Live @ Seminar #8: Early Stage Financing: Dialing for Dollars
David Shore, Stirling Mercantile Corporation and Tanner Philip, Lions Capital Corp / BC Advantage Funds
A Venture Capital Corporation fund, sponsored by the BC Ministry of Finance, entitles investors to a 30% tax credit. It is very popular and has sold out for the year.
A management team is like a three-legged stool: research and development, sales and marketing, and financing.
There are only six venture capital funds in BC, and only three are able to invest at the moment. The market is tough. Steps in the process: Package the business plan, identify appropriate targets, meet targets and follow up, complete due diligence, negotiate final terms. The process can easily break down at any step, time means nothing. Be emotionally prepared.
Question: How regional is the investment community?
Answer: Very. Investors tend to stick to their area. Investors also want to be close for face time when required. Regions have their specialities, in Vancouver: biotech, gaming, web, mobile.
Sources of financing: equity, debt, grants, and revenue. Banks will generally ignore you. Lots of good government money available.
Angel investors: the best angels are the ones that know you. It’s about building a relationship with that investor. They usually invest in areas of business they’re familiar with, and have had previous successful exists. They are faster moving and tend to invest early. (these are all generalizations and don’t always hold true.
Venture Capital funds: they may be active or passive, focused or diversified. They’ll participate through multiple rounds, move slower and more carefully.
Question: At what point does an active investor start to seek more control?
Answer: “When they cut the cheque?” *chuckles*. Soon and early.
It’s important to understand what motivates your investors. They think long term. VCs focus on the 10% of investments that go 100x. They have a diversified portfolio, you have one shot. VCs have a 20% performance fee, meaning they get 20% before the shareholders of their fund.
With Angels, there is one decision point. In a VC organization, there is a lead contact but also multiple decision makers within the organization. When you bring in equity investors, there is a dilution of your control, and increased governance and oversight. But you also gain access to their network of contacts and business insight.
Before seeking investment, it would be good to get even a small board together, 3 people. The yearly cost of director compensation might be around $15,000. Another option is to give them equity and similar values.
Question: What do investors think of having two founders on a board?
Answer: General practice is that only one is on, usually the CEO.
Targeting investors that understand your company and have done similar deals. Look at their CVs and portfolios. Find the right person at a firm; having the right one can make or break the deal. Ask who the best person in the firm is. Lever contacts to understand where you are in their queue.
Your first contact shouldn’t be a presentation, meet for coffee first. Talk about the business, not the technology. Follow up on this first meeting the same day. Answer questions, and ask some. Suggest another meeting and specific topic for it.
Executive Summaries: keep it concise. Start with a simple description of who your clients are and why they will buy from you. Have a clear value proposition. Keep it down to about two pages, and proof it with others. Don’t use technical jargon and acronyms. Make it clear how much money you will need. Each paragraph should explain why the company has value. You should be able to explain the value of your business in one line. Consider Science Proposition vs. Value Proposition; you want to be talking about the value. Avoid saying: “our projections are conservative”, “we have no competition”, “we have first mover advantage”, “we only need to capture x% of the market”.
Pitch presentations. Pitch time should be about an hour. 20 minutes of slides plus interaction. Ideal presentations: 12 slides, cover product, market, management, and interactive discussion. Don’t bring your entire team or focus too much on the technology.
Expect that angels or VCs will get on your case for due diligence items, such as: business plan and executive summary, all material contracts, details of financial and revenue models, Management CVs and references.
What are investors looking for? Opportunity to earn 20-35% compounded annually. Experienced Management. A sustainable competitive advantage. Market validation. A clear lucrative and sustainable value proposition. Large market opportunity and the ability to scale it.
Deal terms. Some terms of preferred shares: paid first upon liquidity, option to convert, dividends, varying levels of control over the business. Investors will often have more experience of the management, have had experience with many different companies. “Consensus is when both parties are equally unhappy”. Remember that investors are future business partners.
