The final seminar in the New Ventures BC 10-week seminar series is tonight, as Vancouver Angel Investor Dr. Basil Peters presents “Start at the End: Exit Strategy”.

Peters is the author of Early Exits: Exit Strategies for Entrepreneurs and Angel Investors (But Maybe Not Venture Capitalists). He is the Fund Manager for Fundamental Technologies II – an angel investment fund.

Dr. Basil Peters: Start at the End – Your Exit Strategy

I was a technology entrepreneur and my comments come from a technology background.

For Investors, motivations are different.

We think of your company as a black box with some sweat equity from you, some equity from us and some capital gains spit out of the end. That’s it.

Exits are the best part of being an entrepreneur and an investor, but it’s the least well understood.

Much of what you hear about investments is wrong. And there are quite a few dirty secrets to boot. That’s been compounded by the state of the economy.

There are basically two ways to sell your company: an IPO or an M&A Transaction (private sale). These days, it’s just M&A.

What happened to the IPOs?

The economy and regulatory changes like Sarbanes Oxley.

What about M&A exits?
The media distorts our perception by focusing on the big deals. But the dirty secret is those big transactions rarely are good deals for the buyers. Corporate America is now figuring that out. They’re not going to their boards with a billion dollar buy proposal unless they’re sure it’s going to work.

Most Exits in M&A’s are under $20 million. The median price is likely under $15 million. That’s a much smaller number I would have thought before I did my research. But if you’re building a company today, the reality is you’re probably going to sell it for less than $15 million (and that’s a good thing!).

Advice from a Fortune 500 Friend
The big companies know they’re not good at startups. They suck at building businesses from zero to $20 million in value. But they’re good at building companies up from $20 million to $30 million.

A company priced at $100 million is already out of our sweet spot to buy. But a $20 million buy is easier to get approved just within his division.

Google wants even earlier exits, according to Charles Rim, one of the top Google M&A guys. “90 per cent of our transactions are small transactions — less than 20 people, less than $20 million in value.”

They actually prefer companies that are pre-revenue (as in, pre-appreciable revenue — under $1 million in revenue). This interview with Charles Rim is available on Basil’s blog.

Big Companies Have Cash
That’s a problem. “Shareholders are complaining — spend it on companies or give it back to us!” They have billions of dollars in cash only earning one per cent interest. They’re in a feeding frenzy to buy start-ups.

The most familiar buyers are Fortune 500 companies, but medium-sized companies are also aggressive. Private Equity funds are also coming onto the market. As well, there are plenty of individuals who are not ready to retire who want to buy companies.

How Big Does My Company Need to Be Before I Sell It?
It’s a common misunderstanding that you must grow it to be profitable, or grow it to X million in value. The true determination is just to prove the business model.

For example in a recurring revenue business, you have a spreadsheet that clearly shows actual results for gross margin per customer, customer lifetime and cost of customer acquisition. At that point, you can build a credible projection to start having a discussion with a qualified buyer.

That’s the threshold, often well before the first $1 million in revenue and before the company is growing fast.

It’s always better to sell as soon as your prove the model. Sell on an upward trend, on the promise and not the reality. Very often, “stuff happens” that makes the business not as great as it was just a little while before. Most entrepreneurs end up riding it over the top, past its best-before sell date. Don’t ride it over the top!

Entrepreneurs may think they’ve figured out the best time to sell the company, that it’s best days are behind it, but the exit can actually take up to sixteen months. Between the time you decided to sell and the time of selling, the optimal value you can get goes down as “stuff happens”.

The Internet has accelerated everything. You can market and sell to hundreds of millions of prospects in just days. This has accelerated almost every other aspect of the start-up life-cycle. Now we have “weekenders”, where businesses come up with the entire business plan over the weekend. The definition of early exit can now almost be something that happens before the end of the weekend!

People are now creating businesses in 30 days (and if they aren’t working great, you can sell the idea on Flippa after 20 days!).

Exits in just 2-3 years: Flickr, Delicious, Club Penguin, YouTube, Playfish, Mint, AdMob. Two or three years is plenty of time to make the business work and sell it.

Do You Even Need Investors?
100 years from now, this time will be recognized as a golden era for entrepreneurs. Never before have there been so many opportunities to build businesses that are easy to capitalize on. It’s all because of the Internet.

Capital funds are a legacy of an earlier time. Investors often don’t get it. But in this open source world, we can build valuable mashup companies with no money.

