While filming elevator pitches at one of the seminars this year, the fine folks of Fundfindr shot some additional interviews and put together a five minute “webisode” video that gives a nice overview of the competition, its history, and its mandate. The video features Angie Schick, NVBC Program Manager, Dave Thomas of Rocketbuilders, competitor Boyd Cohen of 3rd Whale, and Ross Waddell of the BC Innovation Council.
Visit fundfindr.tv for more video on entrepreneurship topics. If you’re interested in professional video production for your event, demo, pitch, product or service contact shannon@fundfindr.tv.
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.
New Ventures BC is reaching outside of the Lower Mainland and “taking the show on the road”. Seminar #8 will be offered in three other locations.
Kelowna - May 27, 2008, 3pm
Early Stage Financing: Dialing for Dollars - speaker: Tanner Philp
Landmark Business Centre, 406-1708 Dolphin Avenue
Hosted by OSTEC REGISTER
Victoria - June 4, 2008, 1pm
Early Stage Financing: Dialing for Dollars - speaker: Tanner Philp
Vancouver Island Technology Park
Hosted by VIATeC REGISTER
Prince George - June 10, 2pm-4pm,
Early Stage Financing: Dialing for Dollars - speaker: Tanner Philp
Hosted by the Innovation Resource Centre, 101-1584 7th Avenue, Prince George.
Of course, the final seminar will also be happening in Vancouver this Wednesday, May 28 @ 6:30pm at SFU Segal Graduate School of Business, 500 Granville St. Speakers will be Tanner Philp, Lions Capital Corp / BC Advantage Funds and David Shore, Stirling Mercantile.
Basil’s blog on best practices for investors and entrepreneurs: www.angelblog.net
The title of the presentation is “Your First Financing is the Most Important”. You can save a lot of time by going for friends and family first. VCs only fund about 2% of startups. Generally, $2 million is the smallest amount they’ll write a cheque for, so they have a hard time finding suitable investment that they are confident in.
Why do people invest? Expectation of financial return? Because they like the business plan? No. Real answer: because they like you.
First rounds are easiest to do, because they are small, investors usually know the entreprenuers, the business is still on paper, moods are postive. A problem is that most people who invest in Friends and Family rounds really shouldn’t. They usually aren’t able to objectively evaluate the business plan. The three keys to a solid funding round are fairness, alignment, and governance
After the board and equity allocation, the most important element is structuring. Assuming that about 50% of the value of the company is typically created at the exit, then a most fair vesting formula splits shares between the early life of the company, and when the company is sold.
Valuation is incredibly difficult, often based more on gut instinct that quantitive metrics. But there are some guidelines. If you’re a company without revenue or patents, then friends and family rounds are usually in the range of $0.5 - 1 million. Angel rounds are usually valuated at $1 - 3 million. Friends and family may be willing to pay a lot more, but don’t let them.
Keep structuring simple. Since the 90s, investors have developed a preference for ever more complicated agreements. This creates flawed relationships between entrepreneurs and investors. Today, there is a move back to common shares.
Fairness. Successful early-stage investing is always win-win. If the agreement is not fair, but seen to be fair, that will likely change over time. Alignment: that everyone is working towards the same objective. Financial interest should be the same between all parties. One easy way to do this is with common share structures to maintain alignment. Unfortunately, most VCs will still require preferred shares.
Corporate Governance is a big change for early stage companies. A real board is important from the beginning. He believes boards are more important than CEOs. All directors, except the CEO, must be fully independent of management, and they must have made a meaningful investment in the company (but, an investment shouldn’t entitle anyone to a seat on the board). It has become harder to attract good directors. The time required is related to how fast the company is changing. A lead director for an early stage, high growth tech company might need a day a week.
Director Compensation. You’re asking them to make a significant time commitment and accept real personal risk. Fairness is important. An advisory board is not the same thing as a real board. If you can’t get a good board committed, is it really fair to ask someone to invest?
He’s seen many times where companies have raised money from friends and family without any paperwork of corporate structure, share register, or subscription agreements. Some of these are legal requirements. You need legal advice before taking money from friends and family.
Initial Corporate Structuring. Best options are BC or Canadian federal companies. Investors often don’t like investing in foreign companies. Create a structure with an unlimited number of common shares, and an unlimited number of “blank-cheque” preferred shares.
Determine a roadmap for financing. How much money will you need, when you will need it.
Securities Legislation. To distribute a security, you must file a prospectus. However, there are exemptions from prospectuses. Key exemptions: family, friends and business associates, accredited investors, private issuers, employees, permitted consultants.
A stock option is the right ot purchase a number of shares at a predetermined price, used as an incentive for team building. Should be 10-30% of issued capital. Need to plan for growth and allocate options carefully.
Question: how onerous is it to make an offering memorandum?
Answer: Depends on the complexity of your company. Must be accurate. Will take time and effort. The goal is to not do one if you don’t have to.
Question: As a cross border company, are we still eligible for excemptions?
Answer: Each state and province will have different laws and you have to comply with them all.
