Fund My Dream

“We are looking for investors who share our passion / dream” (translation = we haven’t really thought this through; haven’t really got a great deal to show; and hoping that we can find someone as naive as us to not be too bothered about detail).

Image by 123RF

Image by 123RF

I haven’t had much time for blogging these past 12 months but for good reason and more about that soon. In moments when I have time to catch my breath, I have realised an increasingly common recurring problem, or perhaps I should say, temptation. Today I am looking at the latest startup deal proposition in my inbox and enough is enough; I need to write a post about this and similar deal scenarios.

The proposition itself looks well put together and feels like it has decent entrepreneurs behind it but the essence and focus of the proposition boils down to two key messages:

  1. They are at concept stage expecting to start development in the near future.
  2. They have received “endorsement” from a big name and potential future customer.

Even if the team is really strong and even if they have a really tight business plan and have a couple of strong advisors tagging along, they haven’t actually delivered anything yet. They are in essence saying, “please fund our dream.” Of course, it may well be that the endorsements could indeed be strong validation but it would need to be checked out to see if there was any real intent behind it. If the endorsement was nothing but encouraging words (which is often the case), then the founders are left still with just aspirations.

It is not impossible to get a concept funded and it does happen but unless you are an A-grade founder with multiple successes trailing behind you, the chances are slim. However, there some things you can do to get a concept stage opportunity funded, such as, either apply for competitions or grant funding (matched or pure), or apply to a tech accelerator programme. A good accelerator will be there to get your opportunity ‘validated’ by its audience or a clutch of potential customers. Some of them will take on concept stage propositions but it is more likely that they will accept opportunities with at least some sort of development underway. Some accelerators are focused beyond validation and looking for early ‘traction’ (the opening of the revenue tap).

In closing, we’ve all been tempted to do it but don’t reach out to investors and expect them to offer quick and easy shortcuts to your tech nirvana, just based on a vague sense of a shared dream. Settle for the reality and inevitability that super hard startup validation work is required before you can compete with other startups for the cash on the table. Anything else is just naive, lazy or probably, an opportunity waiting to fail.

“Try to make your deal proposition an investment no-brainer.”

 

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6 Key Thoughts Along The Fundraising Journey (Summaries)

This article summaries the recent  set of 6 articles that I put together under the above title.angelinvestor

No1 – You Think You’re Ready To Talk To Investors But You’re Not

A lack of understanding, training and experience as to how to configure your business to attract investment is a very real issue and the main stumbling block for entrepreneurs and founders as they seek finance from business angels.  Knowing how to configure and execute an investment proposition is the key component missing from most founder approaches to investors. The solution is two-fold. Firstly, in your executive summary or pitch deck, ensure you tell your investment story and not just your business story. Secondly, get some help from someone who has previously been through the process and who can make you ‘investment ready.’

No2 – Investor Criticism Now Can Lead To Investor Funding Later

It is a kind and helpful investor who despite their busy workload, chooses to give feedback and their thoughts as to why they do not want to look further or invest. This information or advice can almost be worth paying for because in the long run it could save time, effort and financial resources. Think about working with the feedback to see if some strategic changes can be made, or take their comments and try to find a way to de-risk your opportunity for the sake of any future investor conversation. If you are fortunate to have put yourself in front of several angels but received a rejection at each turn, see if there are any common criticisms. If they are all saying similar things then you have good food for thought as to why you might not be getting funded.

No3 – It’s Not All About Your Business Idea

The statistics show that the odds are heavily stacked against every milestone of business success that you are hoping to hit. From staying in business more than 3 years to procuring angel investment, the odds are not in your favour. Business ideas that have not developed into an investment proposition just won’t catch investor eye-balls. My belief is that founders often feel that if they can just hook the investor with the opportunity then all other considerations will take care of themselves. Most investors are not looking for good ideas per se but for ideas that have begun to prove themselves by gaining some form of validation and/or traction. The potential of the opportunity does not override all other considerations. There is always an abundance of investment opportunity out there for investors but an ‘investment proposition’ is different, it’s an idea or an opportunity wrapped up in as much tangible market place proofs as possible.