Plenty of Fish got started in an apartment. MetroLyrics started with no capital and is probably worth tens of millions of dollars. The world has changed. You’ve got resources even if you’ve got no money.

My wish for you is that you bootstrap. It should always be your first choice. The most spectacular start-up business models started with no capital. Most companies today really don’t need very much capital.

What is venture capital?

The type of financing we’re talking about is private equity (small v, small c). It includes private equity, angel investors, VC funds and friends and family. The big surprise in that space is how big friends and family are: they tend to invest six to seven times more than VCs and Angels. That’s where the big money is for new company financing.

Who Actually Finances Start-Ups?
Angel Investors fund about 27 times more than VCs. About 50,000 companies in America get funded by Angels. By and large, you’re better off going after angel funding than VCs.

Some Surprising Data
In America, each year VC Funds invest about $20 billion.
Angel investors also invest about $20 billlion. Friends and family investors invest about 5 to 10 times more than either VCs or Angels (Fools Gold by Scott Shane).

Angels used to top out investment at around $2 million. Today, angels in groups are now coming together to invest in companies. I now see angels regularly invest $5 million to $10 million.

South of the border in places like Bellingham, there’s money and they’re collaborating over social networks. They’re investing across the border into Canada.

First Exit Strategy, Then Finance
What I wish for your companies is to build a company by first figuring out the kind of business your starting. Build a team on an exit strategy to build the business. Then develop the financing plan. Next, start contacting investors (if you need them). If we adopted this sequence, we’d have more successful companies.

When you add investor money, you’re adding their “DNA” to your own corporate DNA. A lot of times, that hybrid doesn’t survive. Check the compatibility first!

Different sources of financing are compatible with different exit strategies. $10 to $20 million exits are not possible if you get money from VCs. They need a certain return and they will determine when you can sell. Making a mistake about this can cost you the entire company (It almost cost me my first company).

Don’t blow the biggest deal of your life.

Build the exit strategy into your business plan. Even if you have a lifestyle business, you have an exit strategy (you die, somebody inherits the assets).

If you want to sell to Google after two years instead of having a lifestyle business, you must have a different type of business plan.

Question
Can you have multiple exit strategies?

Answer
In theory, yes. But in practice, it’s better to develop a focused exit strategy early (and get the team moving in that direction).

The exit strategy could be as simple as:
Our exit strategy is to (sell the company) in about _ years for around $_ million.

It’s surprising how often there is a serious misalignment from key stakeholders on the exit strategy. The only way to check is to get a “signoff” on a written exit strategy.

It usually takes at least one offsite planning retreat to realign.

Conclusions:

• Most acquisitions are under $20 million. That’s the goal if you’re not leaving the shares to your kids.
• Modern companies don’t need much capital.
• Bootstrap if you possibly can,.
• Angels can finance up to $5 to $10 million.
• Target an exit for under $30 million.
• To succeed, start to plan at the end.

Resources
www.Early-Exits.com – book on exit strategies for entrepreneurs.
www.AngelBlog.net – blog for entrepreneurs and angel investors.
www.BasilPeters.com – for this PowerPoint and videos of previous talks.

Remember: Falling in love with the company and not thinking of selling can cost you millions of dollars.

In business stuff happens. Big companies do steal ideas. A company I invested in was Brightside that made liquid crystal displays. We sold it for $28 million. Less than a month later, I saw models from Samsung. It seemed as though they took the idea after signing an NDA — and basically went into production that week.

One of the reasons for selling early is that if you hang around too long, the big guys will steal your business.

Bootstrapping is a religious belief. It’s a belief that you can build a company without investors. You may need a supplementary revenue stream and may go to investors if you really, really need the money. These days, you can build businesses with such a small amount of money that to get investment, you often have to take onerous terms.

If you can at all, bootstrap the company and try to sell it quickly for $20 million.

Buyers will almost always require you to stay with the company. The buyers often put more value on the team than the business. Sometimes, you have to stay on for as long as three years.

A lot of times, companies that are buying are not that much bigger than the companies being acquired.

Question
How appropriate is this advice for a hardware company that actually makes stuff?

Answer
I talk a lot about companies that are online. But the comments about the economy are much bigger than the type of company. Where it is different is where companies have built in a very long discovery cycle. For example, drug companies and hydroelectric companies require longer time frames, investor capital.

Question
How about alternative energy companies?

Answer
Alternate energy, there’s lots of money out there. Entrepreneurs have the upper hand with the investors. There are lots of places to find the capital (though it’s not easy to negotiate).

