Tag Archives: Fundraising

Top 8 Faux Pas Claims by Entrepreneurs Raising Capital

Capital Raising Faux Pas from The Startup Garage

Top 8 Faux Pas Claims by Entrepreneurs Raising Capital

What Not to Say to Potential Investors

Yes, you need to impress an investor if he/she is going to break out the checkbook.  However, there are some common claims made by first-time and seasoned entrepreneurs alike that do not resonate well with investors.  Some of these claims are infamous buzz words that can be explained in other terminology, other are just outright lies.  In any case, try to avoid these claims in your investor pitch.

1. “Our projections are conservative.”

This may or may not be true.  In any case, investors are less interested in whether your projections are conservative or optimistic and care more about whether they are realistic and how well you can defend your assumptions.  Every investor knows that projections are based on assumptions that will change as the business develops.  Yes, investors are looking at potential returns when looking at financial projections.  But, they are also looking at your ability to turn a business concept into a realistic business model.

2. “We have no competition; no one else is doing what we do.”

Avoid this claim at all costs!  The vast majority of the time this statement is complete false — every good opportunity has direct and indirect competition.  For the rare occasions when this statement is true, it is still a slight exaggeration.  While no one else may be doing exactly what you are doing, there is someone providing a similar product or service that solves the problem that they are facing.  If you truly are a first-mover, make sure you are prepared to address investors concerns about trail blazers making mistakes and costing lots of money.  Lastly, these statement just frustrate investors.

3. “My competition is too slow to be a threat.”

Your competition may be too slow to be a threat, right now.  But, your competition can quickly improve and catch up once you enter the market.  Your competitors most likely benefit from vastly superior market traction and capitalization.  Rather than showing naivete, take some time to prepare sustainable competitive advantages or barriers to entry that you can put in place to ensure that your competition cannot catch up quite as fast.

4. “All we have to do is get 1% of the market.”

There is so much that is off-putting to investors with this statement.  First, it shows that you probably don’t understand your target market.  If your target market is so broad that only 1% adoption will make for a successful business, then your target market definition is likely way too broad.  Second, if you doubt your product/service/brand so much that you only think you can attract 1% of the market then why would an investor get excited?  Third, percentages can be deceiving and it’s an easy route for disappointment.  Rather, look at how many people you need to sell your product to.

5. “Patents make our business defensible”

It is very rare that a patent makes a business defensible against competitors offering similar products.  First, you patent is most likely only a provision patent (not yet granted) and second, it only protects a very specific application.  Learn more about patents and their limitations here.

 6. “We have a few huge contracts being signed next week!”

Whether this statement is false or not, many investors will certainly be considering its validity.  If they happen to believe you – and if they are smart – then they make a commitment to investing next week when the contract is signed and or cash received.  If you truly have contracts signing next week, then hold off on raising capital until those contract are signed (you will be much more attractive and worth much more at that point).

7. “Key employees will join us as soon as we get funded.”

While you may have the capital to attract key employees, money doesn’t mean you will have a successful business.  Building a successful business takes a lot more than just a pile of cash.  Key employees know this and will be attracted to your company before the funding comes if they truly believe in the opportunity.  Additionally, if you don’t have the revenue to pay for key hires that are necessary for the business’ current success then you likely are not attractive to investors.  Investors want to see proof of concept and nothing shows that more than a strong customer base.  furthermore, strong revenues will improve your valuation and reduce financial pressures.

8. “Several firms are doing due diligence.”

This statement can seriously backfire.  Nobody likes the feeling of being hassled by a car salesman, including investors.  If the statement is true, great — you are in a perfect negotiation position should both firms decide to make an offer.  If the statement is not true, you are running the risk of alienating a firm that may genuinely be interested in you.

 

Whether you have a question about raising capital or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

The Importance of an All-Star Management Team

Importance of an All Star Team from The Startup Garage

The Importance of an All-Star Management Team

The most cited answer among investors – and perhaps the most underrated factor among first time entrepreneurs – is the startup team.  There may be a need for your product or service, the market may be enormous, your business model may be attractive, there may be few competitors in the space, and you may even have some bonafide intellectual property, BUT if you don’t have the management team with the skills, experience and track record to execute on your business plan then you likely will not attract investors.

