Pitching to a VC is all about YOU. An investor is investing in you, as much as your idea and business concept.

Thinking startup? David S. Rose’s rapid-fire TED U talk on pitching to a venture capitalist tells you the 10 things you need to know about yourself — and prove to a VC — before you fire up your slideshow.

David Rose is a serial investor and a serial entrepreneur. Here’s his list of what is important in convincing an investor that you are the right choice.

It’s about
* Integrity
* Passion
* Knowledge
* Skills
* Leadership
* Commitment
* Coachable

And of course, it needs to be presented with an infectious enthusiasm!

On presentation techniques, and powerpoint, David says:

“Without question I’ve seen many presentations (both with and without PowerPoint) that are Too Slick, and to me they are at least as much of a turnoff (perhaps even more) than is one that is Too Rough. HOWEVER, that’s not the only choice one has. The slickness is *not* just a function of the slides; it has much more to do with how over-rehearsed, or patronizing, or ‘un-real’ the presenter is. I see hundreds (perhaps even thousands) of presentations each year, including many dozens at conferences like TED, where presentation is often elevated to a high art. And while great presentations are far from common…they do happen.

There’s a wonderful word, first used by Castiglione in 1528, that nails the concept. “Sprezzatura” is “a certain nonchalance, so as to conceal all art and make whatever one does or says appear to be without effort and almost without any thought about it.” That is to say, it is the ability of the courtier to display “an easy facility in accomplishing difficult actions which hides the conscious effort that went into them.”

If you watch the very best presenters at their very best, people like Larry Lessig and Rives and Steve Jobs and Seth Godin et al, there is absolutely NO feeling that they are Too Slick. But all of these guys spend absolutely enormous amounts of time preparing their slides, rehearsing their presentations and mastering the technology…so that the result comes off as “without effort…and thought”. ”

David S. Rose on pitching to Venture Capitalists is a post from: Venture Capital Centre. Click Here To Download Our Free E-Book Explaining Exactly How To Create A Business Plan That Investors Will Read

How big are your risks? What is the outcome? What can I do about it?

Simply treating all risks that you may be exposed to in your business “as equal” in your business plan doesn’t really help you manage them effectively, nor will it help an investor understand them. Further, whilst you probably know intuitively that some are more likely than others to occur, an investor who doesn’t really know you, will be left thinking you haven’t really thought them through.

I had a lot of exposure to risk in my investment banking career, and have subsequently carried this discipline to business. Of course, the risk metrics used in the investment banking world has been proven to be flawed post GFC, but the framework of assessing risk is a good one.

That is – for any given risk, a bank assesses what is the probability of it happening and what is the likely impact, and what are the mitigating actions to minimize the risk and or address the outcomes if it does happen. I don’t think Lehmans were very good at assessing risk to put it lightly but the framework was there I am sure.

It is pretty straightforward when all we are talking about is numbers – and when you have huge statistical ddatabases at your fingertips:

eg $100,000 invested in a company is a $100,000 at risk.

A) What’s the worst case scenario? $100,000 loss.

B) What is the probability of this happening? Using statistics, the bank would consider that, on average, it should be expected that a loss will occur x% of the time [averages proved to be a very expensive metric to rely upon in the run up to the GFC – as it was not an average event].

C) What can we do to reduce the impact of risk?

a. not take one [and not get a return] or

b.hedge.

Hedging is generally the preferred option.

I am not suggesting that it is necessary to develop the level of sophistication that a bank might have in their assessment of risk, but we can apply similar principals that will add enormous clarity on what the risks are in your business. It is not necessary to get too hung up on the exact score you give something your gut will tell you.

In business and ideally in your business plan, your assessment of risk can follow a similar framework as follows:

• State the risk – in wordss is fine
• Apply a score between 1-10 to show the probability of occurrence
• Apply a score between 1-10 to show the impact of such an occurrence
• Take the product of the probability and impact scores
• Rank them
• Add in a mitigating action to minimise the impact
• Are there any actions that can be taken to minimse the actual risk of it occurring?

