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Fundraising for Your Business: Dos and Don'ts of Pitching to 'Your' Investor

This presentation contains recommendations on how entrepreneurs should pitch to a prospective investor, understanding the importance of understanding the company's financials, due diligence process, and general leadership qualities to be an effective entrepreneur.

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Fundraising for Your Business: Dos and Don'ts of Pitching to 'Your' Investor

  1. 1. FUNDRAISING FOR YOUR BUSINESS: Dos and Don'ts of Pitching to Your Investor Aaron Rose Founder and Managing Director, ROI3 Ventures
  2. 2. So, you want to become an entrepreneur? 2
  3. 3. ARE YOU CRAZY? 3
  4. 4. Reasons to Become an Entrepreneur 1.Be your own boss 2.Be in creative control 3.Make a lot of money $$$$$$ 4
  6. 6. High Rate of Startup Failure  Out of 10 start-ups, 3 or 4 fail completely (investors loose all their money; company liquidates all assets);  Another 3 or 4 return money to the original investment;  1 or 2 produce substantial returns.  The National Venture Capital Association estimates that 25% to 30% of venture-backed businesses fail.  “If failure is defined as failing to see the projected return on investment—say, a specific revenue growth rate or date to break even on cash flow—then more than 95% of start-ups fail… .” 6 Source: The Wall Street Journal, Sept. 20, 2012
  7. 7. Work-Life Balance of an Entrepreneur: Your work is your life Your life is your work Passion is NOT enough Obsession & Sacrifice, Obsession & Sacrifice, Obsession & Sacrifice, Obsession & Sacrifice, Obsession & Sacrifice Obsession & Sacrifice, Obsession & Sacrifice Obsession & Sacrifice… 7
  8. 8. Is your idea a hobby or a business? (Be passionate about your hobby, but obsessed about your business) 1. Why you (your idea) and why now? 2. Who are your customers? 3. Are you obsessed with solving their problem? 4. How will people know about you? 5. How will you make money? 6. How will you retain customers, while at the same time, grow your business? 7. How will you achieve and sustain profitability? 8. In five years, your business is a leader of what to whom? 8
  9. 9. Ideas Are Crap Without Execution and Follow-Through 1. Ooze confidence 2. Accept risk 3. Define your purpose 4. Create a plan 5. Assemble a like- minded team 6. Constantly build momentum 7. Anticipate obstacles 8. Build stronger relationships, not a larger network 9. Set micro-goals 10.Be patient 9
  10. 10. 7 Qualities Every Entrepreneur Should Look for in a Co-Founder 1. Cooperative, not passive; 2. Pedigree of success; 3. Complementary skillset; 4. Strong networker (relationship-builder); 5. Plenty of time; 6. Passion for your idea; and 7. Honesty and trustworthiness. 10 Source:
  11. 11. Getting Naked with Your Business Partners Early Founders must have a shared vision for their (1) product and (2) company • Are the founders obsessed with solving the problem? Define roles for you and your business partners early -- including equity ownership Business structure: C-Corp, S-Corp, LLC? What happens to the business when a partner (or key employee) leaves? 11
  12. 12. The Meeting with Your Investor The first 10 minutes are the most crucial in a one-hour meeting (articulate your company’s “WOW Factor!!”); No PowerPoint for the first meeting;* Personalize the pitch/conversation (i.e., develop a connection with the investor); Get to the point quickly (financials); Clearly articulate your “Path to Success”; Address the risks to your business; Present a definitive offer (i.e., Term Sheet). 12 *Brad Feld presents a good argument for not using PowerPoint in the first meeting:
  13. 13. Introduction The Anatomy of the 10 Minute Pitch The Problem The Solution Sales Strategy Partners Competition Traction Advisory Board Management Revenue Model {00:30 seconds} {03:00 minutes} {08:00 minutes } {10:00 min.} Financials The Offer Market Size Customers Financials ADR NOTE: While most templates place Financials near the end, as a prospective investor, I prefer to hear about the projected financials and goals early in the presentation. ADR NOTE: Use this time to review your company’s projected financials and goals. 13
  15. 15. High Rate of Startup Failure 0 1084 Underperforming Failure Complete Failure Successful Ventures 8 out of 10 startups fail How will you take your business from the 80% of the failure side to the limited 20% success side? IDEA DEMO REVENUE PROFIT- ABILITY SUSTAINED PROFITABILITY
  16. 16. Investing in Your Business is About OPPORTUNITY RISK 1. Technology Risk; 2. Product Risk; 3. Market Risk; 4. Management Risk; 5. Scale Risk; 6. Climate Risk; 7. Capital Risk; and 8. Exit Risk. 16See “Preparing Your Business for Internal and External Risks”
