Easy Money, Cozy Deals

Comfy_ChairMaybe it’s the fault of the BBC’s Dragons Den for sitting down a handful of business angel investors in cosy chairs whilst they quiz a few entrepreneurs. With the investors making some sort of deal judgement after 20 minutes, the programme makes ‘deal chasing’ look so easy and gives the impression that you’ve just got to be passionate, convincing and have the ability to trott off some well rehearsed numbers and information. Maybe that’s being a bit unfair on a program that has overall given quite a helpful tutorial into how to prepare your business for angel investors. The problem is that it does somewhat skew the perception of the real world realities of early-stage investment fundraising because it makes it look so instant, so cosy and so easy. The reality is far from this and even for the most experienced serial entrepreneurs find themselves entangled in long drawn out deal conversations and due diligence that can span upwards of six months. Chasing an investor, or series of investors, can be umpteen times more challenging (and long winded) than achieving a sales milestone, or winning a prized client.

I’ve had a run of entrepreneurs recently that I’ve agreed to work with who either feel that the investor has lacked serious intent because of their propensity to ask too many questions or take too long, or on the other hand have presumed that there is an unlimited supply of suitable investors to which they can talk to. The current climate is extremely challenging for startups (I’ve even had fundraising requests for help from US west coast startups).

Accelerators provide a well structured path, not only towards early-stage growth but also presentation to investors, with higher ratios of fundraising success. The reality that many are realising, even entrepreneurs that have raised successfully before, is that there is no easy money and that there are no easy deals being done out there. It’s darn hard work fundraising and founders are being unsuccessful not because of a lack of money in the system but more because their deals are not ready to put in front of investors. Even when a founder is ready, the competition for that money has become so intense. Investors have a batch of great opportunities to choose from. I know investors that have given up on startups for a while because they can’t find a well crafted deal with a good founding team behind it. Don’t tell me that there’s not enough cash out there. There is. There just aren’t enough good deals to match the cash.

Getting your deal ready before talking to investors is key and hence the reason for me creating the startup fundraising and valuation tool, D RISK IT (www.drisk.it). The project will launch sometime in the summer and is also currently crowd funding at:  https://www.crowdbnk.com/p/d-risk-it For a limited time, CrowdBnk are 50% matching any contributions (if you reserved a reward, do let me know).

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6 Key Thoughts Along The Fundraising Journey (No5)

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

(Image Courtesy of FreeDigitalPhotos.Net)

“You get one shot so make sure it’s your best. Be prepared, be focused and be thorough. “

A frequent frustration when receiving incoming investment enquiries (either for the angel network I run, or for me as an independent fundraiser) is when the enquiry is drip-fed or trickles across the internet to me via a string of emails. The most common contact or access into angel finance tends to be via ‘pitching events.’ However, company founders also seek out investors directly where the first point of contact would be by email or a message via LinkedIn. The problem is that these digital introductions can be a very time consuming experience for those on the receiving end. You may not like it but you will be sifted and most likely moved on quite quickly (hopefully politely) so that the next business propositions can be reviewed. 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.

Bad scenario #1:  An incoming email with either, i) a 30+ page business plan, or ii) a 15+ page powerpoint pitch deck. My reply, “Dear founder, would you mind sending me an executive summary or a short 1 or 2 page overview of your proposition. If you don’t have one, please see the attached example (N.B. I often send out an executive summary template). I’m afraid I wouldn’t get my work done if I had to read business plans all day long.” The normal review and sift process takes about 20-30 seconds (similar to a HR recruiter), therefore don’t make the reader work hard or reject you just for providing too much information. Yes it’s true, at this stage it is possible to provide too much information.

Bad Scenario #2:  Incoming email with an attachment but with an explanation that “the financials are not quite ready but I’ll email them over later in the week,” or, “I’m waiting for the result of a really big deal. I’ll keep you posted as things become clearer.” Don’t assume that the reader will remember you or your business proposition when you next email or call them. Many investors and investing groups can get anywhere between 10-30 investment propositions a week.

The best advice I often give out is in focusing companies on how to make a decent executive summary. This summary is so important because it’s your foot in the door. Be unfocused in this and it will lead the reader to suspect that if you can’t write a half decent 1 or 2 page executive summary, then it’s quite likely that the same focus and attention to detail is likely to be seen in every aspect of the business and its associated business plan. The problem with many summaries is that they max out on market aspects and also on product/service information but with very little on the investment proposition being offered to investors. They frequently fail to address the main required question: “how are you going to make money for an investor and what can you show to support this?”

