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.
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”. ”
Many business owners are satisfied with making a good living, and creating a profitable business. And while many businesses are profitable, this is not really the stuff which will excite an investor.
Donald Trump once said, “if you’re going to think, you might as well think Big”, and it is big thinking that will create a vision grand enough that others will want to join you (staff and management for example). Running a successful and growing company is an exercise in leadership. Part of leadership is having and sharing an exciting vision.
Michael Schrage argues that those willing to invest in and test new ideas based on their hunches will often find their noses bloodied yet this is a risk which is necessary in order to create something which is truly massive. The Economist descibed that from 20 investments:
- 4 would go broke
- 6 would lose money
- 6 would do OK
- 3 would do well
- 1 would hit the jackpot.
So, one in 20 is brilliant, four in twenty do well (or better) and a full 50% go broke or lose money.
If you have run a business, you know that it can be hard work. If you are going to wear yourself out, you need to have a great reason for doing it. As a business owner your reasons might vary from noble, to mercenary, to altruistic. For an investor, it is far easier. It is about the money. If it doesn’t have a huge upside potential, why bother? *
Investors look for – and buy into this leadership and vision as well… for a couple of reasons.
The first reason is that the intended outcome needs to be substantial in order to be worth playing for. Almost no investor wants to play in the shallow end of the swimming pool and watch a million dollars turn into 1.5 million dollars over a few years (or see it shrink). If the predicted outcome was this minimal, then there are plenty of other investments that are more reliable – property for example which will give nice steady returns. There has to be the potential for the company to grow by a factor of ten or a hundred times in order to turn the seed capital into a massive return. This is not to say this will always happen… but the potential has to be there. It is estimated only around 3-5% of all businesses have the potential to achieve the type of growth that will attract a VC.
Venture capitalists expect some failures. In fact, they generally have a higher tolerance for failure than most (The very word “venture” implies some sort of adventure and rocky ride.). This is because they are looking for the big wins to make it all worthwhile. So if you expect to attract this kind of money, show off the potential. Guy Kawasaki makes the distinction between a business that is viable (and that there are many businesses which are viable) and those that are fundable (and very few viable businesses are fundable). Being attractive to fund is about scalability and vision. (Check out his videos also on this site).
The second part is about leadership. Investors are buying into a business idea, but they are also buying into a person, or a few key people who will make this vision a reality. Are you this person? And if so, how can you show an investor you have what it takes? Obviously having some runs on the board already will count – if you have previously built a business, grown a company, or lead a large team. If not, you need to show that you see how important this is, and what your tactics will be – maybe it is to hire a strong GM for example. There is no ‘right way’ – but you need to recognise that you need a plan. Just as an aside, quite often the skills needed to lead and the skills needed to manage, and the skills needed to oversee operations are different. Noone is expecting you to fill all these roles, but it is important to map out how you will deal with thesm. There’s many cases of business owners that are brilliant at inspiring, but know they are not the right person to get involved in day to day operations and therefore they make delegation a priority. Richard Branson springs to mind.
So, when you are writing your business plan, make sure you are conveying the potential of tapping into something significant and understand that your leadership will be as important – if not more important – than your business skills.
“The tragedy is not that we set our goals too high and fail, but that we set them too low and reach them”.
Here are some things that an investor will look at to decide if your goal (and potential) is big enough.
1. Market size
2. Growth rate
3. Market maturity
4. Fragmentation within market
5. Barriers to entry
6. Cost structure (% GP of sales)
7. Changes within market – dynamics of major players
8. Impact of product or service on people’s lives.
9. Nature of purchase (one time v ongoing)
10. Barriers to entry
11. Potential exit strategies
12. Strength of the leadership and management team.
13. Return
14. Differentiation of product or service.
* You may find investors that get involved for reasons other than monetary gain, but these are likely to be other categories of investors – not VCs.
This is a good analysis of the relationship between various stakeholders in a company. In particular it shows the complexity of the business owner / CEO role who is the balance between internal and external parties.
There is a great summary at the end as well highlighting 4 key success factors for a CEO:
1. Maintaining company value
2. Focus on congruency of goals between different stakeholders
3. Persuasiveness, keeping everyone on track and leading
4. Transparency in actions
Make Your Business More Attractive to Venture Capital Investors By Derisking
Derisking is the process of removing risk factors from your business in order to make it more attractive to an outside investor or to an outside buyer. It is one of the most important factors in the grooming process in order to be an attractive company to invest in i.e. “Investor Ready”.
There are dozens of areas and hundreds of ways in which a business may be exposed without knowing it. In the normal course of business an owner may not worry about these factors, as they are within the “comfort zone” of operation. For an external party to get involved however, they need a much more transparent organisation so they are not confronted at a later date with skeletons in the closet.
It is important because businesses already face uncertainty. And while a venture capital investor may have a reasonable tolerance for risk, they will not welcome unnecessary risk. The goal is to control as many areas of risk as possible, so at least the risks are known. Most companies who have had an internal focus (i.e. have focused on sales, marketing and operations in order to grow) have not thought about all the areas in which they are vulnerable.