If you take $10 million from a fund, with a $30 million valuation, the smallest amount the VC will approve for an exit strategy is $300 million. What you’ve done is put yourself in the category of a moonshot. It’s long odds.

Question
Is it possible to combine a funding strategy with an exit strategy?

Answer
There are a small number of companies that will take a minority stake. This also limits your options. Reduces chances of success to have a funder who might have been an acquirer.

Question
If you’re going to take angel investment, is it a smart idea to get angels who are knowledgeable of people in industries that might want to buy you?

Answer
If you can find directors who have contacts with companies that might buy you, that’s great. But it’s not hard to find buyers. To get to the right guy in the right company, you might just need to send an email. You may not require that connection. It’s not hard to find buyers.

Tonight, the New Ventures BC seminar series presents Perfecting your Pitch. The seminar is presented by David Shore of Stirling Mercantile and Jonathan Bixby of Strangeloop Networks.

David Shore, Stirling Mercantile

First a Poll of the Audience
By a show of hands a little more than half of the audience appears to be in the competition. One third have given presentations to investors. About the same number give presentations regularly.

They’re here to learn how to give a great presentation, how to be concise, to get some pointers on style for a pitch and learning how to win the competition. $300,000 at stake. The key to doing well in presenting to investors and in order to advance in the competition, you have to do well in the presentation.

Talking about presentations in general. Towards the end, we’ll talk about presentations to an investor.

We’re constantly presenting with a screen behind us. These tips will show you how to do it well.

Jonathan Bixby, CEO and Co-Founder of Strangeloop Networks
If you are to win this competition, you’ll have to go through a jury process with very smart, cynical judge. They’ve seen countless pitches, of which they’ve approved only a small percentage and many of those went south after.

You have to be able to explain it to the judge like this: “Tell me about it like I’m a kid.” If you can’t articulate what you do, if the value statement is not clear, you’re not going to win.

Tell Me What You Do
We boil this down to some simple questions. We’ll also discuss some good and bad examples of companies. In an in-camera session, we may have a workshop after as people give their pitches.

What do you sell? Who do you sell it to? What’s the value proposition?

We sell (hardware/software => that helps (our target market) => to (save money or make money)

Winner
Energy Aware 2006 Winner.

Good Statement
Energy Aware Technology sells home energy displays to electric utilities to help their residential consumers better understand the way they use energy so they can find ways to save money.

Focus on the problem, the solution and the target market that shows your value statement. Don’t focus on the technology.

90 per cent of what we’ve been told about presenting isn’t right.

The winner of the NVBC competition tends to be the one that the judges remember because of the CEO’s presentation. Differentiate yourself. You have to be a great communicator about the excitement level about your business.

Barrack Obama, Bill Clinton, Steve Jobs, all have natural charisma and flair. But all of those people communicate in a certain way with a certain style.

Highly Recommend Book
Hit Me Again! … I Can Still Hear Him! The Secrets of Superb Public Speaking by John Miers

Demo of a superb conversation (canned, but what can you do…) between Jonathan and Dave.

First, I think, then I speak. Then David thinks, then he speaks. There are non-verbal cues, but that dance of communication is the way that humans communicate.

We’re taught in speech-making to talk in an entirely different way. We tend to phase out because people “speak in a weird way” during presentations.

Barack Obama uses the same conversation style in a speech as he does in a one-on-one conversation. That’s a key to his success.

You can’t listen and think at the same time.

It’s not the rate of words that’s important. It’s the rate of ideas.

I Think. I Speak. You think. You speak.

The audience speaks with movement (head nodding, expression).

Terrible tool of Power Point. It’s a weapon of mass distraction. Use it correctly. You cannot be articulating slides which are complicated. People are not going to listen.

Power Point is Abused. Why do we put our speaking notes on slides? You can’t read and think at the same time. Also, the audience can read way faster than the speaker can talk. So don’t use speaking notes on your slides.

Having bullet points, you might remember the points. But you want to be remembered as the speaker (The CEO).

Steve Jobs uses symbols, visuals. Not using bulleted speaking notes.

How do I know if my presentation is graphical enough? Look at overview of slide deck. Nice to have visual representation of what you’re trying to get across.

Is there an order of bringing up a slide? Different schools of thoughts. Black, visual, then black. Some people will speak to it while people are looking at it.

For technical conferences, you may need more technical written content on slides. Those slides aren’t forbidden. But generally, you want to err on the side of simplicity with visuals.

