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SVASE Funding Pitch Workshop a Winner June 13, 2006

Posted by The PR Cassandra in Posts.

Wow – my partner, Ron, and I spent four very profitable hours at the SVASE Funding Pitch Workshop last night.  Given by SVASE president and angel investor, Chris Gill, it was an eye-opening experience. I have also added a link to my Blogroll – Hot in Silicon Valley – I met Vic last night and he covers many VC events on his blog.

We have worked with startups for over 10 years, so some of the information shared confirmed what we knew, but there was a good deal of new information and insider tips.  Gill is a very generous person – he shared solid information and entertained us with "tales of the VCs" – it was terrific.

We took this in preparation for submitting two of the startups with whom we are working as candidates for "First Impressions."  At this event, one's presentation and business model will be critiqued – invaluable.  Gill said that 20% of those who made it through First Impressions got to term sheet

The numbers he shared were sobering.  Only a very small fraction of entrepreneurs ever receive angel or VC funding.  Investors receive thousands of business plans and throw the vast majority away.  It reminds me of the publishing world with its slush pile – unsolicited manuscripts or queries filling waste baskets.

With some 400,000 entrepreneurs – investors look to TRASH biz plans not FUND them, said Gill.  They do a very quick sort, and we realized we still had work to do.

I can't tell you how much effort and education it takes to explain that editors are interested in NEWS vs. INFORMATION to technology companies.  Like entrepreneurs, technologists are in love with their technology, and think everyone else is, too – or should be.  In fact, investors, like editors, want to know how will what you have change people's lives?  What are you offering that makes people pay for it or use it?  How does this fit with the competition (and there is ALWAYS competition – the height of arrogance to think otherwise)?  And, what will make your company a success?

In other words, to speak with investors – technology entrepreneurs need to to TELL A BUSINESS STORY NOT A PRODUCT STORY.  I have seen dozens and dozens of technology companies FAIL – not because they didn't have a great idea or technology, but because they didn't have the right business mindset and capabilities.

OK, a few of the things that stood out in my mind from last night. 

The quick sort reject criteria:

  1. Not a Delaware C Corp
  2. A no "name" attorney ("name" attorney firms include Wilson Sonsini or Venture Law Group)
  3. Untried team with little or no relevant experience and who hadn't worked together before or done a successful venture in the past
  4. Inability to articulate the business proposition in 30 seconds
  5. Lack of direct consumer/buyer/market knowledge
  6. No evidence anyone is willing to pay for what you have
  7. Revenue and growth assumptions flawed (ie, not based on real-world understanding, but just multiplying factors on a spreadsheet)
  8. Lack of a trustworthy intermediary, such as a well-regarded Silicon Valley law firm, to make an introduction to angels or VCs
  9. Lack of understanding of the time and cost to sales and of the resources it takes to make it big
  10. Time to break-even or profitabiiity not attractive
  11. Lack of relevant marketing expertise or executive experience
  12. No credible evidence that the investor will receive 30-50% return of investment within five years – no reasonable exit strategy

Because of the costs of Sarbanes-Oxley legislation designed to improve the integrity of corporate governance since the Enron, et al. scandals, Chris said that acquistion is the most likely exit strategy for US companies seeking investment.  He also said that investors expect to get out by five years.  By five years, the company needs to have revenues in the range of $50-$100 million – and, as Chris said, and I know, that is not so easy.

Throughout the night, Chris stressed that investors need to see EVIDENCE – evidence of an experienced and trustworthy founding team, evidence of customers or partners willing to pay for the product or service, evidence that the business model was a sound one and would return 30-50% of the investment put in.

We also reviewed the PowerPoint template that SVASE recommends new ventures use.  We'll be reviewing our current PPTs and making adjustments as needed.  15 max, 10 is better and Band of Angels keeps you to one slide!  As Chris said, if it takes you an hour and a half to describe what you do, you haven't got a fundable business, or you better learn how to describe it succinctly and in BUSINESS TERMS.