Here are some examples of how risk in your business might be presented – you wouldn’t have all these entries in your assessment only one for the risk of death of the owner for example – the ones listed are only for illustration purposes:

Assessment of risk is A LOT more subjective in business in general than lending money. But attempting some sort of objective assessment like the above will go along way to demonstrate you have a handle on the overall risk of being in business.

Risk Model For Venture Capital Funds is a post from: Venture Capital Centre. Click Here To Download Our Free E-Book Explaining Exactly How To Create A Business Plan That Investors Will Read

In Part One I talked about how a business needs to go from zero to $1m in the eyes of Michael Masterton. This is infancy in the lifecycle of a business.

In infancy, the focus was developing your Optimal Selling Strategy by understanding your marketing, testing different things,  and creating a unique selling proposition. It was also about adding as many new clients as possible.

Many businesses stall in infancy and become victims of their own success. The owners may reach a point where they can make a good living from the business. The danger of this is that unless things change, they will stagnate. (95% of businesses stay smaller than $1m turnover per annum).

Here I talk about the next stage – childhood, in which a business goes from $1m to $10m.

“Childhood” is about changing gears and adding new products (even at the risk of cannibalising your existing products).

At this stage of the business, here are some points to note:

* Add new ‘front end’ products
* Innovate – look for improvements to existing products – not revolutionary new products (originality is overrated)
* Add many products and ‘let the market decide’ which will work
* Add backend products that you can sell to your existing clients.
* Aim for speed, not perfection
* Don’t jump categories – make changes to existing products that are one degree removed.
* Don’t try to make huge leaps or change the selling channel.

Most importantly, acknowledge you need to grow personally to handle and lead the rapid growth of the company.

This is most likely to be the stage at which your business decides to seek capital. Having proven its business, it can use the capital to grow the business.

Critically, this is the stage at which your business is the most attractive to an investor.

Ready, Fire, Aim :Taking your business from $1m to $10m – lessons from Michael Masterton is a post from: Venture Capital Centre. Click Here To Download Our Free E-Book Explaining Exactly How To Create A Business Plan That Investors Will Read

Often you hear people compare a new venture to the opportunity that has passed us by … just as if we had been offered an opportunity to invest in Google (or Microsoft, or eBay, or amazon.com), and passed it up. By not investing in Google, or eBay, or amazon.com …just imagine your loss. If you had that chance now, of course you’d take it. Or so the logic goes. (The recent marketing by Dubli heads down this path…)

But here’s the funny thing … the start of Google had Sergey Brin and Larry Page wearing out shoe leather around Silicon Valley trying to get capital … endlessly pitching … and with lots of smiles. But no cash.
(Source: The Search, John Batelle)

It wasn’t until 1998 that Andy Bechtolsheim put in some cash, and the real success story starts from there and other funds coming in after that – including Jeff Bezos of Amazon fame. At the door knocking stage it didn’t even have a revenue model or a company structure (it did have a name, having just changed from being BackRub)

So, what did all those venture capitalists not see, that in retrospect seems like such an amazing opportunity.

Whatever it was… here’s the lesson: venture capitalists miss opportunities daily. And they don’t mind.

And this also presents your challenge. Even when you (think that you) have a sure thing, that the market needs what you have and that anyone would be mad to not want it… remember that you are competing with so many other opportunities put before them, that the chance of them passing on your opportunity is high.

If smart people can pass on Google, then they can pass on you.

There are some valid reasons for this. In the early days, Google had fantastic technology but a poor revenue model. In fact, it is possible that if it were not for the hype around dot coms, a plan as skinny on detail as Google’s would not get off the ground even now.

Your job as an entrepreneur, is to make sure you have a strong business model and can convey to a potential investor how you will commercialise your technology, and what their risks are. And of course what the upside will be.

For a great read on the steps that lead Google to where it is now, check out The Search. . Or here.