Why Do Investors Care So Much About the Management Team?

The reason is simple: something will go wrong, and only great teams can effectively respond to competitors, markets, funding environments, staff departures, PR disaster, etc.  Furthermore, success breeds success.  Investors want to put their money in the hands of people who have a proven track record with launching companies and providing a solid return to investors.

How To Build the Management Team

You likely will not have the capital to hire a full suite of C-level gurus when launching your company (you wouldn’t be fundraising if you did).  But, you can still have a team of gurus acting as your board of advisers.  By simply having the knowledge and resources that these advisers bring to the table at the tips of your fingers will go a long way in easing the concerns of investors.  Furthermore, you’ll want to make it clear in your business plan that 1) you are aware of the C-level positions and the expertise gaps with your current team, and 2) this is exactly what you will be spending their capital on (among other important startup costs).  Lastly, you current management team will likely not have all of the skills and experience to effectively run all components of the business, but it is imperative that your team has enough to be effective at the companies core competencies…even if that means bringing on a partner before approaching investors.
 

Whether you have a question about your management team or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Ban Overturned on Publicly Advertising You Are Raising Capital

Ban Overturned with SEC from The Startup Garage

Ban Overturned on Publicly Advertising You Are Raising Capital

Raising Capital? Shout It From the Rooftops!

The Securities and Exchange Commission (SEC) voted to overturn the ban on “general solicitation” or publicly advertising that your company is raising money.  As a result, the SEC has deemed it legal for private companies to tell anyone that they are raising money, which was previously illegal.

How This Effects Startups

The lifting of the ban is expected to have a huge effect on entrepreneurs and startups by allowing them to reach a much broader audience.  Previously, an entrepreneur could not tell a newspaper that it was seeking funding.  They had to quietly and privately deal with a very small group of investors who had free rein over deal flow.

By allowing entrepreneurs to publicly advertise that they are fundraising will open the private market to a significantly broader pool of investors.  One of the more substantial sources of capital that this regulation will affect comes from crowdfunding.  Companies are legally allowed to sell equity in their company to accredited investors (and in some cases un-accredited investors) which will drastically increase entrepreneurs access to capital.  For more information regarding the amendments to the private offering rules from SEC visit this link.

With the solicitation ban lifted, more investors will know about startups they can invest in.  While there is certainly a lot of benefit for entrepreneurs and startups, many are calling for the need to add regulation to reduce the risk of fraud and other undesirable outcomes.


 

Whether you have a question about Publicly Advertising or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Angel Investor Stewardship

Angel Investor Stewardship from The Startup Garage

Angel Investor Stewardship

Angel Investor Stewardship – An Underrated Skill

One of the most underrated skills that a startup CEO needs to know is how to keep his/her investors updated, excited and engaged.  It is through the lens of the CEO that investors know what’s going on, and in some ways, engage with the businesses.  Furthermore, if you need more money down the road, you want your investors to be happy with how you’ve managed the business and your relationship.  Here are a few tips on how to best interact and update your angel investors:

1). Keep in touch, preferably by email.

If you are an early stage startup, you should be in touch every 1-2 months at least and every 2-3 months if you are a later stage startup.  If you have a full board of directors or advisers, it is probably best to setup a regular phone conference.

2). Be concise.

Keep your correspondence between 1-3 pages.  Your investors are busy and they are smart.  They just want to know the key information about what’s going on; they don’t need every detail.

3). Be consistent.

Create some sort of template that you use in every correspondence.  For example, you can use the following headers: highlights, low-lights, and goals.  With a consist report card of sorts, your investors will feel up to date and any uncertainty will be put to rest.

4). Be truthful.

Highlight your successes, but don’t hide all your problems.  Be sure to include one or two of your main strategic problems.  First, they may be able to help.  Second, every company has problems; it will seem fishy if you don’t disclose yours.  With that said, you don’t need to give away any secrets or provide sensitive information.  Rule of thumb: if you wouldn’t want it going public or having your competitors read it, then don’t write it.

