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