Just a note – the Google founders had a real life “start in a garage story” – much as Microsoft did. Their frugality extended to their celebrations on receiving their first investment: Burger King.

“Imagine investing in Google at the start…” is a post from: Venture Capital Centre. Click Here To Download Our Free E-Book Explaining Exactly How To Create A Business Plan That Investors Will Read

Don’t rely on a strong environmental benefit, or any “green” factors to help you get investors, unless those factors help drive the market for the product.

Don’t get me wrong, I am all for being green. What I am saying is that being green is not a reason in itself to attract an investor. Nor, for that matter, is it a reason to attract customers.

Even venture capital funds that have a green philosophy still aim for target ROI, and the same criteria as other investors (management strength, market, marketing, exit strategy). In these, green is just the price of entry.

In marketing and sales, all things being equal, customers may choose a green product over a “standard” product. Hopefully, all things being slightly unequal (ie a higher price), they will also choose a green product. But reality is that as soon as the price differential grows too large between self interest and world-interest, people will choose self interest. Of course everyone has a different profile, and some will be prepared to go to extreme lengths to protect the environment, and as such may be willing to pay a higher premium.

Investors are the same – they may choose a green investment over something else, but rarely at a premium.

The exception is that if “green” is the reason for driving consumers, and is part of the overall competitive advantage of the company and its offering, then this will have a positive benefit. Keep in mind that in this case, it is a strength not because of the investors concern for the environment, but because of how they see that influencing the market.

So, in creating your pitch for investors, remember their driving motives. And, if your customers are driven by environmental concerns, and this helps the investor get what he wants, then it is an appropriate strategy. Keep in mind that a decision to invest is driven by commercial aims, not environmental concerns.

(Coming soon – blogs on businesses which are in essence propped up by or dependent upon government subsidies for environmental and economic stimulus. Eg the recently (Feb 2010) cancelled insulation scheme, and the impact this types of artificial demand can have).

Being Green – and its impact on raising venture capital? is a post from: Venture Capital Centre. Click Here To Download Our Free E-Book Explaining Exactly How To Create A Business Plan That Investors Will Read

Valuation raises its head as a subject after an investor has determined that the business is worth looking at. It is not the first thing that an investor will look at. In fact, considering the number of business plans that don’t get read past the executive summary, it is something which business owners spend far too long dwelling over.

Having said that, once a plan is actually being considered, it becomes an important factor.

There are two sides to the valuation.

For a business owner, it controls the “cost” of the funding that they are seeking ie how much they need to give up (in equity) in order to get money into the business.

For an investor, it controls what they get for their money.

An investor buys into a company (and its potential) so that it can earn some money and then get that money out again. The mechanism is generally an exchange of funds for a percentage of the ownership of the company. This means a calculation must be made about what the company is worth, and what the business owner is prepared to give up to get the funds.

In addition to the valuation question it’s a complex negotiation that has many factors involved:

The valuation of the company, and the method used for this
- How much the owner is willing to give up and how much the investor wants
- How much the investor needs these particular funds
(if cash is low, and there are no other sources, the investor will probably negotiate a better deal)
- How the deal is structured – debt or equity, a mix, or debt that converts to equity.
- What else the investor is putting into the deal – expertise, contacts etc (“Smart money” is better than just money)

A valuation that is too high, and by implication represents a higher cost of entry to an investor, means someone might walk away from a deal. A valuation that is too low means the owner is underpaid for their asset.

At the heart of this are two opposing forces. Generally the owner will want to give up as little as possible, and the investor will want to take as much as possible. With all other things being equal, and hoping that the owner isn’t out of cash (which means the investor will pretty much get whatever he wants!) then the valuation provides a mechanism for structuring a deal.

There are many methods for valuation. Some are explained here.

None of these is completely accurate, and in fact they may give wildly different valuations.

At the end of the day, the business owner has to decide if what he gives up is worth the cost (in equity). So, often the right question is not to look at what you have now, but to look at the potential you can have with this investor on board (with the benefit of the funds, plus the advice).