The process of derisking limits the areas of exposure, and therefore decreases exposure to uncertainty. It also increases the chance of success through improvements in clarity in almost all areas of the business.
Derisking falls into two areas – one is simply clarification (i.e. creating a contract where an informal arrangement was in place) and the other a change of substance i.e. changing a supplier because it lowers risks.
Some examples include:
Formalising employee agreements. This may mean creating contracts for employees that have previously operated without one, or strengthening existing contracts. Particular issues would be with protection of IP, ownership of IP, confidentiality and restraint of trade after employees leave.
Creating / clarifying written agreements with suppliers
Creating/ clarifying agreements with customers
Moving “ad hoc” sales to contracted revenue where possible
Formalising and documenting internal processes
Protection of IP – patents, designs, copyright and so on.
Protection of data by limiting and monitoring access to key systems (CRM, accounts etc)
Key employee insurance (including of the owners) in the event of death.
Creating or clarifying credit terms and policies. Getting credit offered back within trading terms, and ensuring that all credit offered is documented with the correct application forms and personal guarantees.
Removing reliance on key personnel, in particular vulnerability to information or relationships which may be lost on their departure. This may mean adding additional points of contact to key client accounts so individual relationships are less critical.
Documenting key processes – getting the knowledge out of people’s heads
Ensuring insurances of assets are up to date, and sufficient.
Lowering legal exposure (liability). Ensuring insurances are held that cover product liabilities and so on.
Ensuring compliance with all ATO and ASIC regulations. Creating systems for their ongoing compliance.
As you can see, this is a lengthy, but not even remotely exhaustive list. The due diligence process will highlight those areas which need further work. This might cost several thousand dollars, and lead on to significantly more expense than that. In some cases the process may take a year, and cost hundreds of thousands of dollars.
One of the important things to remember in raising capital is to build in the cost of raising the capital.
This falls into two main areas:
Actual costs – such as hiring consultants – legal, accounting, corporate advisors, strategists etc
Opportunity cost and change in focus. The process of raising capital for business can take anywhere from three months to a year (or more) of attention from key owners and managers of the business. During this time, it can be difficult to maintain a normal focus on things which are essential for survival – sales, marketing and operations for example. This cost can be significant, while at the same time be difficult to measure. In fact, this defocusing may have a major impact for any growing company that is pursuing two goals – new business, and business funding (or preparing for a sale of the business).
The need to derisk is apparent if you place yourself in the shoes of a buyer contemplating a purchase of (or investment in) your company. Without going through the derisking process, your company could contain any one of a dozen hidden time bombs (key staff who could leave and set up in competition, unsettled legal issues, poor data security etc). By transparently documenting how you have examined, reduced or been able to totally eliminate risks in your business then you are showing a buyer that you understand their concerns.
The flip side of the coin is that your company is now a far more attractive proposition to purchase or invest in. You will have invested a significant amount of money and time in the derisking process, but the result will be a company that is now sellable (all other things being equal) compared to a mystery. This means first of all that you may achieve a sale when previously none would have taken place, and secondly that you are likely to achieve a far higher sale price than before.
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.
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.
Tom McKaskill is an experienced investor and entrepreuner with a wealth of experience. He is the author of numerous books on specific aspects of investing and raising capital.
The book has 15 chapters covering the following:
1. Begin with the end in mind
2. High growth – high risk
3. Spot the IPO
4. Financial v strategic exits
5. Threats and opportunities
6. Identifying strategic value
7. Finding strategic buyers
8. Enabling the opportunity
9. Reducing risks to the buyer
10. Setting up the exit deal
11. Evaluating potential investments
12. Executing the exit strategy
13. Structuring the trade sale deal
14. Selecting professional advisors
15. Conclusion – impatient capital
Business owners looking to raise venture capital for business, that DON’T live and die by numbers – and it is more often than you would think – will be marginalised by investors.
No matter how powerful your vision, or appealing your product, if you are unable to present accurately and effectively the current position of your company, you can say goodbye to the funds from investors.
Here are a few tips that you should consider about your business financials when looking at raising capital:
1) If you, the business owner, are not comfortable with the numbers, then you need to recruit someone who is.
2) Even with a good numbers guy, the numbers need to be presented effectively, clearly, concisely, and without “noise” (=too much detail) ie summarise, as well as have the detail handy just in case required.
3) It goes without saying, your proposition must make lots of money for yourself and the potential venture capitalist. For example – venture capitalists require at least a compound 30% return but depending on the risk may go up to 100% or more.
4) Have an effective framework in place to regularly and accurately demonstrate to your stakeholders (your investors, board, employees, banks etc) that you are on top of your numbers.
Remember trying to attract venture capital investors is all about providing an expectation of a return for a given set of risks. If you can’t demonstrate how you are going to manage the return (that includes producing it) then you simply wont attract an investor.
