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Effective Communication with Angel Investors

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Presentation was given at the 2nd Annual NEI Venture Capital Symposium

Presentation was given at the 2nd Annual NEI Venture Capital Symposium

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  • 1. Effective Communication in the Acquisition of Private Equity Financing Northeast Indiana GROWTH CAPITAL SYMPOSIUM April 22, 2009 Sweetwater Remound Wright Northeast Indiana Innovation Center
  • 2. ho am I? • Remound W. Wright, Inaugural Director, Center for Entrepreneurial Excellence (CEE) – (7 Years with the NIIC) • Duquesne University – MBA • Business Development, Strategic & Corporate Financial Planning (6 Years w/ Phelps Dodge & NAVL) • Public Accounting + Internal Audit (10+ Years with Touche Ross & Co. & Westinghouse Electric) 2
  • 3. hy an Innovation Center presenter? • What is NIIC? • 501 (c) 3 Non-profit business technology based incubator & accelerator; • Innovation Park is 55 acre campus adjacent to IPFW our host at Stellhorn and Hobson Roads; • 70K+ square feet in 2 bldg (biomedical wet lab space and office space) including the new EGC • ISO 9000-2001 Certified • 11.5 FTE staff • 5 Clients have graduated since inception 3
  • 4. revenue he Venture Financing Chain Maturity Expansion IPO, Acquisitions Growth Banks Gestation Inception Roll-out Venture Capital Firms & Prototype Corporate Investors Founders Angel Investors Time 4
  • 5. Why Discuss Effective Communication? Because…. There is Art in the Ask! 5
  • 6. The worlds of business and fine art have much in common. Money and Music Finance and Fiction Profits and Paintings A painter puts oils on a canvas… A writer puts pen to paper…. An entrepreneur takes a business idea and brings it to life. 6
  • 7. How you ask questions is very important in establishing a basis for effective communication. 1. Effective questions open the door to knowledge and understanding. The art of questioning lies in knowing which questions to ask when. 2. Address your first question to yourself: if you could press a magic button and get every piece of information you want, what would you want to know? The answer will immediately help you compose the right questions.” 7
  • 8. Why Discuss Effective Communication? Effective communications critical to the success of all private equity (PE) relationships -This is a relationship business. -People have choices: •Who to invest in; •Who to invest with; •Who to take term sheets from; •Who to work deals with; •Who to establish and maintain relationships with. 8
  • 9. Four Goals of Effective Communication • To inform – you are providing information for use in decision making, but aren’t necessarily advocating a course of action; • To request for a specific action by the receiver; • To persuade – to reinforce or change a receiver’s belief about a topic and, possibly, act on the belief; • To build relationships – some messages you send may have the simple goal of building good-will between you and the receiver. 9
  • 10. Effective Communication… 1. Achieves shared understanding 2. Directs the flow of information 3. Helps people overcome barriers to open discussion 4. Stimulates others to take action to active goals 5. Channels information to encourage people to think in new ways and to act more effectively 10
  • 11. The 5 Essentials of Effective Communications 1. Know your audience and match your message to the audience. 2. Respect your audience and suspend judgments. 3. Know exactly what you want to achieve. 4. Think and organize before you proceed. 5. Think from your audiences point of view. 11
  • 12. Many entrepreneurs don’t get the funding they seek because they don’t know the investors criteria. If approaching an angel investor you must have thought through these key questions… 2.How much money do you need? 3.What do you intend to do with the funds? 4.How much return will the investor realize on the investment? 5.When will the investors realize a return? 6.How will the investor realize a return? 12
  • 13. Investors typically analyze an opportunity by its stage of development. •Pre-seed Stage •Proof of Concept •Seed Stage •Pre-sales, pre-profit •Early Stage •Early sales, pre-profit •Mid-stage •Growing sales, breakeven •Late-stage •Growing sales, profits •Exit •Large growth potential Entrepreneurs must know the intended outcome of investment based on their stage of development. 13
  • 14. Entrepreneurs must know who typically invests at each stage of their development? Stage Amount Source Pre-seed Stage $100,000 Family, Friends & Founders Seed Stage $500,000 Angels Seed Stage $2,000,000 Venture Capital Early Stage $5,000,000 Venture Capital Mid-stage $8,000,000 Venture Capital Late-stage $10,000,000 Venture Capital Exit $11,000,000 - $1B Investment banks, companies Entrepreneurs must know when and where (the appropriate places) to look for investment. 14
  • 15. An investors expected rate of return by stage development. Stage Source ROI Pre-seed Stage Family, Friends & Founders 20X in 7 Years Seed Stage Angels 10X in 6 Years Early Stage Venture Capital 5X in 5 Years Mid-stage Venture Capital 3X in 3 Years Late-stage Venture Capital 2X in 2 Years Exit Investment banks, 1.35X in 1 Years companies Entrepreneurs must know when and where (the appropriate places) to look for investment. 15
  • 16. Effective communication demands that entrepreneurs to know the ?’s. If approaching a banker for investment you must address these key questions… •Ownership •Business Plan •Cash Flow •Contingency Plan 16
  • 17. Effective communication demands a well written strategic business plan. It is vital in today’s world that the entrepreneur realistically understands how their product is positioned in the market place. The Big 8 key strategic questions relate to: 5.What market problem or need does the product address; 6.How big is the problem; 7.Why is this product the best solution and why will customers buy; 8.What management skills are required to bring the product to market; 9.How much money is required; 10.How will those funds be used; 11.How will competitors be neutralized, and 12.How much money will this venture make? 17