A few years ago there was a great show on Seven called Dragon’s Den which had budding entrepreuners pitching their ideas to four succesful Australian business people. The question that was often asked, and was foundational to the negotiation was “would you rather have a smaller slice of a big pie, or a big slice of a small pie?”. Venture Capital in prime time was great viewing, and there were some instant lessons on how to pitch and negotiate.

This remains as the question to you as well… what are you willing to give up to get to where you want to be?

Importance of valuation in the venture capital equation is a post from: Venture Capital Centre. Click Here To Download Our Free E-Book Explaining Exactly How To Create A Business Plan That Investors Will Read

Venture Capital is a specific term that refers to funding obtained from a venture capitalist. These are professional serial investors and may be individuals or part of a firm. Often venture capitalists have a niche based on business type and or size and or stage of growth. They are likely to see a lot of proposals in front of them (sometimes hundreds a month), be interested in a few, and invest in even fewer. Around 1-3% of all deals put to a venture capitalist get funded. So, with the numbers that low, you need to be clearly impressive.

Growth is usually associated with access to, and conservation of cash while maximising profitable business. People often see venture capital as the magic bullet to fix everything, but it isn’t. Owners need to have a huge desire to grow and a willingness to give up some ownership or control. For many, not wanting to lose control will make them a poor fit for venture capital. (If you work this out early on you might save a lot of headaches).

Remember, it’s not just about the money. From the perspective of a business owner, there is money and smart money. Smart money means it comes with expertise, advice and often contacts and new sales opportunities. This helps the owner, and the investors grow the business.

Venture Capital is just one way to fund a business and in fact it is one of the least common, yet most often discussed. It may or may not be the right option for you (a discussion with a corporate advisor might help you decide what is the right path for you).

Here’s a few other options to consider.

Your Own Money – many business are funded from the owner’s own savings, or from money drawn from equity in property. This is often the simplest money to access. Often an investor would like to see some of the owner’s fund in the company (”skin in the game”) before they’d consider investing.

Private Equity – Private Equity and Venture Capital are almost the same, but with a slightly different flavour. Venture Capital tends to be the term used for an early stage company and Private Equity for a later stage funding for further growth. There are specialists in each area and you’ll find different companies with their own criteria.

FF & F – Family, Friends and Fools – Those closer to the business and often not sophisticated investors. This type of money can come with more emotional baggage and interference (as opposed to help) from its providers, but may be the fastest way to access smaller amounts of capital. Often multiple investors will make up the overall amount needed.

Angel Investors – The main business angels vary from venture capitalists in their motives and level of involvement. Often angels are more involved in the business, providing ongoing mentorship and advice based on experience in a particular industry. For that reason, matching angels and owners is critical. There are substantial easily locatable networks of angels. Pitching to them is no less demanding than to a venture capitalist as they still review hundreds of proposals and accept only a handful. Often the demands around exit strategies are different for an angel and they are satisfied with a slightly longer term investment (say 5-7 years compared to 3-4 for a venture capitalist).

Bootstrapping – growing organically through reinvesting profits. No external capital injected.

Banks – banks will lend money, but are more concerned about your assets than your business. Expect to personally guarantee everything.

Leases – this may be a way to fund particular purchases that allow for expansion. They will normally be leases over assets, and secured by those assets. Often it is possible to lease specialist equipment that a bank would not lend on.

Merger / Acquisition Strategy – you may seek to acquire or be acquired. Generally even a merger has a stronger and a weaker partner. Combining the resources of two or more companies can be a path to growth – and when it is done with a company in the same business, can make a lot of sense – on paper at least. Many mergers suffer from differences in culture and unforeseen resentments that can kill the benefits.

Inventory Financing – specialist lenders will lend money against inventory you own. This may be more expensive than a bank, but might allow you to access funds you could not have otherwise.

Accounts Receivable Financing / Factoring – again a specialist area of lending that may allow you to tap into a source of funds you didn’t know you had.