No4 – Validation & Traction – Two Crucial Words When Looking For Investment

Providing proof points to show that potential customers are both interested and then likely to buy is vital in gaining investor interest. These two proof points are called validation and traction and achieving them can both significantly de-risk the opportunity for the investor and increase the possibility of a deal being struck. Validation is about proving that there is market interest. Engaging a little bit with that audience and getting early feedback helps your investor see that real people or real customers believe in your offering also. Traction is about giving your investor an early and mini demonstration that real people will pay for what ever it is that you are offering.

No5 – Investor Contact – A One-Hit Pitch or Contact, Not an Unfolding Mystery

A frequent frustration when receiving incoming investment enquiries is when the enquiry is drip-fed or trickles across the internet to me via a string of emails. You may not like it but you will be sifted and most likely moved on quite quickly. Remember, investors are looking for the best of the bunch, as soon as they see the investment opportunity, if it’s not in the top bracket, then they need to drop it quickly and move on. You get one shot, so make sure it’s your best. Be prepared, be focused and be thorough.

No6 – Don’t Treat Fundraising As Just An Access Issue

I get many requests from company founders asking if I can introduce them to angel investor. The problem is that there are several assumptions usually being made when someone says this to me and they broadly fall into two categories.

1) They believe they are ready to speak to investors, overwhelmingly, they rarely are. Even if they are investment ready, they still might not be  ‘deal ready.’ This means configuring the deal opportunity with the aim of de-risking it as much as possible to make it easier for an investor to say ‘yes’ to.

2) The deal is good enough and if they had access then they could do a deal. A broker (including angel groups and networks) is also a gatekeeper and deal sifter. Before they will give access, a review of the proposition is needed. If it’s not ripe for an introduction then it will be rejected. I see many founders wandering around from angel to angel or angel network to angel network, hoping that eventually someone will believe in them and their propositions and say yes.

Why I don’t sign NDAs (usually)

Too often I am approached by company founders to raise funds for them but first with the proviso that I sign their NDA (Non Disclosure Agreement). 

I’ve written this blog post so that from now on I can refer to it, instead of having to respond individually each time and explain why I am unlikely to sign the requested NDA.

Below are some thoughts and several reasons why I and many in the investment landscape generally do not sign NDAs just to take a look at a business plan, executive summary or pitch deck.

Who is the NDA target?

If the target recipient of your business data is an investor or someone who can get you investment such as a broker or an intermediary, then don’t NDA them.

If they are an investor then they get tens or even hundreds of submissions to wade through and they couldn’t possibly sign NDAs for all of them (let alone have time to store, track and cross reference with each new incoming business plan and NDA).

If they are a fundraising intermediary, then they need to get your investment proposition in front of the right people and an NDA can hamper that process.

If the target is a supplier, affiliate, commercial partner – someone in the trading mix, then sure, do an NDA but not to someone who is considering either getting you money or giving you money, as you’re tying their hands needlessly.

If with that investor or intermediary you start to move towards further discussions, then at that stage it is quite ok to discuss an NDA but be aware, some individuals will make it their policy to not sign NDAs unless there is an absolute necessity to do so.

‘Secret Sauce’ or just ‘Go-To-Market’ Strategy?

Most people don’t have a ’secret sauce’ in their business plan; no technological breakthrough, ‘key’ IP or an innovation that is the cornerstone of their proposition.

They may have some IP but the essence of the majority of the business plans that I see are about an identified a gap in the market with a go-to-market strategy that requires stealth, speed, momentum and someone else’s money.

Too often I am asked to do an NDA when the essence of the idea is either to squeeze into the market place with what is often called in business as a ‘me too’ offering, or to race your way into virgin territory, known as a ‘first mover advantage’ or a ‘land grab.’