  17. 17. “Is Your Pitch Venture Ready? Pitch Checklist” by Dave Parker Judging Pitch Decks Criteria 1. Team 2. Market/Customer 3. Traction 4. Big Idea/Problem 5. Timing 6. Business Model/Finance 7. Product 8. Competition 9. Intellectual Property/Competitive Moat 10. The Ask Critical Qualitative Measure 1-4 Scale (1 = hate it, 4 = love it) 1. The evaluator hates (strongly dislikes) your pitch – hate is such a strong word… so think of it as a “1” 2. We don’t like it – not as negative as a 1, but still… you may have missed something, or have some weaknesses in your pitch or a major milestone. 3. We like it! That’s not a 4, we don’t love it, but it’s a good place to start! 4. We Love it! Maybe it’s not perfect yet, but still. 17 “It’s about meeting face to face with investors and having a dialog and presentation with a Venture Capitalist (VC) partner or Angel investor. The best pitches check all of the boxes investors are looking for in a presentation.”
  18. 18. Financial Strategy “If you don’t know your numbers, you don’t know your business” 1. Projected Profit and Loss (P&L) Statement 2. Projected Cash Flow 3. Projected Balance Sheet 18
  19. 19. “If you don’t know your numbers, you don’t know your business” 1. What are your annual sales based on a trailing 12 months, not the calendar? 2. What are your gross profit margins? 3. What are your expenses as a percentage of your gross profit? (Not a percentage of sales. You pay your bills with gross profit – not with revenue.) 4. What are your operating expenses segmented by (1) sales and marketing, (2) general and administrative, and (3) research and development?​ 5. What is the percentage of each segment as a percentage of gross profit? In other words, what percentage of gross profit will be spent on sales and marketing, G&A, and R&D?​ 6. What is your cost of revenue (sales)?​ 7. What is the company's timeline for operational and financial milestones including break-even point and plans for sustained profitability? 19 Year ending Dec. 31, 2020 2021 2022 Sales and Marketing $175,000 $ - $ - General and Administrative $150,000 $ - $ - Research and Development $175,000 $ - $ - Total Operating Expenses $500,000 $ - $ - Year ending Dec. 31, 2020 2021 2022 Revenue $200,000 $ - $ - Operating Expenses $500,000 $ - $ - Net Income (Loss) ($300,000) $ - $ - Financial Highlights Operating Expenses
  20. 20. “Know Your Numbers” “When I go in to meet these new companies, I can tell within three minutes if they have any idea what they’re doing when it comes to the economics of their business. “So the first thing, more than anything, know your numbers.” --Tilman J. Fertitta, Chairman, CEO, and owner of Fertitta Entertainment 20
  21. 21. Do I Need a Business Plan? A Business Plan allows you to list your goals and plan to achieve them (i.e., a map to present your “Path to Success”); A Business Plan allows your team members to understand the company’s mission, vision, goals, and financial targets; and Each team member should be using the same road map. 21See “Your Business Plan Is Your Business's Roadmap”
  22. 22. Entrepreneurship: Have a Plan 1. Executive Summary A. Company and Technology: Background, Goals and Strategic Direction B. General Market Opportunity C. Business and Revenue Model D. Management Team E. Investment Summary 2. Company Description A. Mission B. Vision C. Goals – every company’s goals should include: i. Understand your customer and provide exceptional customer service; ii. Build a product or service of the highest quality; and iii. Build shareholder value. 22
  23. 23. Entrepreneurship: Have a Plan 3. Products and Services A. Include the company’s intellectual property strategy: (1) patents, (2) trademarks, and (3) copyrights 4. Market Analysis (including Competitive Analysis) 5. Marketing, Sales, and Distribution 6. Management and Organization A. Management B. Executive Team C. Advisory Board 23
  24. 24. Entrepreneurship: Have a Plan 7. Risk Factors A. What are the risks to your company? B. What are the risks to your business sector? C. What are the risks to doing business in a particular geographic area (e.g., China)? 8. Financial Plan A. Projected P&L Statement B. Projected Cash Flow C. Projected Balance Sheet 24
  25. 25. Entrepreneurship HAVE A PLAN HAVE A PLAN HAVE A PLAN HAVE A PLAN HAVE A PLAN!!! 25
  26. 26. 26 You are here
  27. 27. You Cannot Do It Alone 1. It takes a team 2. Surround yourself with people smarter than you Your Team’s Intelligence You Your Team 27
  28. 28. Expectations for Team Members Understand and support the company's mission, vision, goals, and business model; Be willing to learn new ideas and concepts; Be willing to teach new ideas and concepts; Be willing to express your opinion and support it; and Be willing to make mistakes and learn from each mistake. 28
