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How to prepare to seek and pitch investors from Ideas to Deals Live, 8-27-09

How to prepare to seek and pitch investors from Ideas to Deals Live, 8-27-09

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Ideas To Deals 8 27 Ideas To Deals 8 27 Presentation Transcript

  • Ideas to Deals Building an Investment Ready Business
    • “ In preparing for battle I have always found that plans are useless, but planning is indispensable.”
    • - Dwight D. Eisenhower
    • Build A Business
    • Make Meaning
    • Make a difference
    • Make Value
    • If you succeed in building a business, either funding sources will be fighting to give you money or you won’t need their money.
    • Key to Writing an Operating Plan
      • Do it for you.
      • Keep it simple.
      • Keep it real.
      • Internalize it.
      • Work it.
    • The key to funding is knowing your business and being honest about what you have.
    • Can you answer this:
    • What do you do?
    • OK…
    • Can you put it in a box and sell it?
    • What kind of Business Do
    • You Have?
    • Scaleable, Exponential Growth, Defined Exit?
    • Heavy Service Component, Slow/high Growth, No Exit?
    • Who is out there to buy our Product?
    • How do we get them to buy our product?
      • What is it all Worth?
        • Valuation
        • Valuation of early-stage companies is a little short of random.
        • Valuation is negotiated, there are no hard numbers especially for early-stage companies.
        • Provide a good projection of future value at a potential, future liquidity date and discount back.
        • Know comparables…What other companies, similar to yours, have generated what multiples of sales at liquidity.
        • Build value as you build the company ~ Focus on “Value Inflection Points”.
        • Focus on dollars not percentage
          • 10% of a $20 million company is worth more than 100% of a $1 million company.
        • Key Valuation Issues
        • Know what investors look for and expect.
        • Make sure you and the investors are on the same page. Good investors will want you to have a fair percentage of the company.
        • Know why these things are important to investors.
        • Understand the factors that influence value
        • Anticipate investor questions.
        • Look at competitive deals.
        • Learn from the process ~ Listen well
        • Suggestions for CEO’s
    • Pre Investment
    • Unit Holders Issued Valuation Pre-investment Post-investment
    • John Doe 500k $500k 25% 19%
    • Bill Smith 400k $400k 20% 15%
    • Jane Brown 800k $800k 40% 31%
    • ESO Pool 300k $300k 15% 15%
    • Note…ESO does not dilute
    • Total Issued $2 mil $2 mil 100% 80%
    • Post Investment
    • Investors 500k $500k 0% 20%
    • Total Issued $2.5 mil $2.5 mil 25% 100%
        • Cap Table Example
    • Pre Investment
    • Unit Holders Issued Valuation Pre-investment Post-investment
    • John Doe 481,250 $240,625 19% 11.5%
    • Bill Smith 381,250 $190,625 15% 9.5%
    • Jane Brown 781,520 $390,625 31% 19%
    • ESO Pool 375,000 $187,500 15% 15%
    • Investors 481,250 $240,625 20% 11.5%
    • Total Issued $2.5 mil $1,250,000 100% 62.5%
    • Post Investment
    • Investors Rd 2 1,500,000 $1,250,000 0% 37.5%
    • Total Issued $4 mil $2.5 mil 100%
    • $750,000 raised at $.50 per share; decrease in valuation of 50%
        • “ Cram Down” Example
  •  
    • Friends, Family, Founder
    • Bootstrapping is building the business from internally generated funds.
      • You need to establish a foundation for your business.
      • Build credibility and show that your business has customers and a product that people want to buy.
      • Focus on customers and cash flow.
      • Work hard and be creative in seeking ways to drive revenue while holding expenses down.
        • Angel Investors
      • Angel investors are high net worth
      • individuals who are interested in investing in
      • emerging businesses.
        • Two Types of Angel Investors
        • Professional
        • Strategic
    • Professional Investors
        • The underlying reason that they will invest is return on their investment.
        • They invest in spaces they know.
        • They invest with people they know
        • They invest based on referrals from people they know.
        • Invest based on due diligence.
        • Will require professional terms.
        • Looking for a big payout based on a liquidity event.
    • Strategic Investors
        • More interested in the product than the business.
        • Invest based on gut reaction.
        • May take common stock
        • May not look for a liquidity event.
        • May be the friends in FFF (or referred by FFF)
        • Key points About Investors
        • If you take someone else’s money you have a partner. They will want to have some influence on the company to protect their investment.
        • You will probably have to relinquish some level of control over the company.
        • If you are unwilling to share leadership of the company, investors are not the option for you.
          • Institutional Venture Capital
        • The only reason that they will invest is return on their investment.
        • They only invest in spaces they know.
        • They only invest with people they know
        • They only invest based on referrals from people they know.
        • Invest only based on due diligence.
        • Will only require professional terms.
        • They are only looking for a big payout based on a liquidity event.
    • Seeking Investors
    • Investors invest in people and teams that can execute.
    • “ A” teams with “B” markets will generally beat “B” teams with “A” markets.
    • Investor Business Plan Summary Format
    • Summary should be “concise”
    • Summary should provide a clear description of the problem you solve.
    • How you solve it.
    • Your business model.
    • The underlying magic of your product.
    • Defensibility of your product.
    • Summary should be no more than “ four-pages” .
    • Pitching
      • Question: How can you tell if an entrepreneur is pitching their business?
      • Answer: Their lips are moving.
    • Tips for Pitching
    • Explain what you do in the first minute.
    • “ Clearly” explain what you do in the first minute.