Neither of these usually have a secret sauce (cornerstone IP or some designed, technical or conceptual protectable advantage) that no one else has.

More commonly, it is a business that has identified a gap in a market that is trying to steal a march on their potential competitors.

I can understand wanting to keep such plans under wraps a little and away from the eyes of competitors but if you want money from strangers, you are going to have to raise your head above the parapet and display the essence of your wares.

Two alternatives to (an immediate) NDA.

Instead of thrusting an NDA before someone, there are one or two steps you could take if you really do feel there are parts of your business plan that should not be seen before an NDA is signed.

1) Initially send out an anonymous executive summary that does not give away who the company is but still outlines the investment proposition and the majority of the business concept.

2) Send out the business plan with full details but take out the core which describes the key innovation. Put a little note in its place saying that it has been removed pending the signing of an NDA.

Times When I Do Sign NDAs.

Generally, I am not going to sign an NDA just to read a business plan.

If the founder believes there is some very commercially sensitive data within their business plan and they want me to assess their proposition without exposing their very tangible innovative core, then just as mentioned above, I usually suggest that they blank out or remove this particular data.

This way I can still get an understanding of the business just as an investment proposition, without understanding the secret sauce.

One time when I may consider signing an NDA is if I am going to work directly with a company for a fee or retainer. It would not be out of place for a company to ask me to NDA if they wanted to pay me for consultancy (but not for fundraising, unless there was the previously mentioned ‘key’ IP).

Time Poor.

For those that are involved in getting businesses funded (and I include funding types – angel/VC equity, debt, grants and asset finance, etc) they receive too many businesses plans on a weekly basis to be able to take time to read not only the business plan but also to study the legal terms of a multiplicity of NDAs (each NDA is always different from the last).

It is not realistic to ask your fundraiser or potential investor to sign an NDA (at least not at the review stage). VCs and angels may well sign an NDA once they are interested in doing a deal and in getting you locked into exclusive discussions. If you were to stand up and pitch at an angel network event, would it be realistic to turn to everyone in the audience and ask that they sign an NDA before they heard your pitch or saw your business data?

If we’re gonna get legal, let’s do it properly!

I’ve heard one individual say to a founder after being presented with an NDA “If you want me to help you and insist that I sign your NDA then you should cover my legal bill to get the NDA reviewed by a solicitor.” This is not a very realistic scenario or at all likely to happen but when you think about it, If you want someone to represent/fund you and speculate on your success, why should they be locked in to some sort of legal terms when it is you asking for their assistance.

Some NDA Demands look amateurish or arrogant.

Most VCs certainly do not sign NDAs just to look at a business plan. There can be the perception that if a founder approaches, barking “NDA me, NDA me” then it can actually make you look a little amateurish, or worse still, arrogant.

Amateurish for some of the reasons above, or just that perhaps you’ve heard a solicitor once say “always get an NDA signed,” without realising things don’t work exactly like that in the real world.

Arrogant because you presume your business plan somehow warrants special treatment and the overriding of their ‘no review-stage NDAs’ policy.

NDAs do have a use in the investment landscape and I have signed a few in my time but knowing when and how to submit them is the trick.

For further reading, here’s a good article on the same theme: http://www.youngentrepreneur.com/blog/real-investors-don’t-sign-confidentiality-agreements/ and here is someone else who has similar thoughts and approach on this subject as I do: http://www.marcus-povey.co.uk/2012/07/09/i-almost-certainly-wont-sign-your-nda-heres-why/

The Metrics of Fundraising from Business Angels

One way or another, right or wrong, there will probably be a cost to you to gain access to the angel investment you seek for your business – or as someone once said to me, “It costs money to get money.”

8875026_s3bUnfortunately many companies place the same expectations on gaining access to a discussion for angel capital as they do to access a bank loan

But it doesn’t work that way,  here’s why…

In many instances a middle layer is involved in sifting, introducing and shaping the deal flow that is presented to investors. This layer could be a freelance intermediary, a corporate finance organisation, an online marketplace, or an angel network that brings investors together to see investment pitches. Either way, people’s time is involved and obviously there has to be a cost to pay for that time, as well as the effort, management and draw upon resources.