5). Involve many.

You know the power of networking.  Keep your network up on your company.  Even if they aren’t investors, they may be able to help out now or down the road.  Keep those bridges strong by updating them on your company.

6). Ask for favors.

This monthly update is a great time to ask for favors.  Whether it be an introduction, key personnel, marketing favors, etc use this as an opportunity to get some help.

7) Record your correspondence.

First, this makes it easy on you and your investors when you need to go back to an old update.  Second, it avoids any problems down the road with claims about information that was or was not disclosed.


 

Whether you have a question about Angel Investors, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Investor Activity – 2012 Summary

Investor Activity – 2012 Summary from The Startup Garage

Investor Activity – 2012 Summary

Private equity fundraising improved in 2012, with the amount of aggregate capital raised by closed funds increasing from $312bn in 2011 to $327bn in 2012, an encouraging sign for the industry. However, the number of funds closed fell from 911 funds in 2011 to 761, indicating limited partnerships (LPs) are now often placing more capital with fewer managers.

According to Preqin (alternative asset industry intelligence firm), the majority (60%) of LPs made new private equity commitments in 2012. However, this is a drop from the 66% of LPs that committed capital to funds in 2011 and suggests many investors still remain cautious in the current financial climate.

Investment Activity by Region

The level of investment activity in 2012 varied among investors in different locations. Certain investors, primarily banks and insurance companies, located in North America and Europe have become increasingly restricted in their investment activities due to stricter regulations, requiring them to re-evaluate their investments in the asset class.

Asia and Rest of World-based investors were the most active, with 67% of the LPs in this region making new commitments. In contrast to tighter regulation in developed markets, LPs based in Asia and Rest of World have seen restrictions on their investments decrease in recent years. Furthermore, investors based in Asia and Rest of World  have become increasingly experienced in investing in private equity and now represent a significant source of capital to fund managers.

Investors Above, At or Below Their Target Allocations

The proportion of LPs below their target allocations to private equity has gradually decreased since 2009. As shown in Fig. 3, almost half (45%) of LPs were below their target allocations to  private equity in December 2009, following the onset of the global fi nancial crisis. This decreased to 28% in December 2012. The vast majority (57%) of LPs are at their target allocations to the asset class and 15% of LPs are over-allocated to private equity.

 

Whether you have a question about Investor Activity in 2012, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Pitch Deck for Angels and VCs

Pitch Deck for Angels and VCs from The Startup Garage

Pitch Deck for Angels and VCs

The single most important thing that the VC is going to be investing in is YOU!  Your pitch deck presentation is simply a visual tool to help you deliver your message. It is paramount that the audience is solely drawn to you, and that your deck merely contains short bullet points, headlines and images that evoke an emotional connection or act as a summary of your presentation. You will want to develop a separate pitch deck that you will provide as a handout that includes much more information about the pitch. However, during the presentation itself, the deck needs to be bare bones and the information needs to come from you.

Here are some tips to consider as you work through your presentation deck:

  1. The first slide should contain the company logo.  At this point, you’ll provide a brief (1-2 sentence) overview of what the company does , how it does it and why it is important.
  2. Next, introduce the management team and key players.  Explain how their experience and skill-sets align with the company and where it is going.
  3. The very next slide needs to clearly introduce who the market is and what the size of the market is.  First and foremost, you target market needs to be focused.  Second, it is important that you use outside validators to convince the audience that what you are telling them is true.  Outside validators can include successful beta runs, size of companies in the same or a similar space, credible research firms, etc.
  4. Once your audience has an overview of the company and understand who the market is, present the product or service.  A simple image on the slide will do.  It is up to you to explain the product in simple and succinct terminology that does not confuse or patronize the investor.
  5. The next slide is about the business model.  Explain how the company makes money and why this model was chosen if necessary.
  6. Follow the business model slide with an overview of the competition.  Investors want to see who the competitors are, their strengths and weaknesses, how you are positioned among them, and most importantly, how are you special.  Be sure to include outside validators here as well, such as strategic relationships.
  7. Discuss any barriers to entry that exist in the industry and how your company has or will overcome them.  You may also want to mention any barriers that your company has or will put in place to deter any new entrants or copy-cats.
  8. Provide a simple P&L on the next slide and discuss the key financial takeaways in your projections.  Be sure that when you present the upside potential that you are not too low in your assessment but that what you present is believable as well.
  9. Dedicate the following slide(s) to the capital amount that you are requesting, the use of proceeds and lastly, your valuation.
  10. Conclude with your logo on the screen and wrap up the key points made above as quickly as possible.