  • 18. Beyond the previously mentioned criteria, we let clients know that investors look for... •Great deals, not good deals; •Exceptional Return on Investment (ROI); •Dominant competitive advantages; •Proven management; •Large and growing markets; •In their sweet spot; and •Synergy with other portfolio companies. 18
  • 19. For entrepreneurs the results of effective two-way communication are… •Develop & Maintain Better Relationships •Trust •Rapport •Credibility In this environment – information travels quickly •Stronger Skills in: •Leadership •Negotiating •Relationship building 19
  • 20. iCARE – where effective communication about venture financing begins. Investment Center for Advancement of Regional Entrepreneurship An Entrepreneurial Preparedness Program of the Northeast Indiana Innovation Center A “one-stop-shop” where entrepreneurs find out every thing they need to know about venture financing. Come and learn more about “Art of the Ask”! 20
  • 21. THANK YOU Contact Info: Remound W. Wright Director Northeast Indiana Innovation Center Center for Entrepreneurial Excellence 3201 Stellhorn Road, Fort Wayne, Indiana 46815 rwright@niic.net 260-407-6462 DD 260-402-1920 Cell http://www.niic.net 21
  • 22. Venture Capital Glossary What We/They Say… What We/They Really Mean… Acquisition strategy The current products have no market Adverse customer selection Existing customers can’t stand the product; no positive customer references Basically on plan Revenue short fall of 25% Dotcom business model Potentially bigger fools have been identified Considerably ahead of plan Hit plan in one of the last three months Currently revisiting the budget Financial plan is in total chaos Cyclical industry Posted a huge loss last year Entrepreneurial CEO Totally uncontrollable, bordering on maniacal Funding interruption Existing investors tapped out and unwilling to provide additional funding Ingredients are there Given two years we might find a workable strategy Investing heavily in R&D Trying desperately to catch the competition Limited downside It can’t get much worse 22
  • 23. Venture Capital Glossary What We/They Say… What We/They Really Mean… Long selling cycle Yet to find a customer who likes the product On a manufacturing learning curve Can’t make the product with positive margins Possibility of a slight shortfall A revenue shortfall of 50% Repositioning the business Multi-million dollar investment recently written off Somewhat below the plan Revenue shortfall of 75% Too early to tell Results to date have been grim Turnaround opportunity Lost cause Unique No more than 6 competitors Upgrading the management team The organization is in complete disarray Window of opportunity Without more money, the company is dead Work closely with management Talk to them on the phone once a month 23
  • 24. Alternative Guide to Venture Capital VC Term… What It Really Means… Accountants As in investigating accounts, an oxymoron Business Plan Winner of the Booker Prize for Fiction. Vital to securing an investment. Treated like an embarrassing relative post- investment. DCF Analysis Deceit by Computer Fraud. Highly scientific and extremely unreliable method of valuing companies. Due Diligence The (sometimes optional) process of finding out what your buying. Ideally before buying it. Envy Ratio The ratio between how much money a management team makes and how many workers they make unemployed. Exit The only door a VC can see. (David) Frost on Sunday A VC’s favorite interviewer. Also the first letter of FOSB – an impolite decline. Also: Failure. Unimaginable. Hockey Stick Every self respecting business plan should have one. Shows the smooth line progression from heavy start up loss to Microsoft levels of profitability that is in every startup’s birthright. Hockey sticks are useful for beating management over they head when they don’ t happen. Internet The medium by which a number of stupid and unlikely people have made millions. And lost them again. To be approached with caution. 24
  • 25. Alternative Guide to Venture Capital VC Term… What It Really Means… Incubator Where teenagers lecture entrepreneurs on the facts of business life (how much they would sell their Pokémon cards for, the latest Teletubby stories, etc.) Would-be investment executives work at incubators until they are old enough to join a proper firm. Jersey Where many VC funds are domiciled. Because they like the weather. Kindergarten See Incubator. Lawyers A necessary evil, apparently. Management To be blamed for poor investments. NPV – No Positive Value Another widely used and largely useless valuation technique. Profit and P45 Form given to departing employees. VCs seek to make one by handing out the other. Private Equity VCs like to keep private how much equity they own. Portfolio Company Like children – Cute to look at in the early stages, then they start spending your cash and ruining your records, before you finally lose patience with in and boot them out of the family home. 25
  • 26. Alternative Guide to Venture Capital VC Term… What It Really Means… Quantum Leap What lemmings believe in before they invest in dot-com start ups Also: Question. Obvious and usually unacceptable evidence of disbelief. Receivership An alternative exit strategy. Very popular with American VC firms in the late 80’s early 90’s. Stock Exchange Where large numbers of old economy companies have historically been put out to pasture. A slow lingering death awaits. A happy hunting ground for VCs. An unlikely exit scenario unless you have little revenue and no profits. Trade Sales What a VS tells his investment committee when he can’t think of how to exit a deal. Also: Terrible deals. What the competition does. Unions A VCs greatest ally. Particularly helpful in restructuring dying businesses to meet the needs of the market economy. We’re all capitalists now. Warranties and A guarantee (backed up with financial penalties) from the vendor Indemnities to say they’ve been honest .” Window of Opportunity What a management team always promises. Youngster Dot.com manager. Zero Sum Game Pleasant way of generating M&A fees. 26