IPO – this is normally a strategy after some initial capital raising and having proven a business is viable through the development of a track record. In Australia there are various ways to “list”. They are useful for raising larger amounts of money ($50m and up) as the costs can be quite high ($1m plus).

MBO (Management Buy Out) – This tends to be a later stage strategy, rather than a startup funding strategy. In essence debt is raised to buy out the owners and investors. It is often a strategy to gain back control from outside investors, or when investors seek to divest themselves from the business.

One of the most important things to remember across all these strategies is that they all require a significant amount of work in order to make them work – from the way the business is structured, to dealings with staff, suppliers and customers – need to be examined and groomed so that they make the company attractive as an investment proposition. This process of grooming and derisking can take anywhere from three months to a year. It is often costly both in actual expenses (consultants, legal advice, accounting advice) as well as changing the focus of the owners from “sticking to the knitting” and making money within the business to a focus on how the business presents itself.

Options To Venture Capital is a post from: Venture Capital Centre. Click Here To Download Our Free E-Book Explaining Exactly How To Create A Business Plan That Investors Will Read

Download or open this Guide to SME Business Finance which is a Commonwealth report on sources of funds (2004). Despite the age of the report it is a highly valuable comparison of options.

Contents

Introduction

1. Options for Financing Business Growth
2. The Business of Finance
3. Financial Information Requirements
4. Business Planning
5. Accountants
6. Government Assistance
7. Other Australian Government Information Resources
8. State and Territory Programs – Websites

Sources of Finance is a post from: Venture Capital Centre. Click Here To Download Our Free E-Book Explaining Exactly How To Create A Business Plan That Investors Will Read

Some Great Definitions

This is a useful overview of some main points, as provided by VentureCapitalSA

Can private equity help my business?
If you are aiming to start up, expand, turnaround, buy into or buy out a business, private equity funding could help you. Private equity investors are seeking unlisted businesses with potential for growth who are willing to trade a share in the company for investment. Private equity funding is provided to businesses in all sectors including food, technology, retail and manufacturing.

Do I need a private equity partner?
For private businesses, finding the money required to achieve significant growth can be the biggest factor prohibiting expansion. If you are willing to trade a share of your business to an experienced private equity investor, you stand to benefit from not only the injection of money but also the experience and skills of your new partner. Private equity investors aim to increase the profitability of their investment companies by providing a stable base for strategic decision making, not by taking day to day control. Think of it this way: you may have a smaller percentage ownership, however in a few years, that percentage should be worth more than the whole of your business was before. However, if you are not willing to release a share in your business, private equity investment is not suitable for you.

Expansion
The company is now established and requires capital for further growth and expansion. The company may or may not have made a profit at this stage. This may be a period of rapid growth and the company will usually require several rounds of capital injection as it achieves the milestones set in the business plan.

How does private equity work?
Private equity investors receive an agreed share of the company in return for the risk of investing. The investor is a business partner, sharing the risks and successes of the company. Funding through private equity is very different than receiving a bank loan. Repayments for bank loans must be made according to a contract, regardless of the success or failure of your business. Private equity investors hold a stake in your company and their return on their investment is dependent upon your business growth. Many private equity investors provide management expertise and experience, contacts and discipline. The investor has to be very careful about their investment because of the high risk in a company failing. They therefore have to check that the information provided is correct (due diligence) and they seek returns that are very high. In general, private equity investors are interested in companies which have the potential to significantly increase turnover within 2-5 years.

How does the investor realise their return?
The investor will want an eventual exit, there are a few ways they can exit the business and it is important to have an exit strategy agreed as early as possible. Ways for an investor to leave a company and realise the return on their investment include: 1. Sell the shares back to you for a profit 2. Sells shares to another investor 3. Sell when the whole company is bought by a larger company 4. Help list the company on the stock exchange

IPO (Initial Public Offering)
The sale or distribution of company shares to the public for the first time (i.e. listing on the Stock Exchange).