Please join us this Wednesday, May 21st for our next seminar - Friends, Family, Trusted Associates: Early Funding, featuring Basil Peters, Fundamental Technologies II and Steven Lukas, Fasken Martineau, DuMoulin LLP. Register online.
Date: Wednesday, May 21st
Venue: SFU Segal Graduate School of Business, 500 Granville St.
Registration and networking: 6:30pm
Seminar: 7:00pm
After the seminar, you’re invited to attend the after party of Launch Party 4, also happening this Wednesday, May 21st. Launch Party is a mixer/networking event for entrepreneurs, techies, and marketers. These events have consistently attracted largely, lively crowds; you don’t want to miss it. For more information and to RSVP, visit http://launchpartyhq.com
Marketing Plans. When putting together a marketing plan, one must begin with the end result in mind. Focus on market entry.
Some key market research questions: What is your target market, how big is it? Who buys your product, and who will use it (not always the same)? How does the customer fix the business problem you are addressing? What business problems are more important to them than this one? Why would they buy from you?
Markets can be segmented in many ways. Evolutionary vs. Revolutionary products. Segmenting is important to focus marketing and development efforts on the most ideal group. It narrows the product definition and limits competitors. Selling more isn’t always optimal, smaller markets can be more profitable.
Primary market research, talking directly to customers, is important. You have to be able to describe your product. Develop a consistent set of interview questions. Various online survey tools available.
Understanding the technology adoption cycle is important to developing a marketing strategy. Following a bell curve, you have technology enthusiasts, then early adopters, followed by the early majority, late majority, and finally, laggards and resistors. Tech enthusiasts will ignore missing features. They lead others in purchases. Early adopters are attracted by high-risk, high-reward technologies, and envision strategic applications to them. Late majority followers and risk adverse and resistant to change.
“The Chasm” is the gap between early adopters and the majority. You have to find aspects that appeal to the majority. So how do you cross it? Understand the customer’s whole problem. Develop a whole product, and a marketing plan.
The actual product, plus all associated factors (services, partners, warranties, image, training), form the “Whole Product”. Some areas can be filled by partners, ie, software requires someone else to sell hardware. What is the total cost of ownership?
Whole Product Audit Exercise:
- What complimentary services must be acquired with your product?
- What additional hardware or software must be purchased to deploy your product?
- Will customers achieve ROI without complementary products or services? How will these “total cost of ownership” issues affect the sales process? Customer satisfaction?
Positioning: why will they buy from us vs. the competition? It means fitting the product into a predetermined mindset of the customer. Example: premium vs economy. Factors that effect positioning: partnerships, pricing, distribution, service/support, sales cycle, competition, and company valuation.
Product Positioning Exercise (12-18 months):
For [target customer segment]
who wants/needs [solution to problem]
the [product name] is a [product category]
that provides [compelling reason to buy from vendor]
unlike [main competitor]
the [product name [key differentiator]]
Can a competitor’s product name be substituted for your own? Then your positioning is weak.
Pricing is tricky. You’ll often hear objections of it being too high or two low. Better to start high, it’s more difficult to raise the price later. There is always a price ceiling. Competitive pressures and seller reputation. There are many models for pricing in software: per seat, per service, concurrent user, site license, per volume, or business value. Too low of a price can create a perception of lack of value.
Pricing strategies. The pricing model is more important than the price. Cost plus: set a specific profit margin. Target return: set price to achieve a target ROI. Value-based: value to the customer relative to competition.
Ad-Hoc Pricing Audit Exercise:
What are some common price objections you hear? Is your price too high or low?
How does your pricing model compare with the industry? With your competition?
Do you offer promotional pricing? How effective is it?
To begin, a couple notes of business. Firstly, round 2 deadline is May 21. Second, next week, FundFindr, will set up a “pitch station”, where you can record your pitch for their website for investors to see. Practice and refine your pitches!
Tonight’s speaker is Sean Hodgins of QCDocs discussing Basic Finance for Business Plans.
Annual financial statements should include the following: balance sheet income statement, cash flow statement, supporting notes. Find a company similar to yours and read their public financial statements. Reliable data is important, and multiple scenarios should be considered. List key assumptions.
Key Terms:
P&L: Profit and Loss statement.
EBITDA: Earnings before Interest, Taxes, Depreciation, and Amortization.
Cash burn: EBITDA plus capital purchases = rate of cash expenditure
Runway: Amount of cash until you run out.
Pre/Post-money Valuation
Key Programs:
SR & ED: Scientific Research and Experimental Development (refundable tax credits)
EBC: Eligible Business Corporations (30% refund to investors)
NRC-IRAP: National Research Council-Industrial Research Council (up to 75% of R&D staff costs)
Telefilm
Keep it simple. Numbers are instrumental in telling the story. Costs should focus on R
Elements of a business model: Who’s going to buy what you’re selling? What price? How does it compare to competitors? When do the sales happen? Customer acquisition costs? Customer support costs? Alternatively, you have the “Eyeballs Model” of bringing visitors to a site, valuing visits over revenue.
Case Study: QCDocs Systems. Streamlines bookkeeping through Software as a Service. The opportunity was in small businesses of under 100 employees. Sean goes through a number of tables that they used to map out the business model, highly recommended that you check out the slides.