You want your presentation to be like a rocket, building speed and momentum throughout its trajectory until it reaches its destination and ends with a climactic explosion.  So to your presentation needs to continually build momentum, getting stronger and stronger throughout the presentation and ending on an extremely high note.

David Rose, entrepreneur turned investor, outlines all of this and more in his TED Talk.

 

Whether you have a question about Pitch Deck for Angels and VCs, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

TED Talk on Pitching to VCs from “The Pitch Coach” David S. Rose

TED Talk on Pitching to VCs from “The Pitch Coach” from The Startup Garage

TED Talk on Pitching to VCs from “The Pitch Coach” David S. Rose

As an entrepreneur, David Rose has raised millions for his own companies.  As an investor, he has funded millions more.  According to the “The Pitch Coach,” the single most important thing that the VC is going to be investing is YOU.  “Therefore, the entire purpose of the VC pitch is to convince them that you are the entrepreneur in whom they are going to invest their money and make a lot of money in return.”  In order to accomplish this you need to convey several characteristics that will convince the room that you are this person.  The most important characteristics are integrity, passion, experience, knowledge, skill, leadership, commitment, vision, realism and coachability.

Your pitch deck presentation is simply a visual tool to help you deliver this message.  It is paramount that the audience is solely drawn to you, and that your deck merely contains short bullet points, headlines and images that evoke an emotional connection or act as a summary of your presentation.  You will want to develop a separate pitch deck that you will provide as a handout that includes much more information about the pitch.  However, during the presentation itself, the deck needs to be bare bones and the information needs to come from you.

David Rose outlines all of this in his TED Talk in addition to a compelling description of how your pitch deck presentation should be developed:

  1. The first slide should contain the company logo.  At this point, you’ll provide a brief (1-2 sentence) overview of what the company does , how it does it and why it is important.
  2. Next, introduce the management team and key players.  Explain how their experience and skill-sets align with the company and where it is going.
  3. The very next slide needs to clearly introduce who the market is and what the size of the market is.  First and foremost, you target market needs to be focused.  Second, it is important that you use outside validators to convince the audience that what you are telling them is true.  Outside validators can include successful beta runs, size of companies in the same or a similar space, credible research firms, etc.
  4. Once your audience has an overview of the company and understand who the market is, present the product or service.  A simple image on the slide will do.  It is up to you to explain the product in simple and succinct terminology that does not confuse or patronize the investor.
  5. The next slide is about the business model.  Explain how the company makes money and why this model was chosen if necessary.
  6. Follow the business model slide with an overview of the competition.  Investors want to see who the competitors are, their strengths and weaknesses, how you are positioned among them, and most importantly, how are you special.  Be sure to include outside validators here as well, such as strategic relationships.
  7. Discuss any barriers to entry that exist in the industry and how your company has or will overcome them.  You may also want to mention any barriers that your company has or will put in place to deter any new entrants or copy-cats.
  8. Provide a simple P&L on the next slide and discuss the key financial takeaways in your projections.  Be sure that when you present the upside potential that you are not too low in your assessment but that what you present is believable as well.
  9. Dedicate the following slide(s) to the capital amount that you are requesting, the use of proceeds and lastly, your valuation.
  10. Conclude with your logo on the screen and wrap up the key points made above as quickly as possible.