There is the ‘free’ DIY fundraising route and this is to be very much commended for those who know what they are doing and have a well put together offering (and I’m not just talking about the business plan when I say ‘well put together offering’). Developing one’s own investor relationships is extremely worthwhile. However, be warned that this could be slow and time consuming and at worst, you could have spent a lot of time and effort just to find out that you were a long way off from being ‘investor ready’.

If fundraising is not an imminently mission critical activity and you have the ability to put occasional time aside, developing your own pool of investors is extremely worthwhile. It will help you gauge better how your proposition will be seen by the investment community, enabling you to make tweaks and changes along the way. Alternatively, the angel networks and pitching events generally do a good job at getting your ‘investment ready’ basics out of the way and your business proposition polished up nicely.

The Resource Drain

For some time now I have wanted to look at putting some sort of estimated cost value on the resource, time and effort that is involved in the campaign approach to fundraising. In particular, two fundraising campaign approaches:

1. the in-house DIY approach and

2.  the external hire approach

I then looked to see what data I could try and attach to the two.

For the DIY route I have been able to talk to executives within a biotech company that frequently has to undertake DIY fundraising to gain VC interest, as well as their bucks, to fund their latest projects. The chart below represents an approximated cost to the business in terms of time and money. I have adjusted the salary details downwards, to fall into line with a more likely salary position of an early stage company.

The details show the amount of time two individuals (the CFO @ 75% of his time and the CEO @ 50% of his time, both on £60k salaries) spend on fund-raising.

The chart shows an estimated in-house organisational cost of £37k to release 2 people to fundraise. I ran these equations past the company and they said the salaries for more established executives in their sector would be higher. The true financial cost for them, they said, would probably by closer to £80k each time they undertake fundraising.

So this is a typical costing of the resource time and effort. Now to look at the output from a typical fundraising campaign.

Depth of Campaign

Occasionally, I take on the work of a fundraising intermediary/broker on behalf of a business that I think stacks up well for investors. This means that I sift and select business proposals/companies before presenting them to investors. It should be said that no two campaigns are the same. Some can last 2 months some 8. Some can get investment from just contacting 10 investors; some can get funded after contacting over 100. I’ll leave you with some of the results that I pulled from a recent 6-month campaign.

(Emails)

Total of emails generated between all parties (i.e Inbox total for this campaign) = 504
Total of the 504 emails that were from and to the company team = 186
Total number of emails to investment sources (504 – 186) = 318

(Investors)

Total number of investment sources contact by email (initially) = 132
Total number of angel investors approached = 77
Total number of investing groups approached (VCs & Funds, etc) = 55
Average number of emails sent to each investor source (318 / 132) = 2.4

(Contact)

(Article written for iBusiness Angel)

Average number of phone calls to each investor = 4
Average time in minutes talking to each investor source (@ 2 minutes each call) = 8
Total time spent talking to all investors (8 mins x 132 investment sources) = 1056 mins = 17.6 hours
Time spent on dead/fruitless calls – no replies, secretaries & gatekeepers (6 calls average, 30 secs each x 132 investors) = 396 mins = 6.6 hours
Total number of meetings (including 2 scoping meetings with the company to start campaign) = 18

Look also at this article if you’d like to see what a sophisticated fundraising campaign looks like:  http://techcrunch.com/2013/08/10/how-we-closed-a-1-75-million-round-on-angellist-using-new-inbound-tools-and-techniques


Things Investors Don’t Like To See in Your Biz’ Plan

I haven’t really done enough investment activity yet to feel that I warrant the title business angel but enough of my business partners and colleagues are and it is from my experiences working with these guys that has prompted me to put this post together. In my dealings with various investors, VC and institutional funds, I often review and discuss business plans and meet with founders to look at the proposition they are setting out. Below are some of the things I sometimes see that get the alarm bells going….