    • Articulate the problem in the market and what you do to solve it.
    • Purpose of a pitch is to “stimulate interest” not to close the deal.
    • Keep it tight. 10 slides, 20 minutes, 30 point font.
    • Speak to the audience’s interest.
    • Title Slide: This is where you tell what you do and give a simple to understand example.
    • Problem: Describe the pain you are alleviating for your customers.
    • Solution: Show how you solve the pain.
    • Business model: Explain how you make money.
    • The advantage you have:   Why are you different than everyone else?
    • Marketing and Sales: "Clearly" tell what your sales strategy is. Do not forget to discuss your pricing. 
    Pitching Plan
    • Competition: Show there is enough of a market available to buy your product even with the competition.
    • Management Team: You need to convince the investor that you have the team that can execute and will succeed.
    • Financial Projections: You need a simplified, clear slide here. You need to justify your numbers.
    • Current Status/Future Status: Show your use of funds and how that will drive the growth of the company. You do need to discuss exit options. Who are buyers and when. Don't hem-haw around.  show the investor that they can not only expect the company to succeed (which is about you) but also that they can expect a return in a certain time frame (which is about them).
    Pitching Plan
    • Investors’ Interest
    • How are you going to make money?
    • How are you going to generate my return?
    • Are you capable of “executing”?
    • Don’t When Speaking to Investors.
    • Don’t try to BS the investor because they see through it.
    • Get your value proposition across early in case you don’t get to the end of the presentation.
    • Don’t get bogged down on the mechanics of the product. Early on the investor will assume it works as you say it will.
    • Don’t When Speaking to Investors.
    • Don’t ask for an NDA at initial meetings!!!
      • Real investors are not in the business of stealing ideas and trying to develop them.
      • You control what is in the summary and initial pitch. You don’t need to disclose the “secret sauce” at this point.
      • Investors will sign an NDA prior to due diligence.
      • Get over it…You’re not that special
  • Recommended Readings
  • Resources for Assistance
    • Ohio Small Business Development Center
    • http:// sbdcfreeadvice.ning.com ,
    • 614-287-5294
    • TechColumbus
    • www.techcolumbus.org ,
    • 614-487-3700
    • Ideas to Deals Blog
    • www.ideas2deals.typepad.com
    • Everything is always impossible
    • before it works.
    • That is what entrepreneurs are all
    • about – doing what people have told
    • them is impossible.
  • The Ohio SBDC at Columbus State p. 614-287-5294 http://sbdcfreeadvice.ning.com For Information on SBDC Activities
  • “ Pitching the Dream” Mark Butterworth Innovation4ward
  • Agenda
    • What investors looking for
    • The pitch
    • Deal structure
  • Angels – Looking For
    • A company where they believe can add value and make money (and have fun)
    • An industry they understand and good management team
    • Invest based on: Chemistry
  • Venture Capital – Looking For
    • A company where they can make lots of money (fun is not a factor)
    • Big markets, sustainable differentiation and good management
    • Invest based on: Management team
  • Good Management – Ideal
    • Experience in a start-up or launching a product within a large company
    • Domain knowledge
    • Relationships with key customers
  • Good Management – Other
    • Broad vision
    • Ambitious
    • Tremendous energy
    • Good listener
    • Adaptable
    • Know that they don’t know everything
    • Hire people better than themselves
  • Investment Criteria: Other
    • Sales and marketing strategy
    • Competition
    • Technology
    • Financials
    • Exit strategy
  • The Investor’s Mindset
    • Their time is more important than their money
    • You must manage the process!
  • First Meeting – Angel Investors
    • Goal: Get a second meeting not a check
    • Format: Short, non-technical PowerPoint
    • Message: Within the first three minutes:
      • The problem you are solving,
      • How you solve the problem, and
      • That you have the management team to execute
  • First Meeting - Other
    • Do not assume:
      • they have read the plan
      • that you will get through presentation
    • The product or technology is only 5% of the pitch in the first meeting
    • One page summary financials
      • Assumptions more important than numbers
    • How the investor will make money!
  • After The First Meeting
    • You must manage the process
    • Anticipate the investors needs
    • Submit your own Due Diligence Review Manual
    • Don not tell them “it is in the business plan”
      • Opportunity to customize to their “hot buttons”
  • Deal Structure
    • Individual Angels:
      • Security: Common stock
      • Exit: Share buy-back , Sale or IPO
      • Return: 15% to 20%
      • Valuation: reasonable
    • Organized Angel Funds and Venture Funds :
      • Security: Preferred stock
      • Exit: Sale or IPO
      • Return: 30%+ compound annual
      • Valuation: Tough but fair
  • Preferred vs. Common Stock
    • Common  Investors and management have same rights
    • Preferred has additional rights:
    • Liquidation preference – get their money back first
        • Anti-dilution provisions – protection against reduction in valuation
        • Redemption – investment plus dividends back at predetermined time
        • Dividends – 5% to 8% annually
        • Veto over strategic decisions (sale, liquidation, IPO)
  • Resources:
    • Gerald A. Benjamin and Joel Margulis. Finding Your Wings (How to Locate Private Investors to Fund Your Venture). New York: John Wiley & Sons, Inc. , 1996.
    • David Gladstone. Venture Capital Handbook (An Entrepreneur’s Guide to Obtaining Capital to Start a Business, or Expand an Existing Business). Englewood Cliffs: Prentice Hall, 1998.
    • Pratt’s Guide to Venture Capital Sources . New York: Securities Data Publishing, 2000.
    • www.pwcMoneyTree.com
  • The Ohio SBDC at Columbus State p. 614-287-5294 http://sbdcfreeadvice.ning.com For Information on SBDC Activities