men?
A: The rate of increase in the number of businesses in which women were at least 50 percent owners is quite a bit higher than the increase in men-owned-businesses. The National Foundation of Women Business Owners reports a 17 percent increase in the number of women-owned firms between 1997 and 2004, compared to an overall increase of only nine percent in the total number of firms.
Q: Why do fewer women seek capital than men?
A: Three possible answers. 1. Women entrepreneurs are not interested because the kinds of businesses they tend to start such as retail and service businesses are not the type that most angel investors care to fund. 2. Women entrepreneurs do not know who to ask or how to go about seeking capital. This is a by-product of their network composition. Most angel investors tend to be men (roughly 90 percent) and since women entrepreneurs are not typically part of their network, women do not know how to contact these angels. 3. There is discrimination, or perceived discrimination, in the angel capital market against women and therefore only those women with the best networks or those with the most promising business ventures will find it worth their time and effort to seek angel funding. I should note that we do not find evidence of discrimination.
Q: Why are women likely to seek funds from women angels?
A: It is not simple for the average entrepreneur to find an individual or group of individuals who are willing and able to provide two or three hundred thousand dollars worth of equity capital. Instead, angel investing appears to occur primarily within fairly closed networks.
Homophily is the tendency of individuals to interact with others who are similar to themselves, and sex-based homophily can be particularly strong. We do find strong evidence of homophily in the seeking of angel capital; men appear to seek funds from angel groups comprised disproportionately of men and women appear to seek funds from angel groups comprised disproportionately of women.
Q: How do women entrepreneurs fare compared to men in receiving funds?
A: The data suggest about the same. We have some evidence that angel groups that invest in a relatively high proportion of women-owned-businesses tend to invest more funds than other angel groups. This may be due to the kinds of businesses these groups fund, the stage of the investment, or just a quirk in the data.
Q: Why is so little known about women receiving private equity investors?
A: From the supply-side, since angel investors are not organized around a formal market, researchers have difficulty identifying them and even when we do, many angel investors are reluctant or have such heavy demands on their time that they cannot participate in academic studies. From the demand-side, identifying serious aspiring entrepreneurs, especially those in the kinds of industries that angel capitalists tend to invest in (that is, high growth) is perhaps even more challenging.
Q: What other data did you uncover?
A: As an interesting aside, in a current project that Jeff and I are working on together, we find evidence that angel groups comprised disproportionately of men accept a higher proportion of women-sponsored proposals than do angel groups comprised disproportionately of women.
Q: What questions did your research leave unanswered?
A: We need to examine much more carefully the demand-side of the market. Why are there so few women entrepreneurs who seek funding? For a given level of quality of proposal, are men and women equally likely to receive funding?
Q: What advice would you offer women entrepreneurs seeking funds?
A: There is a growing awareness that women entrepreneurs may face added challenges in acquiring early-stage equity financing. This has led to the creation of women-focused angel groups such as The Women’s Investment Network in Portland, Oregon, which is part of the Oregon Entrepreneurs Network, www.oen.org, or the Seraph Capital Forum in Seattle, www.seraphcapital.com. Make use of their resources and any forums offered.
Well put.
From the Coach’s Corner, here’s more angel-funding advice from an expert who warns that many novice women entrepreneurs underestimate the marketplace:
“Tell women entrepreneurs they’ll encounter major competition,” said Neil Delisanti, who retired as a counselor with the Small Business Development Center in Tacoma, WA, www.tacomabusinesscenter.org, and as a business professor at University of Puget Sound. “Advise them to assess their strengths and weaknesses to determine their competitive advantages, and to develop operating strategies.”
Mr. Delisanti said he’s observed some women are too empathetic to customers, but are more organized than men in financial and other administrative matters.
For information on raising capital in turbulent times, visit: What No One Tells You about Raising Investment Capital
“Being a CEO still means sitting across the table from big institutional investors and showing your leadership and having them believe in you.”
