Tag Archives: Investors

What Do Investors Want in A Professional Business Plan?

What do investors want to see in a business plan? from The StartupGarage

What Do Investors Want in A Professional Business Plan?

Welcome to video Fridays from The Start Up Garage


A place where Tyler Jensen, The Startup Garage’s founder, answers questions directly from our viewers.

Key Take Aways From Video:

1. Investors want to see a clean, professional looking, honest, and reasonable assessment of the business.

2. Investor wantwell-sourced research sections, which include the market, industry, and competitive analysis.

3. Investors want an exceptional product description that explains all the features and benefits of the product or service you’re going to be selling.

4. Investors want a reasonable sales, marketing, and operational plan and budget.

5. Investors want 5-year financial projections.

Overall, investors are sophisticated and smart, this isn’t a traditional sales document.

Complete transcript below:

“What do investors want to see in a professional business plan?”

Great question Jen, overall investors really just want to see a clean, professional looking, honest, and reasonable assessment of the business. They want clear, well-sourced research sections. So this includes the market, industry, and competitive analysis. These really need to be cited with trusted sources, so add footnotes in there as well.

The next thing you want is a really good product description that explains why all the features and benefits of the product or service you’re going to be selling. Then they’re going to want a reasonable sales, marketing, and operational plan and budget — so you just need to be reasonable in these expectations of what you’re really going to be able to achieve in terms of growth.

And then they’re going to want to see a well thought out 5-year financial projections. These include balance sheet, cash flow, and profit/loss along with all the assumptions that go into making those up.

So overall investors are sophisticated and smart. So this isn’t a traditional sales document — you don’t want to make it too “salesy”. They want to see something that is just reasonable and honest — and I think you’re going to get a lot further with investors than something that is hyperbolic and exaggerated

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

How Does the VC Funding Process Work?

How Does The Venture Capital Process Work from The Startup Garage

How Does the VC Funding Process Work?

Venture capital is ideal for early-stage tech companies that have already acquired some seed capital, but are too small for a public offering. By the time you approach venture capitalists, you will have a working product and business model, a user base and market validation, all of your patents and legal requirements in place, as well as past revenue, if not profit. The goal at this level of funding is scalability.

A venture capital firm is comprised of investors, analysts and industry experts with the purpose of operating on behalf of many individual investors. While each situation is different, the general pattern for approaching VCs is as follows:

 

The Introduction

An introduction is always the first step. This can happen in a variety of ways: by phone, email or in person. This depends on where and how you make contact with the VC.

 

The Pre-Meeting Workup

Once you have a meeting scheduled, you should send the VC firm your pitch deck, an executive summary or one-page business plan. You will be expected to show evidence of a model ready for rapid scaling. It’s not necessary to send your full business plan at this point.

 

What to Expect at the First Meeting

This will most likely take place with several representatives from the firm. The firm is responsible for the collective capital of all of its investors. The recipients of your pitch will be far more critical of your business model and past operations than at any of the rounds up to this point.

 

The Partners

Following your presentation, the VC firm will have a partners’ meeting. The firm’s board will meet to review new companies up for consideration.

 

Additional Information

If your project goes further than the first partner meeting, more detailed information will be requested. If you have not done so yet, this is the opportunity to send your full business plan and supporting financial information. You will want to demonstrate your competency, so keep it tidy and professional.

 

The Face to Face

Once the firm reviews your project, the other partners will want to meet you to feel comfortable about the investment. There are numerous factors in evaluation, however it will come down to your potential to provide them a profitable exit. Know the numbers they expect and demonstrate your confidence in achieving them.

 

Additional Firm Meetings and Validation

The partners of the VC firm will want to hold a closed meeting again to decide on how they want to proceed with your project. The VC firm will look seriously into your company, investigate your data and study the technology. At this point they may draw up a term sheet with their general guidelines.

 

Term Sheet

It’s in your best interest to have an attorney to look over your legal documents. Understand all of your obligations — VC is not only expensive in terms of equity. These negotiations may make or break your deal. Stay flexible, and be wary of dealings that don’t feel right. VCs end up owning about 15% — 20% of each portfolio company.1 So, make sure your buying the right new boss for your business.

 

Signing the Deal

While this IS an accomplishment, your work has only begun.

 

Bottom Line

These are very busy people, handling lots of money. Be as prepared and concise in your dealings as possible and try not to get down if your business is not chosen. Learn as much as possible in the process.

