SLIDE 1: INTRODUCTION STEP CHANGE THANKSThanks Ash, Jeff and the team at Step Change, thankyou for giving me the opportunity to be here.It is so nice to see so many familiar faces in the audience. Thank you for coming and joining in on the fun ... which if there is one thing that you can expect from all of us this evening is a little bit of light hearted fun ..... AUDIENCECould I get sense of who is here tonight - so by way of a show of hands ....How many of you own a business that you might be looking to raise capital How many of you might be looking to launch a business - that will require seed capitalHow many of you want to sell your business in the foreseeable future. How many of you are just here for a the beer and the wine.!KEN MACLED & SCOTIA MACLEODMy name is Ken Macleod. Me and my advisory, Scotia Macleod, have evolved out a diverse 20 year career in finance - initially with investment banks but in the last 10 or so years, I have been privately investing in, lending to or advising the small to medium sized business owner
We specifically develop strategy and plans for high stakes events like the acquisition of capital, or owner exits,
We ALSOdesign investor and sale ready programs for businesses going through this process
We partner with and or intensively work forwell established companies in this way but
we also have a mentoring framework and a number of other ways that works better for the budget sensitive, earlier stage or seed stage opportunities
SO ….. I have 10 minutes to tell you as much as I can about securing investment in your businessIt is a big subject and so I thought I would distil it down and RAPIDLY talk about some of the challenges I see for earlier stage companies seeking to attract investment to their business.The rules apply to any business owner – so you will all hopefully glean something from tonight.
Setting the SceneGreat opportunity with loads of upside! Been in business for a couple of yearsDeveloped some verifiable confidence around what you doYou have a small teamAnd you want to go places that you think capital is required forChallengesWho are we going to approachWhat is critical tothem
Seeds to SowIn my attempt to simplify this process for you, there are 3 seeds I want to sow this evening. It is not rocket science but it is sometimes worth approaching UNFAMILAR territory with familiar concepts. The first one is – the strategic framework for securing capital is not dissimilar to the one you would use to marketing your own products services Look at it this way – in your business today, your customer, that until you came along, was suffering from some sort of pain. You understood this pain, and provided a solution for it. It is the same in the world of raising capital. Investors want to make money. Not making money is their pain. Your challenge is to provide them with a proposal that convinces them that they can make money. 2) Secondly – if you ready your business for an investor, whether you secure capital or not, you will have a better business at the end of the day. There is a school of thought that investors are a necessary evil in order to grow, but ultimately good investors are aligned with your best interests – to build stronger and more valuable business. 3)And my last seed, is this. It is uncanny how close this process is to the process of dating. I have solicited the help of a chap called Bobby – I thought it would be useful to be reminded of some of the challenges we all faced back in the day or are still facing in this dog eat dog world. Here is Booby.
He has no strategy - he has not thought through the likely outcomes of his approachHe has a bit of a screw loose He doesn’t have a clue who is talking to – therefore is communicating to the world at largeHe is totally self obsessed – not concern for the well being of the other party in this prospective partnershipHe committed the ultimate faux pas – and servered all possibilities of a date.He hasn’t positioned himself as an attractive proposition….Lets learn from this and position ourselves in an attractive way to the investor community.
4 clicksAnd the # 1 most important decision making factor in an investors mind, whether they care to admit it to you or not isYou You the entrepreneur. You the management team. You and your team need to exhibit a depth of experience , knowledge and commitment commensurate of the opportunity on the table. But it goes beyond this … you need to have vision, be multi functional, be professional, but above all you need to have integrity, be trustworthy, likeable and coachable.It does sound like you need to do a Myers Briggs test before embarking on this. And you kind of do – in so far as seasoned investors are excellent judges of character. They know how important people are to the success of a venture. But in support of those of you who are looking at this scratching your head wondering how to bring this altogether - no team will be perfect. People do raise capital without the strongest teams. Whilst these attributes are all desired, investors will make compromises. But be aware that any compromises add to the risk that ultimately decides your investment outcome.