David Shore (continued…)

The Structure of the Presentation
This is tailored towards an investor presentation. Biggest investment firms have presentations all day long. Investor companies must reject upwards of 95 per cent of presentations. Mindset is “as soon as I can find something wrong with this, I can leave this presentation… and go to the next one”.

A dozen slides you must include in your deck, to change an investor from a skeptic to a champion:

You’ll have about 20 minutes to give your presentation, about a minute and a half per slide. Next 20 minutes are people asking questions. If you have 40 minutes of questions, not a good sign.

Title Slide
My Company (Logo)
Presentation to: Smart VCs (include investor’s logo)
Date and Time

A video won’t win the competition.

A blank screen won’t win the competition, either. “I don’t have a presentation. Just give me your questions”. This approach doesn’t work.

First slide should give a snapshot of what business you’re in. Eg. a picture that shows hardware says “We’re in the hardware business”.

Second Slide
The Team. Introduce them by name and title (including board members, and possibly advisors — if they’re engaged). This introduces credibility to everything you do. It helps if there’s an association showing that team members have worked together before.

It’s OK to say in an early stage company, we’re looking to close a gap in the team. Even go to the investors and ask if they might identify someone.

Next Slide
Industry Problem
Often referred to as “the pain”. Many presenters wrongly use this as their first slide. Articulate it in a way that connects to…

Next Slide: An Image Showing Your Solution

You will want to spend a bit more time on this, talk about the IP, talk about the genesis for the project, who you got feedback from when you chose this, what are your features sets, etc.

Show some validation eg. “I think this is the biggest thing I’ve ever seen!” – Mr. Big, Bigcorp.

Next Slide: Addressable Market

Perhaps a pie chart? Focus on how many widgets you’re going to sell. Look at where the IP could be focused to go after a larger market and make more money.

Eg. A product for woodworking shops that would speed up their efficiency and make them horribly profitable. But there weren’t enough woodworking shops! That’s a good company, but it won’t get venture capital. We expanded the market. banking and oil and gas industry could also be customers for the company. Suddenly you go from a company that could get $12 million after five years of hard work to a company that could get $60 million for the same amount of work. Now it’s exciting.

Five years is what we recommend you project for.

Addressable market is the market if you had no competition at the price you would sell it to them for. It should be in the billions.

It’s difficult to get clear, non-conflicting data about the addressable market. You’ll get different numbers.

Next Slide: Competitive Position
You’ll want to spend some time on this, perhaps using a two way graph showing different functions. Place your company on this grid as it relates to value proposition in target market. Show why your value is going to be the better way to go and the strategic direction.

Next Slide: Sales and Marketing
Pricing strategy, target markets, channels, where you are now. Perhaps describe it graphically in a timeline?

Next Slide: Projections
High level spreadsheet, showing projected income statement analysis, looking five years out. Investors generally hold their investment for five years. They will do a calculation based on profits or multiple of revenue. Fifth year is far more exciting. Don’t expect the investor to do the extrapolation. Do the math.

You’ll have a good idea of your expenses and customers in your first year. Investors will focus on how long it takes to become profitable. They want to see that the growth is realistic but exciting. Want to see growth margins that are consistent with industry. If you’re a company showing a profit margin of 50 per cent, that’s an indication that you need a better CFO. If you’re generating a better profit than 99 per cent of the companies doing this, your numbers may not be convincing.

Year 5 numbers are a projection. A bottom-up forecast is something based on the costs for running your business and how quickly you can sell product, hire, train, get out to the marketplace. It’s not easy to do. But financials that talk about how we’re going to get X-amount of a market are top-down forecasts and are less credible.

NOTES: You only have 20 minutes. You’re not trying to answer all questions with tons of detail. But you want the investors to be interested enough to come back to you with questions later, during the due diligence process.

I’d like to see a top-down projection that added credibility to what you’re doing. I can’t do it. I’d like to see someone else do it. Perhaps it would be useful only to add on to a bottom-up analysis.

Question: Why do the financial projection out to five years when those numbers can’t be credible?

Answer: It’s true that anything beyond three year financial projection, it is difficult to show valid numbers. But if you don’t do the five-year projection, you’re leaving it to your investors to do that math. Investors want to get ROI from life of investment. You do the math. Don’t make the investor do the analysis.

Next Slide: Road Map
This is intended to say where you are within the life cycle of your business.

First, the IP Roadmap; Going from Alpha to Beta to doing a full launch. You may show how revenue comes into the picture. Then you can start talking about the funding roadmap. Show the overlay of the different segments. Show milestones that you’ve hit and how they match up.