  • Delusion: This is a hard one. When I am deluded, I often don’t know it and I rarely want to hear from others that I am deluded. We want to push ahead with our business vision but if we are not careful we can do so out of our own emotional attachment and at the expense of some sort of external validation that shows others feel that what we want to create is genuinely wanted.  Validation may come in the form of, customer expressions of interest,  viability of being able to actually create the working model and the greatest validation of all… sales. Investment viability delusion can manifest itself when there is very little measurement or detail in the narrative of a business plan. Lofty ideals, a great deal of marketing spin, name dropping or avoidance of plotting detailed investor returns. For me these are all clues that a particular business still has work to do before they will gain serious investor attention. Here is a fantastic website (indeed resource) called Venture Hack which talks about building just enough (the Minimum Viable Product – MVP) to get validation, before you spend too much of yours or your investor’s cash. Then after you’ve achieved the MVP, you should then try to achieve the Maximum Buyable Product – MBP, explained here.
  • Lack of Realism: Bit similar to the previous point but I wanted to make another similar point. It is ok to admit the difficulties and weakness of your business proposition. I recently pointed out to a founder that he had built a whole chapter of his business plan around various 3rd party suppliers, dressing them up as though they were somehow in the company and on the payroll – trying to beef up his headcount. If you cannot describe your weaknesses, or you even avoid discussing them at all costs (because for sure they are there and investors will be expecting them), then investors may get the feeling that they will never get straight answers from you when they need them; they will perhaps feel that they will be treated to a constant stream of spin instead. Try to be open about your weaknesses (your SWOT analysis is often the place to do this) and say how you hope to address them, or at least try and demonstrate how a potential weakness might actually be a strength also. I distrust business plans which fail to talk about potential weaknesses without a degree of realism and humility.
  • Product, product and more product. Some of the worst business plans are the ones that are majorly weighted towards describing the product or service in detail, with scant follow up detail on: 1. how the business will go to market (It’s a scary thing to hear a founder with technical development skills and no startup experience, only a corporate background, say how they will ‘buy in’ the operational management team, as well as sales and marketing personell) and then 2. exit and provide returns for investors. ‘Product’ is safe territory for the founder and it is quite common for a founder to wax eloquently on their product but then go lite, talking broad sweeping strokes when it comes to sales and marketing. Their enthusiasm for describing the product they have invented or dreamed up is not matched with equal detail and enthusiasm for describing both the revenue streams or how the business will exit.
  • Comfortable salaries:  The exit should be the payday goal / trigger. The investor of your first round is not looking to supply a comfortable wage. Businesses that go lean and bootstrap (especially pre-revenue ones) warm the cockles of an investor’s heart. You have to show that you are in this for the long haul (or at least until the investor’s exit) and not looking for just a comfy job with a nice salary. They want to know that you will eat locusts until exit day when from thereon in you can have caviar until your heart’s desire.
  • No mention of IP protection. There’s others that could write so much more on this than me but one tip I have been told is a good idea is to maybe put IP in a separate company. This is a measure which can protect the IP in the event of a fail and therefore the assets of a company will be protected. Either way, make sure you have both a short term IP strategy that looks to procure revenues from IP opportunities and a long term strategy that positions and tempts any future investors or trade sale partners for IP acquisitions.
  • Big picture vision but no detail. No ‘from here to there.’ Some entrepreneurs are lucky, their vision is really game changing and their pedigree would mean that investors might be willing to buy into their vision, even if they only have a broad outline of how to revenue it. For the rest of us we have to convince, cajole and persuade by means of endless due diligence rounds, questionings and presentations of various data, showing that we know how every bit of revenue will be made and from which revenue streams, why the monthly burn rate is so high and why we think we will get 1000 customers in month 4 and not just 500. It’s not about proving the accuracy of these facts because at the end of the day they will only be predictions. It is more about showing that you have tried to benchmark against other available information – perhaps a previous startup that has built a business in much the same way as you are planning to.
  • Skin in the game – Are you investing also? Recently I spoke to a founder that wanted me to locate a sum from investors for a niche employment website. He had built a prototype and built a small following that had expressed membership interest in his website idea. He told me that he had no capital and could not put any money into the development process alongside an investor. My reply was that this might be a tall ask if he was putting ‘no skin in the game.’ I suggested that it might be possible if he could split the investment required into 2 tanches, the second being triggered on him hitting a sales target. The founder almost went pale when he realised that he would actually have to get close to the sales figures he had put in his business plan, otherwise his business would fold. It made me realise that the founder probably didn’t really feel the sales targets were achievable. Performance related investment – a common tool of the investor.
  • Stratospheric Thinking – (I’ve added this one at a later date to the original post). I only see this one occasionally but it’s definitely worth a mention. It happens when founders try to impress that they are ready NOW to take over the world and bring about world domination in their sector or business area. The business plan majors heavily on the organisational components and structuring, with plenty of comment on various holding companies and partnering organisations all fitting together to provide a monster big organisation that by sheer size and gravitas will assume its place on the high table. The subtext with this approach almost says, “something big is happening here so jump onboard quick or you’ll miss out.” Or “the numbers and plans being made here are so big that even if we are out a little in our calculations, there’s enough excess to not worry about the detail of the business plan so much.”