-Christie Hefner
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Columnist Terry Corbell is also a business-performance consultant and profit professional. Click here to see his management services (many are available online). For a complimentary chat about your business situation or to schedule Terry Corbell as a speaker, why don’t you contact him today?
What No One Tells You about Raising Investment Capital
Investment capital is available during all economic cycles, according to leading consultant Joey Tamer.
Ms. Tamer consults to capitalized start ups and in-house ventures within the Fortune 500 to launch, build and expand technology companies. She advises product and service companies on their growth and profitability. She has consulted since the early days of the PC through to her Web 2.0 and Web 3.0 clients of today.
Her clients have included: J.P. Morgan Capital, Sony, IBM, Apple, Hearst, Blockbuster, Technicolor, Harper Collins, NEC, Time-Warner, Agfa and Scitex, and many early stage ventures such as Earthweb (IPO 1998), and iSuppli.
As you might expect, she’s regularly invited to chair venture and investment panels in technology sectors.
“In good times, risk capital is available from all sources, and they compete and sometimes share hot deals with each other; the practice is termed syndication. In downturns, venture money is available from venture capitalists who have raised their funds recently, in the past year or so, and have not yet deployed all the capital,” said Ms. Tamer. “In bad times, funds that are near the end of their seven- to-10-year cycle will use their capital to safeguard existing portfolio companies and will commit to fewer, if any, new investments.”
Ms. Tamer has proven approaches for raising money.
“Capital strategies allow the CEO to know what kind of money – private, angel, VC, strategic corporate – to take at what time to drive up the company’s valuation, and to keep control of the board,” she said. “These strategies are sensitive to economic times as well. I do not find capital for companies – that’s the job of the CEO. Another major strategy I prefer involves identifying sources of non-equity capital – strategic alliances and alternative revenue sources, bringing in early revenue rather than giving up equity at a low valuation.”
She graciously answered questions about raising funds:
Q: Regarding your five strategies for raising investment capital, you suggest creating a “unique product or service in an empty space.”
A:I often help my clients define and present their unique value proposition (UVP) – the special technology or service offering or business model that makes their company different, more valuable, and more likely to succeed than their competitors. CEOs are often too close to the business to do this easily.
During one “down” year, I defined one company’s UVP and wrote its pitch piece for its first round of outside capital, and with these documents they sold the company within eight months during a difficult investment year. Sometimes the right pitch to the right audience works regardless of the economic conditions.
Q: You warn about defensibility.
A: The product or service must be defensible from “copy cats.” Companies must beware of “proving the market,” only to have a large company duplicate their efforts and take away their market share.
Q: What do you mean about scalability?
A: The product or service must grow quickly enough (scale) to offer institutional investors a 10-times return on their investment in the first five years. Private investors are sometimes more patient or expect a bit less of a multiplier.
Q: What is your thinking about management?
A:Investors trust management teams with a proven track record of prior successes. First-time entrepreneurs should gain commitments from experienced players and advisors.
Q: How much capital should be requested?
A:Companies asking for too-little capital often are dismissed as naïve. Capital strategies should define the current round and the subsequent round that will be needed to reach break-even and to predict profitability. Also, CEOs must understand the criteria required by each kind of investor – private, angel, boutique VCs, tier-one VCs, corporate strategic money, and when it is best to engage each kind.
Q: What do you recommend to get investors’ attention?
A: Here are four strategies:
- CEOs must master a 30-second sound bite of their unique value proposition and the potential return on investment (ROI) for investors. CEOs must be able to speak and write this sound bite in one or two sentences. For investors, this is the uniqueness that will result in a significant return on investment.
- Write a pitch piece – a business plan in sound bites. The secret sauce of this pitch piece is to tell the story addressing the investors’ interests in clear powerful language. Use text (3 pages maximum) or PowerPoint (10 slides maximum). Tell the value story to the investors, not the whole story. Have full financials prepared. Investors read a summary, then the financials. Then, if they are interested, they read more or ask more. Long business plans are rarely read these days. Even 10-page executive summaries can be ignored.
