Entrepreneurship 101: What Do Investors Look For?


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Part of the MaRS Entrepreneurship 101 series.

Every entrepreneur wants to know the secrets for successfully pitching a VC or an angel. This lecture features an unusual theatrical format that seeks to unlock those secrets.

Speaker: Peter Tolnai, founder and President of Orchard Capital Group Inc., an angel venture capital fund.

Download the audio presentation and post questions on the MaRS Blog: http://blog.marsdd.com/2007/02/28/entrepreneurship-101-pitching-a-vc/

Published in: Business, Economy & Finance
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  • Note that this presentation was accompanied by a role-playing exercise for the MaRS Entrepreneurship 101 Event Series (http://www.marsdd.com/ent101).

    Video of this presentation can be found on the MaRS website:
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Entrepreneurship 101: What Do Investors Look For?

  1. ? What do investors look for? Presented by: Peter Tolnai ptolnai@marsdd.com
  2. ? The Question “I’m afraid I can’t remember how this meeting was set up and I don’t have any documents. Can you please remind me who referred you to me?”
  3. Setting up the Meeting The Question A Review Positives Some homework on investors ! Resourceful ! Results-oriented ! Negatives Inappropriate use of Craig Lauder (who doesn’t know about this meeting) ! Over-aggressive ! Demonstrates that the team is not well-connected ! Defensive about the deal – won’t send advance materials ! The Bottom Line Get the best quality introduction you can get ! Send some materials in advance so VC can prepare and use time more efficiently !
  4. ? The Question “Please give me your personal backgrounds and tell me the story of how you know each other.”
  5. The Management Team The Question A Review Positives Two people have worked together before ! Negatives Each team member should speak and provide their own backgrounds ! All have large company experience; no entrepreneurial experience evident ! Bob and Mark are brothers: Nepotism often a problem ! The Bottom Line Experience in BOTH a large sophisticated company to acquire skills AND a ! small, resource-constrained company to learn entrepreneurial skills provides best background and complete skill set. Teams who have worked together before reduces risk of creating a new ! management team.
  6. ? The Question “Mark do you think you have the right experience to be the CEO of this deal?.”
  7. Mark as the CEO The Question A Review Positives Some very limited entrepreneurial experience ! Knows the online gambling industry ! Negatives Knows the online gambling industry ! No entrepreneurial experience; questionable abilities to set priorities; identify HR ! requirements; recruit a management team; manage a business “by the numbers”; etc. Overconfident “sales-guy” without recognition of challenges of starting a business ! The Bottom Line Entrepreneur may or may not be the CCEO at different stages of company ! development. Listen to the VC and assess if he/she has practical insights on this point. !
  8. ? The Question “Please tell me about the technology and the market you’re going after.”
  9. The Market Opportunity The Question A Review Positives None - Sorry ! Negatives “Gray” area legally; needs to be offshore and many investors in the fund would not ! be supportive”. Completely unrealistic revenue and EBITDA forecasts. Defining revenues by ! assuming market share is an illusion; all start-ups start with zero market share. Greedy and arrogant ! Focused on making money personally – not building a business. ! The Bottom Line Build a business that solves a real business or consumer need, and the financial ! rewards will take care of themselves. Building a business is very hard; demonstrate confidence with an awareness of ! the risks.
  10. ? The Question “What segment of the market are you targeting and what is the competition doing in that market segment?”
  11. Market Segmentation The Question A Review Positives The online gambling market in Asia is large and potentially underserviced; these are ! not games that most mos North American companies would typically “do first”. Negatives It isn’t clear that Mark has played Mah Jong or any of the other games he wants to ! target, as his knowledge of the competition appears to be thin. Even if this were a relatively open market opportunity, Mark and the team appear ! to lack the cultural sensitivity which would almost certainly be required to succeed. The Bottom Line You have to know more than just what you’re doing! Try to know EBERYTHING ! about the market: segmentation & characteristics of each segment; competitors and their strategies; key success factors; who has failed and why;movement of key managerial talent; etc.
  12. ? The Question “Can you describe the technology architecture and whether any of your technology could be considered proprietary? Have you looked at the intellectual property estate around your technology?”
  13. Technology Review The Question A Review Positives None - Sorry ! Negatives No IP work at all ! The Bottom Line Understanding of IP estate is essential, both “positive” (“Do we have ! anything patentable?”) and “negative” (“Does our invention infringe on any existing patents?”)
  14. ? The Question “How much capital do you need to get started?”
  15. Capital Requirements The Question A Review Positives At least they understand they need marketing money; many entrepreneurs assume ! their products will “sell themselves” based upon the sheer brilliance of the solution. Plan to complete software V1 and demonstrate viability before raising second round ! of financing at (hopefully) a higher valuation. Negatives Frightening use of proceeds without project plan for software development ! Wasteful spending on the wrong expense items; this is 2007, not 1999. ! Unintended insult and arrogance (raising money in New York), implying that “this ! deal will get too big or you”. The Bottom Line Investors must see well-planned use of proceeds with spending “appropriate” ! to the deal. Amount of capital to be raised in Round 1 should finance achievement of ! significant value creation step + at least 6 months at then-current burn rate to allow time for raising Round 2.
  16. ? The Question “What valuation are you putting on the deal, and are you speaking with other VCs?”
  17. Other VCs The Question A Review Positives Understands the process ! Negatives Consultation with others in management team undermines credibility, followed ! by blatant lying on getting another term sheet to attempt to obtain negotiating leverage. Unrealistic timing ! The Bottom Line Never misrepresent ANYTHIING during the process; it undermines trust in ! everything else.
  18. ? The Question “Isn’t online gambling illegal in Canada and the US? How will you operate?
  19. Legal Structure & Documents The Question A Review Positives Their plan MAY be legal, but clearly violates the spirit and intent of the gaming legislation and ! tax code. Negatives Their plan MAY be legal, but clearly violates the spirit and intent of the gaming legislation and ! tax code. Impossible to obtain legal opinions on legality and tax from credible sources. ! Deviation from “tried and true” convertible preferred share structure is a “red flag” to ! VCs; it always makes things more complicated, consumes time and is expensive to paper with the lawyers. Structure makes it VERY difficult to sell to a third-party buyer (except another online ! gaming company) and very difficult to have an IPO. The Bottom Line Keep the structuring very simple. ! Use standard documents. !