You want your presentation to be like a rocket, building speed and momentum throughout its trajectory until it reaches its destination and ends with a climactic explosion.  So to your presentation needs to continually build momentum, getting stronger and stronger throughout the presentation and ending on an extremely high note.

 

Whether you have a question about “The Pitch Coach”, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

Pay to Pitch? NEVER

Pay to Pitch? NEVER from The Startup Garage

Pay to Pitch? NEVER

Your start-up should never have to pay money to pitch to potential investors. Several “angel groups” will express interest in your start-up only to inform you later that they charge a fee, sometimes up to $5,000.

Some of these wealthy angels argue that these fees act as a filter. First, a potential investor should be able to tell whether they are interested in you and your start-up without you needing to waive money in their face. Second, there are thousands of other investors that don’t require fees to filter their investment opportunities. As an angel investor, it is their job to filter their opportunities and manage their returns.

While it may seem like an extremely difficult uphill battle to source funds, your start-up should never have to empty its own pockets for a measly pitch. Angel investors are wealthy; that’s why they are in a position to invest in the first place. A pitch fee is a nominal amount of money to a true angel investor, yet a large sum to you and your start-up.  If it talks like a scam, smells like a scam and looks like a scam…it’s probably a scam! Even if one of these so called “angel groups” that charges presentation fees actually invests in the companies that pitch to them, there are plenty of other groups and private investors that do not make you take such risk.

Jason Calacanis wrote an excellent post on this topic if you would like to learn more. He also includes a list of angel groups that are under investigation for such practices.

Whether you have a question about Never Paying to Pitch, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

The Rolling Close

The Rolling Close from The Startup Garage

The Rolling Close

A rolling close is when you raise capital, usually from several different investors, over a period of time as opposed to all at once.  The initial investor(s) agrees to a rolling close (i.e. a 3 month window) during which other investors can invest at the same terms.  Whether it’s a matter of logistics for investors or you need additional investors to raise the full amount of capital, the rolling close allows you to continually identify and pitch potential investors while closing with investors that are ready to commit.

The duration of most rolling closes is anywhere between 30-90 days, though your startup can push for however long it needs.  Rolling closes are certainly more favorable to the startup and investors will push back on longer rolling close time frames as it allows potential investors to hedge or get the same deal long after the initial close.  Additionally, some investors may see rolling closes as an opportunity to wait and see whether they want to invest (they may want to see if you are successful at attracting other investors, or they may want to see how the business fares over the next several months).  Be sure to use this tactic strategically to give yourself the best chance at raising the funding needed to take your business to the next level.

Whether you have a question about the Rolling Close or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

What is Revenue Financing?

What is Revenue Financing? From the Startup Garage

What is Revenue Financing?

Business Revenue Financing, also known as Revenue-Based Funding (RBF), is a means of securing funding by giving investors a percentage of total future revenue based on previous (and projected) sales revenue figures. Often described as a hybrid of the traditional equity funding model, it provides the entrepreneur a funding source based on the performance of the company without having to actually sell equity, and at the same time provides the investor the opportunity to benefit directly from company growth without buying equity in the company. Also different from the standard debt model, the entrepreneur also only pays on realized income revenue, so the payments are variable and tied to the company sales numbers. If the company has zero revenue in one month, no money is owed to the investor for that month. RBF is considered a relatively new form of funding and is continuing to gain in popularity.

RBF is good for companies that are selling product but lack assets to secure bank loans. It is also an attractive option for companies with variable revenue and financing needs, as the payments will increase or decrease according to revenue streams, allowing them to vary with your needs. Companies like restaurants, manufacturing, or brick-and-morter-heavy start-ups may not be as good a fit for this type of financing. This type of funding is typically found through angel investors or firms that specialize in RBF.

Advantages for investors are the high upside potential without the need for exit to realize return. On the entrepreneurial side, there is no required company evaluation or management guarantees with the contract, and the owner retains full control and ownership of the company. The terms for revenue-based financing are based on previous revenue numbers as well as forecasting. They typically include a set percentage of revenues which is paid out for the life of the company of until an agreed upon overall ceiling cap is reached.

Whether you have a question about Revenue Financing or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!