  29. 29. Leadership 1. COMMUNICATION 2. Coachable 3. Lead by example 4. Know your strengths and weaknesses 5. Always improve your skills 29
  30. 30. Leadership 6. Take responsibility for your actions 7. Do not micromanage: Trust your colleagues 8. Give credit where credit is due 9. Avoid criticizing, condemning, or complaining 10. EXPECT RESULTS!! 30Blog posts on “leadership” may be viewed at
  31. 31. Due Diligence Checklist for Investing in a Business (1 of 6) 1. General Corporate Compliance/Organizational Information A. Review the articles of incorporation and bylaws of the company, and any/all amendments; B. Review the minute book of the company; C. Verify that the company is duly incorporated and in good standing in the state of its incorporation; D. Verify that the company is qualified to do business in all states in which it transacts business; E. Review all stock certificates and determine the number and type of the authorized and issued shares of stock of the company and the registered owners of the issued and outstanding shares; F. Determine whether there are options, warrants, or other rights to acquire shares outstanding; G. Review stock transfer records of the company; H. Review all agreements between the company and its shareholders; and I. Review securities law filings under state and federal securities laws. 31
  32. 32. Due Diligence Checklist for Investing in a Business (2 of 6) 2. Financial and Tax Information A. Review the financial statements, balance sheets and income statements of the company, including all profit and loss statements for the current year and the past five years; B. Review all budgets, business plans, projections and management reports prepared by the company within the past five years; C. Review the company’s accounts payable, including their quality, aging and composition, and determine if there are any disputed accounts; D. Secure credit reports; E. Review any forecasted income statements and balance sheets, if available, for both the current and following fiscal years, or for such periods as forecasts have been prepared, and the assumptions upon which the forecasts are based; F. Review company’s pricing policies and compliance; G. Review company’s inventory valuation, turnover and obsolescence review; H. Determine whether the company has any secured financing, including accounts receivable or inventory financing, and review all documents associated with that financing; I. Review and create a list of names and locations of all banks utilized by the company including full information on the types of accounts and the names of persons authorized to draw thereon; J. Review all bank loan agreements; K. Review all federal, state, and local income tax returns of the company for the past five years; L. Obtain copies of property tax assessments for the past five years; M. Communications between the company and the IRS, including, without limitation, audit and revenue agent’s reports (federal, state and local); settlement and consent documents and correspondence; and agreements waiving statute of limitations or extending time; and N. Copies of documents relating to IRS or state tax proceedings, deficiencies assessed, or audits commenced. 32
  33. 33. Due Diligence Checklist for Investing in a Business (3 of 6) 3. Employment and Labor Matters A. Obtain a list of the company’s employees, their job classifications, compensation, and length of employment; B. Review all employment agreements; C. Review all indemnification contracts or similar arrangements for officers and directors of the Company; D. Review all of the company’s employee benefit plans, including retirement plans, pension plans, profit-sharing plans, deferred compensation plans, health insurance, and other employee health and welfare plans; E. Review all documents relating to employee stock option plans, incentive stock option plans, employee stock purchase plans, stock bonus plans, salary bonus plans and any other benefit plans or arrangements; F. Review the company’s personnel manual and all documents furnished to employees in connection with their employment; G. Review the current and proposed organizational structure of the company; H. Determine whether there are any claims by employees or government agencies, or investigations, pending against the company arising out to employment matters, including discrimination claims, grievances, arbitration cases, workers’ compensation cases, OSHA cases, labor disputes and similar matters; I. Review the company’s relationship with independent sales agents and other independent contractors with whom the company deals on a regular basis; J. Review all collective bargaining and union agreements to which the company is a party; and K. Review any copies or schedules of contracts, plans, or arrangements regarding election or termination of directors and officers. 33
