This is a presentation by Granite Ventures who have over $1b in capital invested. The presentation, while it has an American focus, is very informative as an overview on VC from the entrepreuner’s perspective including options on financing, launching a startup, and the process of raising capital.
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Bootstrapping is the process of growing by reinvesting profits back into the business. A business may start with something from the owners, but often not much. In 2003 61 % of the Inc 500 companies had started with $50,000 or less – this normally comes from personal saving rather than outside investors. (This is not to say they all continued this way… ). Costs are kept low, budgets highly monitored, and profits are used to grow. This has advantages and disadvantages. The advantage is that it appeals to many people’s ideas of a good strong work ethic, it keeps companies debt free, and often forces people to find creative ways to get results (ie focusing on selling, rather than investing tens of thousands in a web site). It proves a model will work, rather than just relying on dollars to make it work. The disadvantage is that growth is limited to the amount of profits. A business may just survive, when it had the potential to thrive.
Seth Godin wrote a great book about it. Click here to download it.
Bootstrapping is a mentality. The problem is, it might be a mentality that stops someone from creating a fortune. By getting by on incremental change, and not leveraging an opportunity, the danger is that the business stays small.
Investors will want to see a balance of the good aspects of bootstrapping (keeping costs low, getting by with what you need instead of buying $1000 chairs and a new Porsche) and the slight disposition to risk that shows a business owner can create something bigger.
Often a good fundable business is one which has proven itself through organic growth – building on existing customers and sales activities, and proven that the products and systems work – but that needs capital in order to leverage these assets. A dream investment opportunity is one which is proven, yet constrained by lack of capital.
Some businesses just don’t work with limited resources, so would not be possible to run as a bootstrapped operation. Examples include anything with high fixed costs, longer sales cycles, high R & D, and when the only strategy is to enter a market quickly (some innovative products need to start strong in order to gain first entrant advantage).
As a business owner seeking capital, part of your “packaging” to an investor needs to be a clear demonstration of those things which you have achieved on your own, so that you are seen as capable and resourceful. Companies that seek to raise capital with just an idea, and no results yet, are unlikely to win funding… even if the “results” are not profitable. A company that shows it can win customers, but is losing money (due to its size for example) may still be an attractive investment.
A brilliant example of bootstrapping is Ovid Technologies started by Mark Nelson in the late 80s. He ran the business from an apartment, and as he grew, he rented more apartments in the building… running cables in and out of windows. It grew to 150 employees and in 1994 listed, raising $10m. In 1999 he sold for $200m. This is a great story because it shows both the creativity and persistence that was required to grow the company, together with the final payoff that this gave the owner in being able raise funds, then cash out.
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There’s apparently only about seven movie themes, and every movie is a mash up of these, with a few variations thrown in. There’s the underdog coming out on top (any Rocky movie), impending doom and the lessons it teaches us about ourselves (Titanic or any disaster movie), love lost, revenge, love won… In fact, there is a point at which if a movie doesn’t fit one of these classic themes, it will either 1. Flop incredibly, 2. Be a major success and create a new genre. (Hint: there’s more flops than genre creation going on).
It’s not unlike cooking… there’s only so many ingredients. What matters is how you put them together.
One of the implications of this is that originality is overrated. You are far better taking a slightly worn business idea and apply it to a new product, then try and come up with something truly unique.
Business is the same. There are a limited number of paths to follow to grow.
Here is a list of “drivers” that can change a business or an industry. Where does your idea fit?
Reconstruction of the value chain and distribution model: This usually happens when a step is dropped from a distribution channel . Examples: a store (Bunnings) becomes an importer and avoids middlemen creating unbeatable value (extreme case – some brands are manufacturers and retailers ie Ikea): Technology makes manufacturers or services more accessible such as publishing (self publishing is easy, and avoids having to be “chosen” by a publisher, as well as putting a higher percentage of profista nd control in the hands of the writer): Virtually anything sold on the internet: Remote delivery of services (guru.com). A decade ago, just getting bigger –and creating a superstore was a paradigm shift – now it takes more to be unique. How does your business jump over a previously imperfect delivery system?
Changes in sales strategy or payment terms: Some companies exist because they have taken an idea from one industry, given it a slight twist, and applied it to a new industry. Rentsmart and its competitors are an example of this. Going back 40 years, everyone paid cash for purchases. Credit enabled access to machinery for production or recreation (cars and boats for example…) that would have been otherwise out of reach. The simplicity of the financial products drives the sales process. Taking this concept and applying it to what was normally a smaller business purchase anyway (desktop computers at $1000-3000) and converting this to a weekly $10-30 ongoing payment makes the products so much easier to buy.. therefore making money for the financiers as well as the product suppliers.
Creating economies of scale: Many industries are populated with small inefficient firms. An example would be the printing industry where the investment in machinery is significant compared to the size of the business. Competitive advantage can be created by combining many inefficient companies. Fixed costs as a proportion of sales go down, and this way be sufficient to create a new advantage of lower costs – continuing with the print example, there are several large companies in Australia which have acquired dozens of smaller firms, and as a result of the combined strengths of these plus new practices (such as running three separate shifts per day on the same machinery) can drive down costs of production.
Changes in technology: Improvements and inventions cause change… wireless technologies, biotech, mobile phones. You have a new thing. This is a clear reason for creating a new business. This category refers to revolutionary change.