 


1 AVC.com
 

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

How to Determine Your Startup’s Valuation for Investors

Startup Valuation from The Startup Garage

How to Determine Your Startup’s Valuation for Investors

Startup Valuation

One of the biggest questions from startups is, “How much money should I ask investors for?”

What they should really be asking is, “What is my company’s valuation?” You must know how much your company is worth before asking for any amount of money. And when you do, you want to make sure it is the minimum amount you need to make your idea work. It is not a good idea to under or overestimate thinking you can either get your foot in the door or negotiate down with an investor. It can ruin your credibility and chances of getting funding before investors even look at your business plan.

Making Your Case To Investors

Now that you have a general idea of how much your company is worth, here are some things to think about and how you use that information to justify your request to investors.

  1. Consider implied ownership cost. Don’t ask for an investment that is more than your business’ valuation. If your valuation is $1M, you can ask for $200-300K and offer 20-30% of equity in exchange.
  2. The type of investor you chose is important to how much capital you can ask for. Angel groups will not consider an offer over $1M.
  3. What stage is your company in? If you are in the early stages, but have a prototype, angels might be interested. Keep in mind if your company is still in the “idea” stage, it has no valuation and investors other than your friends and family will not be interested.
  4. See where your cash flow bottoms out, and add a buffer. To be credible, your request size must tie into your calculated financials.
  5. What are the investment terms? The most common is an equity investment. You need to figure out what works best with the valuation of your business and choose terms that will keep the investment amount credible.
  6. Single or staged delivery. You can request to schedule a single investment in tranches, based on milestone achievements. This can allow a larger commitment and lowers investor risk.
  7. How are you using your funds? Investors expect uses to apply to your core mission and want to see a “use of funds” list.
  8. Estimate a return on investment. To help your credibility, project a return on investment at the time of exit.

It is difficult to determine the appropriate size of investment, but it is important to get it right the first time in order to keep hold of your credibility.
 

Want To Learn More?

Raising Capital from Angel Investors eBook

Download our free Raising Capital from Angel Investors eBook.

This guide will walk you through the process of obtaining seed capital for your startup. This book includes:

  • An overview of the angel investor process and who they are
  • The milestones angel investors look for when evaluating your business
  • Strategies for finding the angels best fit for your startup
  • How to nurture the relationship, prepare for the meeting and deliver the pitch
  • Rounding out the details and preparing for the future

Ten Deadly Sins of Writing a Business Plan to Raise Capital

Deadly Sins of Business Plan Writing from The Startup Garage

Ten Deadly Sins of Writing a Business Plan to Raise Capital

In order to launch a successful business and raise the capital needed to do so, a startup needs to consider several aspects of the business including the management team, the size of the opportunity, the product/service/technology, the market/sales/distribution channels, the competitive environment and several other factors.  Another key factor is how these business concepts are portrayed in the startup’s business plan.  Below is a list of the 10 most common mistakes, or sins, that we have encountered with entrepreneurs and past clients when trying to raise capital.

1. Focusing on Technology

The technology behind your startup’s product and service (especially for tech-based startups) is certainly important to investors.  They need to understand the technology and why/how it is better than that of your competitors.  Speaking towards your competitive advantages, it will take more than a patent to attract seasoned investors.  They want to see competitive sustainable advantages — aspects about the company that are not easily copied/implemented by your competition.  Once you have succinctly presented the technology and convincingly demonstrated your sustainable competitive advantages, move on to other sections of the business plan.  Many first-time entrepreneurs or entrepreneurs with strong tech backgrounds waste too much business plan real estate on the technology section and only manage confusing the reader as a result.

2. Missing the Mark on Assessing the Opportunity

If your target market is so broad that a 1% adoption rate will make for a successful business, then your target market definition is likely way too broad.  Investors want to see that you have a narrowly defined market with sales and market strategies tailored to target this specific market.  You can have a large addressable market that you hope buys your product, but it is important to demonstrate that you understand the importance of launching a business with clear and actionable target market.

3. Ignoring the Competition

All good business plans put considerable attention on the competition for several reasons.  1) Understanding the competition can help you understand your position/niche in the market and how to tailor your product, target market, pricing, marketing, etc.  2) Demonstrating the strengths and weaknesses of your competition allows you to contextualize your positioning in the market while demonstrating your competitive advantages.  3) A detailed competitive analysis shows investors that you are a thorough entrepreneur when it comes to business planning and that you are confident enough in your product that you aren’t afraid to discuss your competition.