Management Buy-in (MBI)
These are funds provided to enable a manager or group of managers from outside the company to buy in to the company.

Management Buy-out (MBO)
These are funds provided to enable current operating management and investors to acquire an existing product or business from a public or private company.

Pre-listing (or pre-IPO)
Investment into a company where it plans to list on the Stock Exchange, usually within a period of a few months to two years.

Pre-seed / R&D
Refers to funds used to expand the concept and advance product development, usually during the research and development phase of the business.

Seed
Provided to companies which have not yet fully established commercial operations, and may also involve continued research and product development.

Start-up
The company is in the process of being set up or may have been in business for a short time. Such firms have not yet sold their product commercially and have no track record. Investee companies have completed the product development stage and require funds to initiate commercial manufacturing and sales.

What do investors look for in a company?
In order to gain private equity investment a company must be able to demonstrate: – A product or service with a unique selling point – A business plan showing growth prospects and the ambition of the company – An effective management team with relevant experience Efficient financial management – A planned strategy for offering a share in the company in return for investment

What is a Business Angel?
“Angel” investors tend to be wealthy individuals who may look to invest in a high-growth company that has synergy with their own business or competes in a market where they have succeeded. “Angel” investors generally invest in small businesses in deals considered too small for private equity firms. Typical “angel” investments are around $10,000 to $1 million. As “angel” investors generally invest in companies within their own expertise, the investor may seek a hands-on role in the management of the company or will look to act as the company’s mentor.

What is a private equity firm?
Private equity firms are fund managers who invest capital on behalf of institutional clients such as superannuation funds and insurance companies. They are exposed to the risk of the company failing and as a result, look to invest in companies which have the ability to grow very successfully and give higher than average returns to compensate for the risk. When private equity firms invest in a business they become part owners and generally require a seat on the company’s board of directors. They usually do not take day to day control.

What is private equity?
Private equity is finance provided in exchange for an equity stake in a company. Private equity is provided on a medium to long term basis and provides a capital base for future growth. Investors can provide strategic operational and financial advice based on experience with other companies in similar situations.

What is the difference between Private Equity Firms and Angel Investors?
Private equity firms are professional investors who dedicate all of their time to investing and building innovative companies. The angel investor is an individual who invests in companies for their own interest. Typically angel investors invest less than $1 million in any particular company, whereas private equity firms usually invest more than $1million per company. Angel investors are usually successful business people who have spare cash that they see achieving comparatively little in their bank accounts. The value of angel investors is that they often back and finance small businesses. Angel investors expect a return on their money of at least 30% and want equity as a security for risk. Angel investors generally invest in companies within their own expertise; the investor may seek a hands-on role in the management of the company or will look to act as the company’s mentor.

What is venture capital?
The term Venture Capital refers particularly to the private equity investments made at the very early stage of a business in order for the business to grow and develop. The terms Private Equity and Venture Capital are often used interchangeably.

What rate of return do Private Equity Firms expect?
Private equity firms tend to favour high growth companies that are likely to provide them with a high rate of return. The rate of return sought will vary with the risk: seed and start-up deals are considered very high risk and the minimum rates of return sought over the life of the investment will generally be around 30-40 percent per annum and above. As the perceived risk diminishes with the early expansion stage, expansion stage and management buyout and buy in deals, the minimum annualised rates of return may reduce to the 20-30 percent range. Investors generally look to exit the investment after three to seven years. The private equity firm only realises a return on their investment if the company goes public (IPO) or is merged or purchased by another company. In some cases the investment will be sold to another private equity firm.

Where do Private Equity Firms get their funds?
Most private equity firms raise their funds from institutional investors such as pension funds, insurance companies, endowments, foundations and high net worth individuals.

Who provides private equity?
Private equity is provided by private equity firms and by business angels

Understanding Private Equity and Venture Capital is a post from: Venture Capital Centre. Click Here To Download Our Free E-Book Explaining Exactly How To Create A Business Plan That Investors Will Read