Take a look at some of the summaries in the ‘Deal Activity’ section of this blog. I find this format seems to cover most of the urgent things you should communicate to an investor.

Your feedback and comments to this article, as ever, are always appreciated.

6 Key Thoughts Along The Fundraising Journey (No4)

Validation & Traction – Two Crucial Words When Looking For Investment

“Too Many Businesses Want To Jump From Being A Minnow To A Whale”

(Image courtesy of 123rf.com)

I’m currently seeing a lot of businesses with really great business proposals looking for investment but lacking vital demonstrations of key proof points; in essence they are concept stage or pre-development propositions that ask the investors to take a huge leap of faith. In times of boom, these proof point generally matter less as investors scramble and clamour to sign up all ‘n’ sundry in the hope of not missing out. However, in these times of austerity, reaching these proof points is vital in gaining investor interest. I like to equate these proof points in terms of two proof points; the first being validation and the second traction. It’s not enough to have the best theoretical money making idea, a fabulously detailed business plan, a full set of detailed financial statements and a team of all-star internationals ready and waiting in the wings. It will always be the business that has achieved these proof points who will gain investor attention, over those that have a great business plan and fantastic team but are still on the starting blocks. Achieving proof points can significantly de-risk the opportunity for the investor and significantly increase the possibility of a deal being struck. The first proof point, ‘validation’ is about proving that there is a market, to show that there is potentially a paying sizeable audience, client base or consumer volume that seems to be interested in buying your product or service. 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. This can be done by getting trial registrations, downloads, client letters/emails expressing tangible interest. You can’t do this by quoting top-level ‘size-of-the-international-market’ statistics. Identifying the addressable market is the starting point of validating your offering. The next proof point is the big one – traction. In essence, this is about giving your investor an early and mini demonstration that real people will pay for what ever it is that you are offering. This Techcrunch article entitled “Why traction is so important” really digs down a little more into the subject and is really worth a read. http://eu.techcrunch.com/2011/01/06/guest-post-the-importance-of-traction

This one is also excellent: http://www.forbes.com/sites/caroltice/2012/11/02/what-really-makes-venture-capitalists-invest-in-your-startup/

And a late addition: http://techcrunch.com/2013/01/06/iterations-traction-capital/

And another:  How Much Traction is Enough for Investors? Really really important article:  http://bit.ly/1pL3eVh #Startup #Traction #RubberHitsTheRoad

I’d be really interested to hear other views on what validation and traction look like from your perspective.

6 Key Thoughts Along The Fundraising Journey (No3)

It’s Not All About Your Business Idea

(Image Courtesy of 123rf.com)“Good Ideas & Good Investment Propositions Are Two-a-Penny”

Yes, it really is true and yet many founders give the impression that they alone are holding the big ticket to success. The statistics show that the odds are heavily stacked against every milestone of business success that you are likely to encounter. From staying in business more than 3 years to procuring angel investment, the odds are not in your favour. Even if you do get investment, there are a million and one reasons why a business won’t achieve success and the statistics prove it. Angel investors are speculating their personal money, so don’t be naive and assume that just by the virtue of having a business idea or a business plan that you should automatically have the right to talk to investors. Business ideas that have not developed into an investment proposition are rarely worth the time and effort. 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 that I know are too cautious with their money to hand it over on an untried opportunity alone. Most investors are not looking for good ideas (per se) but for ideas that have begun to prove themselves by gaining some form of business traction. The potential of the opportunity does not override all other considerations.

Investors are looking for people that have gone beyond just identifying a business opportunity, to actually demonstrating and validating it in the marketplace. Such ‘wise heads’ will often benchmark against real-world data that shows how much money they could return for an investor. If “ideas are worthless” (as Colin Willis of the business accelerator Ignite100 explains in the article link below) then what is worthy to an investor? My answer would be founders and entrepreneurs who know how to ‘configure an investment proposition’ and who have validated it as far as is humanly possible. 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. This proof is often referred to as traction or validation but more about this in article No4 – coming soon.

