The value of an advisor in your capital raising process

April 13, 2010

The value of an advisor

Lets face it, if finding capital for your venture was easy, then there would be no such thing as corporate advisers out there selling you the value of advice.

As I sat with another prospect today, who incidentally became a client at the end of the meeting, seeing what I see time and time again, I thought I would make a record of it formally and talk to you about it.

Lets assume that there is limited capital out there.

Lets also assume that not every capital provider is excited by your sector, you or your style – so matter how exciting this opportunity is to you or another person, there are just some investors who are not interested.

Lets also assume that some investors who might be interested, are busy on something else at the time you are looking, or are fully invested, or are overseas – just not contactable.

The long and short of it, as your pool of investors shrinks the more we think about it, it is no wonder that it is considered a difficult to find venture capital.

SO – if you pitch up to a potential investors office, or send them an email with a poorly laid out information memorandum, business plan, or your numbers don’t add up, or even if you under sold, god forbid, your idea or business as an investment, you will have reduced your chances of getting this investor on board, and your overall pool by 1. Who knows, they could have been the one. When you are dealing with such a scarce resource WHY would you take the chance.

Here’s the crux of it. If you have a great business, a great idea and you want to position yourself for a win every time, then you need to test out your idea, test our how you are presenting it, how it is likely to be perceived, what an investor will think about it, how they will react …. All BEFORE you actually communicate to one!

Someone said to me don’t pitch your services on your blog – people will run a mile – so I won’t then. I will do this for free. With this client above, I spoke with him for an hour on the phone, read through his IM and business plan, and gave feedback over several emails over the course of 2 days, and then had 2 hours in a meeting discussing what needed to be done to position his offer more effectively, …… all for free.

You cant lose!

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David S. Rose on pitching to Venture Capitalists

April 3, 2010

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”. ”

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“Imagine investing in Google at the start…”

March 29, 2010

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.

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Sources of Finance

January 16, 2010

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

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Insights and Inspiration – stories of venture capital successes

January 16, 2010

“Things I Wish I’d Known…”

tiwik

16 Stories of Inspiration from The British Private Equity and Venture Capital Assoc

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Understanding Private Equity and Venture Capital

January 15, 2010

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

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Venture Capital & Private Equity Outlook 2010 (Video: 56 min)

January 15, 2010

See what industry heavyweights see on the horizon for 2010.

If you are seeking capital, this kind of insight from investors will help you see how you need to present yourself to be attractive to investors, and win over VCs.

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Overview on Venture Capital (Video: 58 min)

January 15, 2010

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 v Show Me The Money

January 11, 2010

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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Venture Capital – 2009 Industry Overview

December 25, 2009

avcal_cover2009 AVCAL Venture Capital Report

2009 – A year in summary 2009

AUSTRALIAN PRIVATE EQUITY AND VENTURE CAPITAL ASSOCIATION LIMITED (AVCAL) AVCAL was established in 1992 as a forum for participants in the private equity and venture capital industry. AVCAL is the central voice of the Australian industry and its membership includes almost all the domestic, regional and global private equity and venture capital firms active in Australia.

This is the report of 2009 as prepared by Ernst & Young – The survey results are based on the FY2009 activities of 63 Venture Capital and Private Equity firms, representing $24.5b in funds under management.

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