I hope this has been an interesting read and I’d be interested to hear any thoughts or experiences from anyone who has read this.

Web Mission 09: Raising Our Game

With a delegation of UK digital startups being given the opportunity to trot off to Silicon Valley in San Francisco for Web Mission 09, one could get quite excited at the prospects and the future that awaits our digital and technology industries (at least we could have done so until we started leaning about what words like sub-prime meant). I totally agree with this sort of initiative. For those that this will be their first business trip abroad, The contacts and learning that they pick up should not be underestimated.  Their business worldview will be expanded and many of them will be prompted to dream bigger dreams and raise their game. I speak from experience because in the days of Web 1.0 I got myself over to Cannes for a for a few trips to the yearly Milia event. Such events for me were no ‘jolly.’ As I watched the great and good around me, I both aspired and watched, to see how those who were at the top of our game worked (and it must be said – played too). After trips to Milia I started to think, plan and aspire to bigger and better things within my industry and it was not long before I started developing international connections and opportunities. I soon realized after one or two foreign trips that any fool could collect business cards from their business heros. I knew that I needed to drive opportunities and watch out that my vanity did not lull me into a false sense of achievement, just because the so called great and good from the established brands are all around me at whichever industry bash as was at at the time. 

These days I am more critical of my time and activity and whatever industry event I attend I try to get some concrete results wherever possible. Because of my time spent stretching my vision at foreign business events, I now have international aspirations. In about three to five years time I want to be involved in developing business opportunities in Asia. My database of Asian contacts and investors is currently looking quite chunky as I prepare  for future business activity and initiatives over in Asia. I am priming my contacts now and exploring in readiness.

Going on trade missions shouldn’t just be about expanding your Linked In contacts. For those soon off to San Francisco and other similar trade missions, I hope they go not just to present their businesses but also to scout out and assess new territories or opportunities; to also question the way they do and think of business. If they are really sharp, I hope they will push themselves to make the most of a unique business opportunity, by trying to secure some form of business that would never have come your way if you had stayed at home.

Seeding It – BootStorming event soon

New York hosts the next SeedingIt event on the 27th January. They hold 2 different types of event throughout the year. ‘BootStorming’ Sessions, where ideas are shared between entrepreneurs and investors and receive group feedback and secondly, ‘Happy Hours’  which are done in conjunction with TriState Ventures, Angel Network, The Sephardic Angel Fund, NYC-VC.com and Bootstrapper.com.

The Seeding It website can be found here and here also from the MeetUp website.