Re: funding roadmap, every time you’re doing a financing, your value is more, so your dilution is less. Time investments.

Last Slide: Summary
Team, Market Opportunity and Timing.

Many people use the last slide for a thank you or showing contact info. But your last slide might be up for a while. You want to put your best foot forward, keep it up so they’re looking at it. This slide could be up for half the duration of your presentation.

Appendix
Throw some stuff in here that could be enticing. Do a map of your presentation. Number it so you can bounce around your appendix. Be able to jump to the slide while you’re talking about it. Look at your guide, type in the number, go to the slide and start talking to it, using visuals to answer questions after.

These are the slides you may not have time for, but have them with you so that you can relate to them on a question.

AVOID SAYING

“Our projections are conservative.” (Then why are you telling me these numbers? Tell me your real numbers)

“We have no competition.” (Either you haven’t done enough research to find your competitors or there’s no market for this product and that’s why you have no competition)

“We have a first mover advantage (We don’t want to invest in Friendster. We want to invest in the ones who come later and do it right)

“We only need to capture X% of the market to be successful.” (Top-down projection has no credibility)

Five criteria you’ll be judged on. Err on the side of hitting those five elements. Tough to prioritize. That’s what you have to do.

Q & A
Q. What’s your take on animations in Power Point?

A. Use sparingly. It’s rarely needed. It’s distracting. Occasionally, there is a complicated concept and you need to layer topics.

Q. Do You have to use Power Point?

A. Use whatever tool you need to that will convey your information. I saw something done with Excel that was very visual. Stay away from cartoons.

Q. Can you use a physical prototype to pass around?

A. If you can use something physical to pass around, that’s great. If you’ve got a giveaway that can sit on a jury member’s desk, it works.

Q. How much sophistication in terms of jargon should we assume for the judge?

A. Very little. With 15 judges, it’s unlikely that they will all understand technical jargon.

Q. Is it OK to pass around a brochure at the end?

A. Yes, that’s a good idea. It will remind us after the presentation. It can’t hurt.

Q. How engaged can you get with the group of judges? For instance, can you ask for a show of hands?

A. I’ve seen that backfire incredibly. Eg. “How do you think I can win this competition?” Response, complete silence. Judges are catankerous, old-school dudes. They mean business, they’re very successful.

I wouldn’t go there unless you feel the vibe is so awesome in the room. There’s not often an awesome vibe in the room. That minute you spend trying to rile up the crowd is one less minute you have to present.

Tonight, the New Ventures BC seminar series presents All about Funding: Friends & Family, Angels, VCs. The seminar is presented by Tanner Philp of Lions Capital, a fund management and corporate advisory firm located in Vancouver.

NOTE: NVBC is announcing the companies moving through the next round of the competition tomorrow!

Tanner Philp, Lions Capital
Today we’re talking about what I like to call dialing for dollars 101. We’re going to go over the different types of investors as well as how to approach them and get funding of some significance. I’ll give some do’s and don’ts as well as some goofy things we’ve seen over the years.

I’m a Partner in a local venture capital firm. I’m in the business of making startup businesses just like yours. Lions Capital invests in promising emerging life science and technology companies in BC. I come at this topic with a certain background and biases, so if you think I’m being overly biased, go ahead and challenge me. Ask questions!).

Like many people in this room, we’re working with companies from the first money they ever raised to $100 million market capital companies and anything in between.

BC Advantage Funds
This is a Venture Capital Corporation fund offering a 30 per cent refundable tax credit. The administrative and reporting burden is very small. You do need to get an allocation for this.

The tax credit is offered on a first-come, first-serve basis so check it out sooner than later.

Financing Strategy
For the people who have a sales and marketing background, it is the same kind of blocking and tackling process for getting investors. You need to have a strategy for funding your company and for what objective you are funding.

A lot of entrepreneurs don’t think about the financing strategy when they’re just starting out, but it needs to be considered before a launch.

You should be raising funds towards a series of milestones. The more you achieve those milestones, the easier it will be to raise further funding and take it to the next level.

People chronically underestimate the time it takes to gather the funds. In the case of a high net worth individual, you may be able to close a deal over the first bottle of wine — but in most cases, it is far more challenging. Often, starting out you can be looking at four to nine months… and closer to nine than four.

Example: For me to get unanimous consent from my partners, just to get a presentation with everyone in the room, we’re looking at three to four weeks. Now you can see why some of these deals can take 10-12 months.

Price in these timelines. If you can’t raise equity in the meantime, the terms for venture capital will be egregious.