Evolutionary change: Moore’s Law states that in some areas (speed of computer chips for example) speed will double every eighteen months. Where this law applies, there will always be room for new players and new applications. Costs are driven down as well as potential lifted. How can an existing range of products use these benefits?
Imperfect information: A business can be driven by finding deals and maximising their value. Examples include licensing, mining and exploration, art, private equity, antiques. In other words, what makes insider trading illegal can be a good thing in other industries. Your business might be built on one such deal and then the company is there to exploit it (buying rights to a technology because you believe it will become a new standard) or it might be an ongoing source of knowledge (such as a property developer whose advantage comes from researching and buying land that is expected to be rezoned, and thus take advantage in changes in value).
Accessing undervalued assets and resources: This might be in the form of turning around another company and breathing life into it. A customer base may be neglected. New management, new strategy, new ideas and new marketing might make this type of turnaround a viable proposition.
Changes in regulation: This can create or wipe out industries overnight. Consider the implications of changes in security to the airline industry, and the supporting services which then became necessary. Consider the boost to the home insulation industry when the government decided to subsidise installation worth up to $1600 per household. Hundreds of companies were created overnight to take advantage of this free money. Consider also the vulnerability of these companies to further changes… when the subsidy was dropped to $1200 per household half of these companies closed. Similar artificial (but profitable) niches exist in dozens of areas – including energy (solar hot water). Deregulation can also provide a pathway for companies to enter an industry, as has happened in airlines, telecoms and TV. It is believed that financial services changes will also create and destroy various companies in the years to come – changes are afoot (end 2009) that will change the way funds deal wih and renumerate fund managers which will have a major impact in financial services. This will mean both creation of new services and companies, and perhaps the demise of others.
As a business owner, one of the ways you need to sell yourself to an investor is as an agent of change. To do this credibly, you need to put forward a case about what you are doing it, why, and what the driver for the change is. If your business is merely hoping to grab a share of an existing market, and not really make a difference, it is unlikely to really excite an investor. This is not to say that the business won’t work, just that it may not be revolutionary enough to get funded.
Investors are generally looking for something which is a catalyst, and to be there when the change is clear, but has not yet occurred, and sometimes to be part of the energy which creates this change. Every investor (individual or firm) is different and will have varying criteria, but most will want a massive upside potential.
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Writing an effective venture capital business plan can be a challenging task to say the least. Business plans for venture capital require strength, determination and quality since you are going to be talking to the investors that hold the key to the future of your company in their hands.
Unfortunately, no more than 2 to 5 percent of companies looking for venture capital actually succeed with their goal.Some fail on the first attempt and give up, others learn from the experience, correct the mistakes they made with their first venture capital business plan and strategies and go back to the venture capitalists for a second, third and forth time before they get the growth capital they require.
The small percentage (2-5%) that succeed in getting a venture capital investment for their business probably know something that the others don’t! Those that are successful in getting venture capital know how to position their companies in front of the venture capitalists, they know how to present them to capture the attention of their prospective investors and in many cases this is done in the first instance by the presentation of aneffective venture capital business plan.
It is obvious that this is no small achievement given the small number of people that are successful in finding growth capital from investors, so what did they do?
Here is a closer look at a few things that you can do:
1. Position Your Company – This means being in a successful industry with the potential for growth, ideally one that the prospective venture capitalists know well. Having a chain of ten successful stores is a very strong recommendation and would help your prospects as would the vision of ten successful stores presented in the right business plan to the correct group of venture capitalists.
2. Venture Capitalists Want A Sense of “WOW” – The initial response to your VC business plan needs to create a WOW factor. An effective business plan is one thing, but a business plan that makes people sit up and take notice is another. Having a WOW factor in your business plan doesn’t have to mean you set unrealistic goals, it just means that the vision you have, and your mechanism for implementing it are in line and that the venture capitalists reading your business plan can envision it coming to place with the correct injection of growth capital for your business. The presentation may not be everything, but without it, there is nothing.
Business plans for venture capital will have the most unique approach of all. Venture capital business plans cannot be “canned”. Entrepreneurs who use business plan templates at this level of funding just won’t get this level of funding, its as simple as that. The people who are reviewing these proposals have seen hundreds if not thousands of business plans and know which ones are genuine and which ones are from the wanna-bees.
A venture capital business plan presentation must be sophisticated, complete, accurate and, yes, it must also be dynamic. It must represent the company just like an ad in The Financial Review or The Australian would represent the company.
More than any other type of business plan, yours must have a solid foundation of marketing stats. Research, research, and more research.
You should create the most outstanding business plan possible. Sometimes there is no second chance at some venture capitalists, so make that first impression count.
Create an outstanding website. Whether your company’s business is based on the internet or not, a strong presence here is essential to convey your professionalism and seriousness to the potential investors.
It’s an mistake to believe the catchphrase that venture capitalists don’t invest in companies, they invest in people. Without doubt, an exceptionally strong management team with a so-so product will get a better response than a weak entrepreneur with a good product. The theory is that it’s easier to improve a product than it is to improve the people behind it. So strut your stuff — the VCs are watching. (This means you should “make that business plan so outstanding that they can’t refuse it, no matter what the product is.”)
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