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CONVINCING INVESTORS
By Marc Kramer
"Web Sight"
marc@kramercommunications.com
Last week, I spoke at a seminar held by the Entrepreneurs Forum of Philadelphia at the Federal Reserve in Philadelphia about how to raise money from private and venture capital investors. What I heard and what I know from experience tells me that raising money today is no different, regardless of the ability to communicate through the Internet, as it has been over the last 20 years.
On the panel was Bruce Luehrs, a partner at Edison Venture Fund; Tom Drury, a partner at Base Camp Ventures; and Janet Paroo, a partner at New Spring Ventures, which is located in our readership area.
First, I would caution just sending a business plan without an introduction. Venture capitalists, private investors and government funding sources typically receive a thousand or more plans a year. They only fund about one percent of what they receive.
With that said, if you are luck enough to get to meet with an investor be prepared to answer the following types of questions:
What did you invite us? This is the best question you can start a meeting with because it gets the investor on your side and let’s you know how you should shape your presentation.
What does your product or service do and what makes it better than what is currently out there? Really know the benefits and features and how they stack up against the competition.
Who is your competition? If you say there is no competition, the investor will close the plan and thank you for wasting their time. Every company has direct or indirect competition. When Amazon started selling books over the Internet, they didn’t have direct competition on the Internet. Their competitors were brick and mortar bookstores.
What is the barrier to entry? A question that most executives would say went the way of disco, but one that is asked. The investor really wants to know how easy is it to jump into your business. Maybe the barrier is your ability get products at a price know one or few people can. Or maybe the barrier is the specific industry knowledge your employees have that is hard to duplicate.
What experience does the management team have? Make sure you would write a check to have the people on your team run the business if you were an outside investor. If not, go recruit the best people in the industry. Recruiting the best makes it easier to raise new money. A client of mine recruited the number two executive at major company who was making $5 million a year. The executive was so enamored with the business that he agreed to take all stock instead of cash.
How much money are you looking for? Remember you will be taking losses for at least two years and possibly more. Figure out what you will need to be cash flow positive. Base your request on keeping the boat afloat long enough to raise a second round of money. Investors get very worried when they read the financials and the company is showing a profit in the first year and that the money they are asking for is enough to take them to the promised land.
How much of the company are you looking to sell for the money you are asking for? Never an easy question to answer. If you project $25 million in sales you probably need $1 million to $1.5 million and you will probably have to give up 20 to 40 percent of the company based on the uniqueness of the concept and the experience of the management team. Take a look at what similar types of companies have raised.
What will you do with the money? You can’t reply it will be used for general purposes. Your answer is based on your projections. How much will it cost to acquire and service customers and to build infrastructure. The answer might be 25 percent for sales, 40 percent for marketing and 35 percent for infrastructure development.
There are three excellent books that will help you find professional venture capital and private capital and understand the expectations and requirements of each source.
"Where to Go When the Bank Says No" by David Evanson and published by Bloomberg Press. This book provides insights and contacts to a variety of financing sources. The author is a former venture capitalist and investment banker. If you are interested in writing to the author, his e-mail address is devanson@fcair.com.
"Finding Money: The Small Business Guide to Financing" by Kate Lister and Tom Harnish and published by John Wiley and Sons. This book was written by a former banker and business consultant. The book covers funding sources from venture capital to private investor to government funds.
"The New Ventures: Inside the High Stakes World of Venture Capital" by John Wilson, a business writer, was published by Addison Wesley. The book gives in inside view what venture capitalists look for investments and how the process works.
Remember one thing when raising money, ask for more than you need because you can bet you underestimated your expenses and overestimated the market’s reception to your business.