My firm will do twelve financings in a year. Some of the most seasoned entrepreneurs will have just six to ten financing processes under their belt.

It’s much easier to utilize other people’s assets than do it all yourself. You need to ask yourself what is the best use of your time. Are you prepared to spend 40 to 60 hours a week for six months trying to get funding? That’s how much time it could take.

First Step
Building a good board of directors is one of the first things you need to do. You need someone with financing and fundraising experience, a sales and marketing person, possibly a technical expert. But the financing or fundraising board member is critical.

What’s the right number of directors? From day one, you might be looking at three, including the CEO. As the company progresses, that may get up to five, but more than five can become unmanageable.

Investing Through Bankers
There are a few credible people and a large number of bandits. Talk to your lawyer, check two to three references. It amazes me how people will fail to check references and they’re paying bankers huge fees.

There are a lot of shady characters out there. Check references.

What You Need to Do: Sales Approach

Sources of Capital and Characteristics of Different Investors
You can get money from any of these organizations and you should get money from all of them.

Friends, Government, Angels, Venture Capital, Banks and Lenders and Employees.

NOTE ON GOVERNMENT FUNDING. BC is one of the most positive areas to do research and development from government subsidies.

Banks
Banks and most lenders by definition are looking for businesses that have sustainable cash flow over the past three to five years (which actually works out to about seven to 10 years). It can be a waste of time.

If you own a house, it is way easier to negotiate with a mortgage broker than it is for a commercial banker. Don’t waste time going to the commercial lending group.

Angel Investors
Ideally, you’re looking for someone who has experience in your area of business, have a thick rolodex and of course, a check.

Venture Capitalists
We invest other people’s money. Angel investors invest their own money. That’s the difference.

Funds are slow, angels are faster (but still looking at six months, most likely, to raise the funds). You could be a couple of years away. When planning your milestones, plan for this time.

You need to be talking to your customers and investors now, while you’re still building the thing you’re going to sell. You need to be ready for later.

A typical scenario. You raise $50,000 from an Angel Investor, but that money runs out and you miss your funding milestones. The Angel investor may provide a second round of $50,000, but not likely a third time. They’re going to get tired.

What astounds me is the number of people who take money from investors having an expectation of a passive investor, but they instead have an active investor who a CEO has to manage every two weeks or even more often. You need to have that conversation early.

Most investors in BC are generalists. You may not be restricted in getting investment in certain types of business or tech based only on the investor’s experience.

Government Programs
SRED, IRAP/NRC, Government funds, VCC Program, Innovation Grants, EDC, Non-dilutive.

You have to ask yourself, what are you really getting with an active investor. People will tell you that they have certain expertise, but check their CVs. They may not have that background. They should have great connections and networks.

Dealing With Pressures
One of the most important things is understanding the motivations and what is driving behavior from the other side of the table. What are the pressures?

When you raise money, you are taking away reasons to say “no”.

A high net worth individual who invests $10,000 that grows to a $1 million dollar value may get $100,000.

Five to seven investments is a portfolio.

The people who have dollars also have masters. It could be their wife. In the case of funds, it’s their investors.

VC’s are looking for something that aligns with the interests of their shareholders. Understand the influence.

You should also be able to articulate the time horizon for the investment. This is important for selling the investor. It’s not just the rate of return. It’s the time involved. If you are promising a high rate of return but after 10 years, and the investor only wanted to be in for three years, you could have a big problem with the investor calling the company every single week. “Why aren’t you selling the company? I want you to buy me out.”

Portfolio Diversification
The Sequoia portfolio had 10 investments. All except one didn’t work, but YouTube was the one that did work, with a phenomenal return. For the investor, it worked. But for the company requiring investment, you may have only one shot.

VC’s are of the opinion that you either go big or go home. We will push the company to go for 5X or go for zero.

Who To Call?
To build a sales funnel, you need customers. Fortunately, this is usually pretty clear. Look at the background of the investors and those who have done similar deals.

If you go with someone who understands your line of business, you’ll have a much easier and faster process than if you have to educate the investor.

Example: The guy who runs the big construction company and has a ton of money is not the ideal investor for your software startup; here, you might look for those from successful gaming companies.

Learn who’s who from your lawyer, an entrepreneur and agent and www.cvca.ca

The best candidates have oodles of money and experience in your space. After that, the second-best investor still has oodles of money but may be able to take high-risk investments.

Remember that those who seem like they may have money might not. Timing can be a factory. In the current climate, VCs may be looking at funding fewer companies.