A few good articles loosely on the same theme…

http://www.growthbusiness.co.uk/comment-and-analysis/2129233/its-not-the-product-its-the-execution-stupid.thtml

http://www.forbes.com/sites/alextaub/2012/03/01/what-it-takes-to-raise-seed-stage-funding-in-2012/

www.timjoslyn.com/post/2400692301/funding-is-not-a-right

www.nebusiness.co.uk/business-news/science-and-technology/2011/07/01/why-your-idea-is-worthless-51140-28976859

http://blog.elegantbanners.com/2010/12/entrepreneurs-ideas-are-worthless-execution-is-gold

Fundraising & Startups

They say that a downturn is the best time to get your startup going, so I have gathered together a few good links below with a few thoughts on this topic. This article will also push out a few thoughts on approaching fundraising. There is a lot out there on this topic but I want to give a slightly different perspective and look at it from the people/person that assist the companies in securing their investment.

5 Startup Myths

The first link is a website called ‘Small Business Trends’ which was sent from my Google Alerts and I have chosen it because it approaches the subject by debunking some prevalent startup myths. The Small Business Trends article can be found here.

First Time Fundraising

If you’ve never really approached fund raising for your business outside of bank loans or an overdraft, then you probably have a lot of new ground to cover. Perhaps you are considering trying to secure private investment from business angels; ‘trying’ very definitely be the operative word as you embark on trying to convince an investor that they can make stacks of money with your highly lucrative business proposition.

Bootstrapping

Before you start entering into such conversations, let’s look under the hood a little first, just to make sure your approach to business will not scare off investors upon first sight. Are you operating a lean operation by ‘bootstrapping’ your business and keeping your operating costs as low as possible? Here is a good article (from a new media/new tech perspective) by ReadWriteWeb on Bootstrapping. Then there’s this article too from Doug Richard on how to survive a downturn (it’s mainly for established businesses but has some good general nuggets that can be applied by startups and established businesses alike). Guy Kawasaki of Garage Ventures shows why taking a bootstrapped plan b to VCs is much better, here. And finally, some good nuggets here too. For an alternative (anti) look at bootstrapping, see here.

Investment Ready?

Ok, so your now operating lean, you’ve pulled back the operating costs and believe that private investment is the way forward towards your hockey stick growth curve (see point number 3). First big lesson, private investment is not a variation of getting a bank loan, i.e. you can meet all the criteria for a bank loan and have a reasonable expectation that you will get your loan. With private investment there are numerous reasons why you might not get the investor’s cash, even when you can successfully tick all the given criteria. For example, the returns might not be high enough, they might disagree with you on how big the size of market share is, they might not believe in you or your team that you can deliver what the business plan says, or, they just might get an itch that you might not get on well together. Getting equity investment can be a lengthy, time consuming and in many cases, fruitless task. They might love you, love your product, believe in the exponential growth potential forecasts but the whole process can go belly up once the due diligence process kicks in.

Another point worth taking note of is that in most cases it will cost you money to get money, unless you have managed to get direct access to a range of ‘high net worth‘ or ‘sophisticated‘ investors, you will have to go through intermediaries and they will want paying for their work. Typically, they often take around a 5% ‘success fee’ for funds secured. There may also be fees for additional work undertaken, depending on whether you work with an agent like me, or with one of the angels network.

I would also advise against thinking that all that is needed is for your business plan to be thrown out there to land in the inbox of multiple investors. It’s more than just emailing your businesses plan (or executive summary) out to a database of investors. Investors are too busy to look at numerous business plans every week. Someone somewhere has to be paid to soft through them all and pick out the good ones. Investors also rely and prefer often to work via recommendations. Even if you are one of the good ones, you still have a million and one reasons why even after being successful in getting a pitch opportunity, you might still not get the money.

[I have a lot more written on this. If a get one or two requests (comments can be added below) then I might consider putting more in here on this subject, or do feel to contact me personally about this].

Some thoughts

• Realise that it costs money to get money.

• Most (over 90%) businesses that apply for investment, don’t get invested in. You might need to: try – fail – make adjustments – try again.

• Have you or the other Directors put money into the business also? This is kind of expected and gives investors a degree of comfort to know that you believe so much in this venture that you have put your own money in also.

• If there is IP, have you taken steps to protect it?

• Have you got a ‘plan b’ in case you get partially funded, could you roll out in stages instead?