NOTE: This slide has **4 CLICKS**to build the table.So Who are we going to talk to:It is important to remember that EVERYONE who we COULD be talking to is likely to want to MAKE MONEY OUT OF MONEY with the help of YOUR business. With the exception of family and friends, they are all probably in the business of doing so. But each one has a different focus. This focus is also a reflection of their appetite for risk. So……the more we can narrow down the source of your capital the more effort we can make to develop a compelling proposition to them.So…..crudely speaking we have 4 different buckets of investorsThe Banks and Debt Lenders – never discount them in a start up or in early stage. Many of them are quite happy lending unsecured with a reasonable proposition. Venture Capitalists – by these I mean firms or organisations in the business of investing in emerging companiesAngels – High networth individualsFamily and Friends – and note for those of you familiar with the third “F” I care not to be reminded of my own foolish behaviour in another chapter of my life. And my accountant knws what I mean.In the interests of simplicity I have come up with a number of ways that distinguishes each of these capital providers, and scored them on a relative scale of 1-5 – with 5 being of utmost importance. Balance Sheet, Cashflow Break Even - Scale – how big is the opportunity Profits – this I mean historic profits Exit / LiquidityWhat do you think is most important to banks in general BALANCE SHEET…..banks are typically lending and seek significant assets to support a debt position. Venture Capital Firms …. More interested in Scale and the likelihood of an Exit Angels … more interested in cashflow breakeven and survival not least because they are usually the firt port of call for more cash when businesses run out. Family & Friends … one must not underestimate the amount of LOVE that is involved in te decision for a family member to get involved with you, but by the same token they do want to see the venture survive and therefore will likely be focus to a greater extent on the cashflow break even too. So if you are in business 2 or 3 years, profitable, got great upside, with a clearly defined exit, then perhaps it is time to start talking with some venture capitalists. The more focused you are who you are targeting the more likely you are to engage them.
Who are we going to talk to:So…..crudely speaking we have 4 different buckets of investorsThe Banks and Debt Lenders, Venture Capitalists, Angels – High NW individuals , Family and Friends – and note for those of you familiar with the third “F” I care not to be reminded of my own foolish behaviour in another chapter of my life. In the interests of simplicity I have come up with a number of ways that distinguishes each of these capital providers, Balance Sheet, Time to Cashflow Break Even - Scale – how big is the opportunity Historic Profits – this I mean historic profits Exit / LiquidityThen I scored on a scale of 1-5 the relative level of importance each of the investors pays to a given feature. So for example Banks who are typically lending are going to be much more focused on your net assets and the quality of your balance sheet. Venture Capitalist are going to be focused on the growth story ahead, and what the exit looks like. Angel and Family meanwhile will pay more attention to the cashflow break even.So if you are in business 2 or 3 years, profitable, got great upside, with a clearly defined exit, then perhaps it is time to start talking with some venture capitalists. The more focused you are who you are targeting the more likely you are to engage them.
But the general rule for all of the investors is there needs to be balance between risk and reward. 1) Entrepreneurs are naturally optimisticOf all the entrepreneurs gunning for a big win, the majority of them focus on the upside and a small minority are focused on the risk of it not happening. Entrepreneurs are typically optimistic people. Most investors are truly expecting proposals with estimates on the high side, and typically make adjustments to the down. 2) But investors make decisions based on the balance of risk and reward. For example – the banks generally take small risks for small returns. Venture capitalist – large risks for hopefully significant returns. 3) So if you are in the majority, and focusing on what sort of rewards may be realised from your venture, then an equal amount of attention ought to be paid to the risks of that NOT happening and how you are going to manage the risks. This is the way an investor thinks.