Cold Calls
In my opinion, cold calls can work. I do answer cold calls (perhaps because of my background starting out cold calling). Cold spam does get deleted. But I’ve been told even the cold phone call is a waste of time. You want to find that mutual contact who can make the introduction. A mutual contact will shortcut the relationship-building timeline.

This is a small town. If you network enough and meet the right people, you can get an introduction to anyone in this city.

First Contact Advice:

• Go for a coffee or a glass of wine or a beer first.
• Listen 50 per cent of the time, talk 50 per cent of the time. You’re not trying to bombard someone with information. You’re trying to build a relationship.
• Don’t talk about the technology. They want to know about you and how you’re going to make money.
• Ask about their portfolio and deals they would like to do and why. Ask them what the next steps are that would come in the process. How does the investment process work? How will this affect your strategy? Understand their process and desired terms. That way, you’ll know if you’re succeeding or failing in it.

Follow Up

• Write a thank you note the same day.
• Ask for a follow-up meeting.

Presentation Etiquette

• 1 Hour, 12 slides maximum
• Sell the business, not the technology. Most investors will do due diligence on the technology or get an expert to do it for them. It’s just a box to tick, not the fundamental reason they’re making an investment.
• Know your audience. “Nice to meet you, guy I don’t know at all and whom I want to get $100,000 from.” Do your homework.
• Don’t contradict yourself. (I’ve seen arguments over strategy during a presentation. It just looks really bad).
• Contents: Product, addressable market, team, competition, financial.

Do a Throw-Away Pitch
Your presentation should be able to be understood by a seventh-grader. Bring one of your colleagues and give them your pitch. They aren’t going to be investing in you, but with cynical feedback, you’ll be able to refine your pitch.

Timing the Schedule of Your Pitches
Schedule your best probability investors in the middle of the day. By the same token, if you’re spreading out your fundraising process over several months, go to the good ones in the middle of the process because you’ll be in the groove (and not exhausted yet!). You’ll have canned answers, developed responses to criticisms and you’ll have energy.

War Stories and Things Not to Do in a Presentation

Note#1

We once had a presentation by an owner of a software company who had made millions of dollars when his company went public. We asked him how much of his own money he was going to invest. He said “None! It’s too risky!” Obviously, we just wasted an hour in that presentation. Moral of the story — most investors will expect you to invest in your own business.

You should expect that many investors will expect that you put hard cash into the business. Why should a funder put money into your venture when you’re not willing to do it yourself? This is absolutely going to come up.

Note #2

Two local funds. Funders were looking at a clean tech pitch. They asked the founder which law of physics they were breaking. With a stone cold face, he answered, “the fifth”. It belied a total arrogance that was unworkable.

Note #3

Generally not a good idea to bring your entire management team to a presentation. The investor can feel “outnumbered”. It’s not conducive to a good interactive discussion

Note #4

The CEO must be the one to give the pitch. 10 per cent of the time, the founder or CEO (who is still at the helm of the organization) is not comfortable giving the message. That’s an automatic “no”. If you can’t carry the ball, you can’t be in that role.

Due Diligence

Typical items include a management references and CVs, a strategy review, techn ical review, market analysis, IP review and much more. You want to be prepared in advance. Organize a due diligence binder ahead of time (you don’t want to have to take two months to get back to them. You don’t want to lose their attention for even a moment. Know where you are in the due diligence process at all time.

Keep two due diligence binders (One for your investor, one for yourself). Include even simple things like the CVs of your people.

What Investors Are Looking For

• An ideal company for an investor has:
• A team with applicable knowledge
• Addressable large and growing market
• Competitive advantage
• Clear and scalable business model
• Market validation
• Credible vision of success

No company has all of these, especially at the early stage. You’ll need investors who are willing to help. But investors are in the business of saying no. A large part of raising funds is taking away their reasons to say no. Understand their issues and hurdles.

Just ask them, what are the top three reasons they don’t want to make this investment?

Can’t Get Money?

Something like 50 per cent to two thirds of the investment decision will be based on the quality of the team. One of the first things you have to ask yourself is do you have the right people? Do I have the right technical people? Sales people? Most of the time, when an investor says “no”, it’s because you’re missing an element.

You can get advisors, management team additions or new employees to address this.

Another problem is when you’re looking at the wrong group of investors. For instance, we don’t invest in online companies. We just don’t.

Your timing can be wrong. Eg. Greece is going to hell in a handbasket, their portfolio is down five per cent or whatever. Summer is often a horrible time. You don’t want to be running out of financing in July or August. Every high-net worth individual is off on vacation, unreachable. Only one or two in ten financings get closed in that window. The people you’re typically asking for money have lots of it and they usually like to travel.