Investors put numbers under major scrutiny. If they’re wrong, credibility suffers. It’s important to have someone with financial expertise on your team.
Question: Is what you’ve show us sufficient, do you need more detail?
Answer: If the pitch is good, and the numbers make sense, it should work. If they say “do more financial analysis”, it’s a nice way of saying they aren’t convinced of the value.
Question: How did you estimate the number of customers in that model?
Answer: Analysed how many sales people could be hired, how many sales they could do.
Question: Did your estimates anticipate that VCs double them?
Answer: Yes. They will often question your costs as too low.
Question: Heard of someone having to produce 10,000 pages of documents to prove the risk, hwo do you deal with this?
Answer: Software packages help organize and produce this information.
Question: Between here and California, have you seen common threads in businesses that have been successful?
Answer: Raising capital is easier in California, but BC offers more government incentives. The US has bigger incentives for Angel investors.
Question: NRC R&D credit: at what stage do you have to be?
Answer: Concept stage is good enough. You can’t pay yourself, you have to be paying employees and provin a viable business opportunity.
Join us next Wednesday for Seminar #5: Basic Finance for Business Plans with Sean Hodgins of QCdocs Systems Inc. We’re back again at UBC Robson Square, 800 Robson St., Room C-180. Register online to attend in person, or tune in to the live webcast.
Mike Volker from Simon Fraser University spoke to a packed house at the Simon Fraser Segal Graduate School of Business (and president of WUTIF, the Western Universities Technology Innovation Fund) with his talk on “What Angels Really Want” at the New Ventures BC event held at the school on April 30th. With a background in technology start-ups, Volker was able to tie together advice between innovative entrepreneurs and the investors looking to take them to the next level.
Volker said that good companies will always get funded, but should try to avoid the “e-myth,” which is the assumption that technical-minded people have that they will also be skilled at business. Entrepreneurship and leadership matter, Volker said, and getting the two camps together is most important.
Current conditions, from low interest rates and R&D costs, to great infrastructure and easier financing and special incentives make it a perfect time to start a new business, he said.
New Ventures BC is a business competition, created to find new and innovative BC companies. The instructions to the New Ventures jury were to pick companies that are “the most likely to be commercially viable, with the greatest value.” Volker said the same principles apply when looking for investors.
But he added that it’s important for companies to decide if they’re creating a lifestyle business, built to be self sufficient and not require VC funds, or if it’s an attempt to create a next-level “high-growth, high-tech” company with a large eventual payoff.
Shareholder agreements are important to create at an early stage, he said, and it’s equally important to not rely on boilerplate and instead craft an agreement that suits their needs.
After deciding WHAT their business is, entrepreneurs have to figure out WHO they’re selling it to. They have to sell it to themselves, their staff and customers, as well as investors.
Angels want interesting opportunities, an attractive return (10X to 100X being typical), as well as a willing protege. They also want the 3 I’s (Intensity, Integrity and Immediacy) and the 3 G’s (Goodness, Greatness and Greed….for the company).
In order to achieve their goals, entrepreneurs have to surround themselves with the best possible people for their business, as well as being able to take their idea and translate it into revenue.
Fundamentally, Volker said, it’s all about profit and loss. What are you buying, who will buy it, and how much will you make? He added that a clear passion and understanding for an idea or product make s a huge difference, and will get investors on side.
Volker was an early investor at RIM, but he pointed this fact out to illustrate that the founders of that company were no different than anyone else in attendance at the New Ventures event. By crafting a business plan, RIM was able to reach their current dominant place in wireless, and they did so when they were a tiny start-up. Volker said the secret to that growth was confidence not only in themselves but in their business plan, which carried over to creating confidence in their investors.
In terms of product, the object itself or the service it provides is far more important than the technology inside the device. When addressing investors, explain what the product is, what it does, and how it can generate revenue, not the internal workings or esoteric code that makes it work.
Entrepreneurs should also be careful to protect their intellectual property, whether its through copyrights, or patents. They should also identify what stage they are at, from prototype to production model. And Volker stressed the importance of letting investors know what kind of time frame they’ll be dealing with.
Always be conscious of the status of your business plan, Volker said. Additionally, entrepreneurs should stay on top of both costs and potential competitors, because if they don’t, investors will and may find a better solution.
Distribution channels, strategic partners, and supply chains are all integral to moving the product, and shouldn’t be neglected.
Teams are also a vital component, especially when moving from angel investors to venture capital. Know your shortcomings, and bring in team members (including board members and advisors) who can compliment your skills. Finances, including a cash-flow projection to profitability, are also key to starting a new business.
Most importantly…who will buy the product? Why would they buy it? Can money be made, and if so, how much money? All simple questions, but absolutely necessary to ask, he said.
This Wednesday, April 30, Michael C. Volker, Director SFU Industry Liaison Office and President of WUTIF, on the topic of business plans. It’s back at the SFU Segal Graduate School of Business, 500 Granville Street.
Also, by then, the list of companies moving on to Round 2 will be posted. Watch the Round 2 Companies Announcement post to see who made the cut.