- Don’t apologize. Tell the plain truth. CEOs should not aggrandize their company or UVP. An investor will discard the offer if he or she needs to verify the truth of the presentation.
- Take a power position when asking for the investment. Don’t be shy. CEOs should say what they have, why it is unique, why it will create an ROI, and what they need for capital, simply and with confidence.
Q: What techniques are best for presenting an opportunity?
A: I suggest three:
1. CEOs should explain the amount of the raise they are seeking at the beginning. Investors want to know this as soon as they understand the opportunity. This should be part of the 30-second sound bite, and stated in the first couple of slides or paragraphs of the presentation.
2. Early in the presentation, the CEO should define the projected ROI, to keep the attention of the investor.
3. CEOs should then back up their request with their pitch, in positive language and a slow, confident tempo. In the first few minutes, the CEO should define the UVP, the amount of the raise and projected ROI, and the company’s defensibility and scalability. Then, be ready to back up these assertions. At this point the investor may ask questions rather than listen to the pitch. Often CEOs get only a few minutes before being interrupted – these minutes need to make the company’s case.
(Disclosure: I write with utmost confidence about Ms. Tamer, www.joeytamer.com. I’ve had the opportunity observe her and her expertise on numberous occasions. She and I are members of Consultants West, www.consultantswest.com.)
From the Coach’s Corner, here are more of Ms. Tamer’s insights:
What Should You Divulge When Asking for Investment Capital?
Leadership — The 10 Characteristics of a Successful CEO
Eight Strategies to Consider Before Starting A Tech Business
“An investment in knowledge pays the best interest.”
-Benjamin Franklin
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Columnist Terry Corbell is also a business-performance consultant and profit professional. Click here to see his management services (many are available online). For a complimentary chat about your business situation or to schedule Terry Corbell as a speaker, why don’t you contact him today?
Case Study: Mistakes Companies Make When Losing Profits
Updated June 14, 2010
For the average businessperson, economic conditions have certainly been making it difficult to manage costs, threats from competition, and demand and supply. Oy vey! Not to mention maximizing prices for products and services. That’s certainly true for restaurant chains where discounts and promotions occur frequently.
Starbucks, of course, is known for its higher-priced coffee. So, the McDonald’s-like value meals and related issues at Starbucks provide a prospective classic business-school case study regarding price optimization and maximum profits.
Many businesses can learn from the situation in which the coffee company finds itself.
Thanks to a good store environment and consistent quality, I confess to having enjoyed countless cups of the company’s coffee over business discussions with associates. In my travels, Starbucks has been a home away from home whenever I wanted a good cup of coffee.
Now, questions about the company’s profits abound following a robust 20 years. True, the company and investors were delighted that the fiscal 2009 $175 million in cost-savings in helped Starbucks’ Q3 earnings improve to $151.5 million compared a loss of $6.7 million the same period the year before. The company’s profits had declined in significant double-digit percentages, prompting Starbucks to layoff thousands of employees as the company closed nearly 800 stores.
However, cost-savings are only part of the profit-making formula and it appears Starbucks still has more footwork to do. It’s questionable whether Seattle’s proud coffee retailer can return to its its high-profit utopia and sustain it.
Starbucks appears to be on the defensive regarding McDonald’s strategies. First, it was McDonald’s new coffee quality. Now, Starbucks has announced it will provide free WIFI — like McDonald’s.
Mega Growth
Starbucks seemed to act as if it was invincible by growing to epic proportions – it was everywhere and created a happy-buying environment for coffee lovers. The company became famous for not charging customers when it took a few minutes to brew their customers’ purchases. Cheerful baristas treated customers as if serving them drinks were important daily events and rituals.
But along with the economy, it seemed customer service sagged. My friends and associates have expressed dissatisfaction about the company’s customer service. In my frequent visits, it became rare to hear a barista say thank you to customers or prevent buyers’ remorse. Customers most-often tip jovial Janes and Joes. My sense is that such developments lowered customers’ perceptions of Starbucks’ value.