Another big problem is that your terms are not right for the market. High net individuals typically all know each other. They share terms with each other. They will call up their buddies and ask about the terms.

How do entrepreneurs overcome this built-in advantage investors have? It’s very hard for an entrepreneur to know this information, but a good securities lawyer would be able to know if your terms are market-ready or not.

Other entrepreneurs who have been successful in raising funds here or south of the border will be able to also help you determine appropriate market terms.

Synonyms for No

A lot of things actually mean “no”. First and foremost is “maybe”. This is true eight out of ten times. If an entrepreneur is in this situation, go to your mutual contact and get them to find out information. Find out what the issue is.

Other legitimate reasons are: It doesn’t fit our mandate. We don’t have the money right now. It’s too early (certain milestones have not been met).

Sometimes, “it’s too early” means they’re not buying it. They don’t want to rule it out in case you hit it out of the park next year.

For investors that say “we only fit companies that have revenue”, keep them on the burner. When you do progress, you’ll meet their criteria.

“Needs a new CEO”. This is a tough objection to fight.

Strive to get to “No” as quickly as possible. The next best thing to “Yes” is “No”, so you can get on to the next investor faster.

In contrast the only good synonym for “Yes”… is “Yes”. Until the money is in the bank, you can’t start counting it.

Do Investors Sign NDAs?

No. Investors don’t sign NDAs. Especially people who are on the technical orientation side, this scares them. But it’s a practical reality that you have to deal with.

The reason is that any investor who looks at any volume of deals has no way to know if they’re breaching an NDA. As a whole, the industry has said that they will not sign them so they don’t have any liability from signing the NDA and looking at another proposal from a different company.

Best thing to do is not give any information to investors that you don’t want to show up on a wall in Starbucks. Just don’t give that information. This is also true for anything that is unique about your business plan.

What About Legal Costs?

I’m an investor and I want to make an investment in your business. Who pays my legal bills? It is the de facto standard that the company pays the investor’s legal bills. You should expect that. But get them to cap the amount. Put a limit and restriction on it. How much? Million-dollar financing could be $10,000 in legal bills or under.

What to Look for (or Avoid) in an Investor

Be wary of investors who say they can take care of all your problems but can’t deliver.

Deal Terms and Structure: The Basics

Price, Pre-Money Valuation, Investors, Amount, Capital Structure, Legal Bills, Date

Not-So Basics

Board seats, liquidity preference, preferred shares, control, common shares, dividends, drag along, anti-dilution. If investors start talking about this stuff, you’ll need to talk to your lawyer. You need to know what sort of control you’re giving up in your business.

The structure should match the stage. Angel investors are now filling a lot of the funding gap that used to be taken by other types of investors. Typically, if you’re looking at $2 million or more, you’ll be looking at institutional investors.

Negotiate Terms

• Investors often have more experience than entrepreneurs, so get advice from your lawyer.
• Consensus is when both parties are equally unhappy.
• Remember that investors are future business partners and expect the same in return.

Valuation

Start-ups are very hard to value rationally. They’re not based on investments previously made or discounted cash flows. The revenue budget is ALWAYS wrong. The only thing that means anything is when we’re going to run out of cash next.

What you do is look at similar companies. Eg. You’re an outsourced IT company. Apply a valuation with a similar market cap, take all of the big companies out of the equation.

Talk to lawyers and other entrepreneurs to try to get valuation information on six to ten companies that are comparable to yours.

Be realistic. The higher the input valuation, the lower the return at the end of the day. It’s all a bit of voodoo.

Most start-ups are valued in the $1 million to $3 million range. You want to think through your total fundraising strategy. Call investors you are anticipating for the next round. Tell them what you have planned in terms of revenue and ask them what they think the valuation would be and what sort of terms they might be looking for. Always increase the valuation.

If your company gets revalued at only half of last year’s value, this is not nice to granny (friends and family). Your first investors are not really investing in your business model — they’re investing in you.

I’ve been very up front with family and friends. “There’s a very high likelihood you’re going to lose every dollar you give me.” Because I’m honest up front, I can talk to them after if the value does indeed go to zero.

The people who are going to bear the brunt with revaluation are your friends and family. Start off with a low valuation, increase it reasonably.

A Must Read: Top 10 Lies of Entrepreneurs from Guy Kawasaki

Also read the Top 10 Lies of Venture Capitalists