The odds are daunting.  It's about 1,000 to 1 to receiving investment.  70% of companies don't take outside angel or VC investment, so one can make it on one's own.

Chris stressed again and again that it's the BUSINESS NOT THE TECHNOLOGY that will impress an investor.  He gave many examples – look at Starbucks – no patents on coffee! – they took something ordinary and made it glamorous.

Fortunately, both of our startups have made significant strides in the EVIDENCE categories, but we probably have some revision to make to our PPTs.  So, off to review them now.



1. rbstrategist - August 19, 2006

A few added comments. For the entrepreneur who is seeking capital for equity, remember all money is not the same. The Term Sheet can often drive the company. So money from an angel is not the same as money from a venture capitalist (VC). Money from angels usually carries less burdensome terms and conditions and bears longer time-frames. VC’s often expect multiple returns, non-dilutable shares, and significant equity in order to invest. On the same thought, VC’s often can provide professional guidance and inroads to potential strategic partners, clients, and eventual M&A exit strategies.

Angels are essentially high net worth individuals or small collectives. They want a good return (better than they can get at the bank or stock market) with reasonable risk (can be high at times) and the potential for a rapid flip or return strategy. They look at the cap rate of the company and its valuation. A reasonable valuation will more likely attract an angel who can get a decent equity stake for their money and thereby have the potential for a home-run. Angels also invest frequently in what they know or what they like (perception is very very important).

I was once told, “its all about the “wiz bang” – And, is it cool?” Does the business ring to the angel? For VC’s, it can also be about the wiz bang, but they review so many companies that are cool, it also has to have a real market, usually some real clients, and ties which will likely take the wiz bang business to the point where it can be acquired or flipped for substantial return.

I’m not so sure that hard and fast rules should be applied to either angel’s or VC’s, but good guidelines are essential to meeting objectives. Just as in applying for a job, you start with a resume, the pitch and the executive summary can either open doors or close them fast.

Also, the edge for some companies is in who introduces them to the angel, VC or institutional investor. Networking can be as critical as any other aspect of the funding acquisition stages.

I take issue with some VC’s who look at the formation format of the company and its law firm (big name). A start-up must be focused and must use funds wisely. A good demonstration of using funds wisely is keeping your burn rate to an efficient and attainable level. Sometimes, early on, hiring a big name law firm or professional consultants, accountants, or intermediaries can be very costly and not very productive. Look to the network and seek out inroads to the funders and the strong strategic partners through other avenues that will not tax the early funds and equity of the start-up. Some examples include:

a) Networking: Utilize business networking opportunities (e.g. online business networking, professional organizations or trade associations, affinity groups, and even friends and acquaintances who can introduce you to powerful and important resources)

b) Boards: Find the right business advisors to be on your board of directors and board of advisors. Neither of these boards should be passive, and and likewise, neither should be unmotivated. The participants should be able to open doors and ultimately be rainmakers for funding, introductions, and clients. Often board of advisor members will serve for relatively small equity or some promise for future benefit.

c) Strategic, but not Competitive Alliances (Use Leverage): Nobody ever said that every new business must work alone. Find compatibilities with other companies (of different stages) who can benefit from your companies products/services and the relationships and leverage the strategic benefits and value-add to provide inroads for funding, growth, business development and ultimately exit strategies.

Above are just a few potential roads which are not costly, but provide excellent mechanisms for either organic or viral growth and do not cost much or anything and which will likely (if planned and researched well) yield excellent returns.

Finally, the most paramount thing, in my estimation, a new business, especially one looking for capital can do, is to build a strong working business plan. Due diligence, strong models, competitive analysis, and good resource and leadership planning can be the difference between success and failure. Many new companies see business plans as a luxury or something for which they have no time. Quite the opposite should be their perspective as you would not go into uncharted territories without a guide, a current map, or today, a GPS navigator. Think this way with business planning and you will find your way, both in finance and sales.

These are just a few thoughts from the RBStrategist Interpretation.

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