  34. 34. Due Diligence Checklist for Investing in a Business (4 of 6) 4. Business Contracts and Commitments A. Obtain a list of the company’s major suppliers, the goods or services supplied, and annual dollar volume of business with the company; B. Review copies of all agreements between the company and its major suppliers; C. Obtain a list of the company’s major customers, the goods or services supplied, and annual dollar volume of business with the company; D. Determine whether there are currently, or have in the past been material disputes between the company and its suppliers or customers; E. Review all agreements pertaining to the marketing and distribution of the company’s products or services, including all agreements with independent sales representatives, distributors, marketing companies and franchisees; F. Review all material agreements with customers, including warranties provided to customers; G. Review all installment sales agreements; H. Review all forms of sales invoice, purchase order, receipt, agreements, and other sales documents used by the company; I. Review documents describing the company’s products or services such as promotional literature, brochures, and newsletters; J. Review copies of any license or royalty agreements; K. Review any sale-leaseback arrangements; and L. Note any membership agreements or other relations with trade associations. 34
  35. 35. Due Diligence Checklist for Investing in a Business (5 of 6) 5. Intellectual Property A. Review all material license agreements relating to intellectual or intangible property running to and from the company; B. Create a list of all patents, trademarks and copyrights held by or licensed to the company; C. Review all documents relating to patents and trademarks including filings with U.S. Patent and Trademark Office; D. Note any policies and procedures relating to identification and protection of trade secrets and other confidential information developed by the company and/or disclosed to the company under a covenant of nondisclosure; E. Review the technological infrastructure of the company, including: proprietary hardware, software systems, and networks; all leased, purchased, or shared hardware, software systems, and networks; all interconnecting hardware, software systems, and networks’; environmental systems, including vaults, alarm systems, elevators, and telephones; and F. Review sales contracts for hardware and software systems, including warranty provisions, licensing agreements, operating agreements, maintenance and service contracts, consulting agreements and other strategic business relationships pertaining to data processing and information technology. 35
  36. 36. Due Diligence Checklist for Investing in a Business (6 of 6) 6. Equipment and Personal Property A. Obtain a list of all machinery, equipment, furniture, and fixtures owned or leased by the company and depreciation schedules and leases; B. Review any installment purchase agreements; C. Review service contracts on tangible personal property of the company; D. Obtain an inventory list, including category and aging information; E. Review the company’s accounts receivable records, including age, composition and write-off history; F. Review information about the company’s trade secrets and evaluate the company’s trade secret protection program; and G. Obtain a search of appropriate state and local records for U.C.C. financing statements and other evidence of liens or encumbrances. 36
  37. 37. Entrepreneurs Need to Stop… 1. Building companies with no revenue 2. Following shiny objects (opportunistic) 3. Lying to yourself or others about your traction 4. Focusing on too many things at once 5. Using the word “I” 6. Asking investors to sign non-disclosure agreements 7. Thinking that you are the only company in your space 8. Calculating the future value of their stock 37
  38. 38. Entrepreneurs Need to… 1. Fix a problem 2. Tell a story that people will understand 3. Hire for ambition 4. Get to know your customers 5. Make informed decisions 6. Understand time has the same value as money (and manage both wisely) 7. Become a shameless self-promoter (without becoming obnoxious) 38
  39. 39. Entrepreneurs Need to… 8. Project a positive image 9. Be accessible 10. Master the art of negotiations 11. Get and stay organized 12. Follow-up constantly 13. Have a business plan 14. Focus 39
  40. 40. How Can I Help? Aaron Rose +1 (206) 650-8004 Additional information about entrepreneurship may be found at 40