So what will engages an investor otherwise:Very quickly – one must touch all these elements in an executive summary or a power point presentation, then developed upon in a business plan and or an information memorandum. 1. Market – the market must be preferably growing, substantial enough that in capturing less than targeted, you will still end up with a substantial business2. Pain – the more precise defined the better. 3. Solution – what intellectual property or otherwise product or service have you got that solves the problem4. Customer – the more the investor can identify with your customer with the least amount of education the better5. Projections – surprising to most, financials play less of a role in decision making largely because it is rare for early stage assumptions to play out – but they need to be there. 6. Competition – there are broadly two aspects to competition that are important 1) to what extent they are a threat and 2) to what extent they will guide you what to do or not to do. If you don’t think you have any, then it is more a reason to be concerned than to be excited7. Team / Management we have already discussed how important this is8. Funding – what are you going to do with the capital , what are you giving up in return in terms of equity and %9. Exit – how are you going to get me out of this venture – and when will I. THIS IS THE STRUCTURE UPON WHICH YOU SHOULD POSITION YOUR BUSINESS. FILL IN THE BLANKS.
Bobby sealed his fate with his own faux pas when he started mumbling body parts…What must you avoid?Here are my top 6 things you must avoid …. Never State you have NO COMPETITION. You will lose instant crediblity. Every business has competition – even if it is competition for disposable dollarsNever base your projections on top down assumptions. Work from the bottom up. It creates more confidence in HOW you are going to pull it offAggressive valuation models will do you no favours – theory is generally ignored in early stage investments, it will be a probably be a negotiated outcome in the endOver engineered models in early stage businesses are generally a waste of time. Focus on what is critical and execute.Investors are very sensitive to investment proposals that effectively constitute a salary for the owner. Ensure there is significant leverage in the propositionDon’t make an investor reluctantly read the rest of your plan or proposal just because they didn’t GET IT in the Executive Summary. They are time poor. Get the STORY OUT in the Executive Summary, and PRESENTATION. This is the first base that if you fail to pass it is over.
So here are my top 6 tips to take away with you this evening:Be STRATEGIC – think through your approach.Focus on THE TEAM – it is the #1 driver behind the success of early stage businessesFocus on the TYPE OF INVESTORS you are most likely to get attention from. Ignore the others.Develop RISK MANAGEMENT skills – The Risk / Reward equation drives decision makingFocus on the CRITICAL ELEMENTS in the proposal – find solutions to weak elements before you make your proposalAvoid the FAUX PAS – knock knock who’s there …. remember Dinasaur brained Bobby.HERE ENDETH MY STORY FOR THE EVENING….thank you very much for listening!
Dates & DollarsThe same rules apply Ken Macleod
Scotia Macleod develops strategies & plans for high stakes events likethe acquisition of capital or owner exits.
Case Study: Early Stage Business Great opportunity with significant upside Been in business 2 or 3 years Got some runs on the board Got a team together Want to go places and need capital to leverage it Who do we talk to? What is critical to the investment decision?
Seeds to Sow Strategic Approach- consider your marketing strategy as a framework Investor Readiness is Value Creating- preparing for investment improves value The Dating Analogy- Meet Bobby
The Error of Bobby’s way….. He has no strategy He has a bit of a screw loose He doesn’t have a clue who is talking to He is totally self obsessed He committed the ultimate faux pas
Positioning: YOU are the #1 Decision Factor experience integrity trust knowledge leadership vision multi-disciplined coachable likeable Feet on the ground realism passion commitment professionalism
Risk / Reward Entrepreneurs are naturally optimistic Investment decisions are based on risk and reward Successful entrepreneurs are good risk managers
Positioning: Your Business arket M ain xit P S C P C T F E MakeProposalsSimple, ConfusedPropositionsCanTerminate theFundingExercise unding Proposal & Valuation olution eam &Management ustomer ompetition & Validation rojections
The Faux Pas:Top Turn Offs “We have NO COMPETITION” “We only need to secure 1% of a massive market” Valuations are off the scale Over-engineered financial model Lifestyle businesses Executive Summary fails to capture the story
Summary 1 Be STRATEGIC 2 Build the right THE TEAM 3 Focus on the right TYPE OF INVESTOR 4 Develop RISK MANAGEMENT SKILLS 5 Focus on the critical POSITIONING ELEMENTS 6 Avoid the FAUX PAS…
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