Recession or not, consumers who love a company’s services and products, will spend their money. When loyal customers shop elsewhere, my research shows 70 percent of the time it is because the customers feel taken for granted.
Lower-priced value meals are a good idea but they are not the complete solution. At upscale stores or even low-end fast-food restaurants, eventually, it is hard for customers to swallow mediocre service. In a situation where an upscale company slashes costs – without providing noteworthy customer service – it is not conducive to sustainable profits.
Two other profit-complications: Too many company locations will cannibalize sales from each other, and it’s easy to lower prices but it’s difficult to raise them.
In general, how can you manage the sweet spot – between your price-optimization and costs?
Dennis Brown of the consulting firm, Atenga, says many companies make 11 pricing mistakes:
Companies base their prices on their costs, not their customers’ perceptions of value. “In certain circumstances, there are strategic reasons a company may decide to sell a product below its cost for a period of time, or to a certain market segment as a ‘loss leader,’ Brown writes. “However, when a price is set according to the perceived value of the product or service, sales are brisk, and profits are maximized.”
Companies base their prices on the marketplace. “Marketplace pricing is a resting place for companies that have given up, and where profits end up being razor thin,” he says. “Instead of giving up, these management teams must find ways to differentiate their products or services so as to create additional value for specific market segments.”
Companies attempt to achieve the same profit margin across different product lines. “Some financial strategies support a drive for uniformity, and companies try to achieve identical profit margins for disparate product lines,” he believes. “The iron law of pricing is that different customers will assign different values to identical products.”
Companies fail to segment their customers. “The value proposition for any product or service is different in different market segments, and the price strategy must reflect that difference, he asserts. “Your price realization strategy should include options that tailor your product, packaging, delivery options, marketing message and your pricing structure to particular customer segments, in order to capture the additional value created for these segments.”
Companies hold prices at the same level for too long, ignoring changes in costs, competitive environment and in customers’ preferences. “It is important to recognize that the value proposition of your products changes along with changes in the marketplace, and you must adjust your pricing to reflect these changes,” Brown explains.
Companies often incentivize their salespeople on revenue generated, rather than on profits. “Volume-based sales incentives create a drain on profits when salespeople are compensated to push volume at the lowest possible price,” he writes.
Companies change prices without forecasting competitors’ reactions. “Smart companies know enough about their competitors to forecast their reactions, and prepare for them,” he adds.
Companies spend insufficient resources managing their pricing practices. “In fact pricing is of outmost importance, and a key element of the marketing mix,” he says. “Good pricing strategies use hard data generated by modern methods such as Value Attribute Positioning, Conjoint Analysis or Van Westendorp’s Price Sensitivity Meter, to generate accurate hard data on the perceived value of a product or service, thereby enabling mangers to maximize their profits by optimizing their prices.”
Companies fail to establish internal procedures to optimize prices. “Price optimization data comes from focused research,” he points out.
Companies spend most of their time serving their least profitable customers. “While 80 percent of a company’s profits generally come from 20 percent of its customers, a careful review of the data often will show surprises, since a company’s largest customers are often only marginally profitable,” he says.
Companies rely on salespeople and other customer-facing staff for intelligence about the value perceptions of their customers. “Such people are an uncertain source, because their information gathering methodology is often haphazard, and the information obtained thereby can be purely anecdotal,” he explains.
Here’s a tip of the Biz Coach hat to the consultant’s philosophies. Brown’s points are valid.
My research shows about 18 percent of the population only cares about price. Companies that focus only on the lowest price in the marketplace will generally fail.
To attract the other 82 percent of consumers, you can usually overcome a competitor’s lower price with stronger perceived value:
- Helpful, knowledgeable employees
- Robust company image
- Excellent product or service utility
- Convenience
- Price
You might also consider that many value-conscious customers would appreciate a cash discount in lieu of paying by credit card, which would also save you a credit-card processing fee.
From the Coach’s Corner, if you ask, Atenga will send you a best-practice pricing study and tips on pricing. The company’s Web site: www.atenga.com.