4. Ignoring Market Need/Traction

Demonstrating market need and/or market traction will vary depending on the stage of your startup.  If you are pre-revenue then it will be difficult to portray market traction unless you have the budget to conduct customer surveys.  However, you can still demonstrate market need by highlighting comparable products or services.  You should also demonstrate the problem in the market that your product solves.  For startups with past sales it is important to demonstrate current sales and sales growth since launching.

5. Practicing Top-Down Sales Forecasting

Top-down sales looks at the overall market and uses this information to identify your company’s  projected sales, typically as a percentage of the market.  It is important to know the market size and the percentage of the market that you are projecting to capture in order to validate your model.  However, your model should not be based on a percentage of the market and will raise red flags for sophisticated investors.  Investors want to see a growth/revenue model that uses sales data and assumptions that predict sales by product and region.  They also want to see a ‘growth driver’ upon which your sales are generated.  This may be the number of sales representatives, website traffic and conversion rates, size of email lists, number of licensees, etc.

6. Unrealistic Exit Strategy and Multiple

“We expect to be acquired by Microsoft for a 50X EBITDA multiple” is not a good exit strategy.  Rather, provide some statistics of recent exits from comparable firms and provide data such as sale price, revenue at time of sale, revenue/EBITDA multiple.  Provide a range in the multiple size that you anticipate being able to attract based on these statistics and provide a description of key milestones that will demonstrate when you think the startup is likely to be acquired.

7. Unrealistic Valuation

First and foremost, investors may lose interest if your startup is offered at an unreasonable price as this poses an obstacle for negotiations before they even begin.  Additionally, if/when you need to raise the next round of capital, you dont want to risk taking in money in a down round because you overvalued the company early on.

8. Ignoring Milestones

Milestones are discussed in other sections of this blog but it is important to highlight them on their own as well.  Milestones, both past and projected, help to build value, establish credibility and project goals.  They show investors what you have accomplished to date (this also gives you legs to stand on when defending your valuation).  They show investors how you will spend their money.  They show investors that you are a sophisticated entrepreneur and that you understand what it is going to take to build a successful business.

9. Junk and Fluff

If the sentence, picture or graph does not, in some way or another, tell investors why they should invest in your business then leave it out.  Investors are busy and you’ll be lucky if you can get them to read half of your business plan in their first read through.  Don’t ruin your chances by including unnecessary junk or fluff as chances are these will be the choice lines that the investor decides to read.

10. NDA Insistence

In short, investors don’t sign NDAs.  Asking them to do so will make you look like you don’t know what you’re doing.  Investors are more interested in finding good entrepreneurs, not good ideas.  Investors know that anyone can come up with a good idea but that very few have the ability to actually pull them off.  Good ideas come down their pipeline all the time and they will not be afraid to overlook yours because of an NDA.

Investors look at hundreds of deals a month.  You are competing for their time.  Don’t waste precious minutes of their attention or risk not getting their attention because of an NDA that provides little to no benefit.  That’s right, an NDA provides little to no benefit.  If your idea is so easily stolen that justh earing the concept is enough to allow anyone to replicate it, then the investor likely wont be interested in the first place.  In any case, your business plan does not need to include the secret sauce and you should be able to openly share the concept of the idea of anyone.  Lastly, the power of any legal agreement is tied to your ability to enforce it.  Unless you are prepared to sue investors if you feel they stole your idea, why waste having them sign an NDA?

 

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

Seed and Series A Technology Funding Report

Capital Raising Trend Report from The Startup Garage

Seed and Series A Technology Funding Report

Tech Seed and Series A Medians and Averages Show Little Change

Despite some notable early-stage Juiced and Jumbo Series A round investments in tech firms such as GitHub and Clinkle, the average and median Seed and Series A transactions are showing little change.

Juiced Series A deals typically range between $8M and $15M.  Companies raising this type of capital typically have substantial market traction and boast teams of 20+ professionals.  These deals resemble traditional Series B investments.

Jumbo Series A deals typically range between $15M and $60M.  Companies raising this type of capital typically have been bootstrapped for quite some time, boasting revenues of $10M+ and looking for institutional capital to grow fast with goal of reaching a not too long term IPO.

Average and Media Seed and Series A Deals

The average tech Seed deal has stayed consisted at $800K with the media at $50K as outlined in the graph below:

Average and Median Tech Seed Deal Size from The Startup Garage

 

The average tech Series A deal reaches $5.1M with the median at $3.35M as outlined in the graph below:

Average and median tech Series A deal size from The Startup Garage

 

 

Looking at these early-stage deals by sector we see that Internet Seed deal averages declined to $770K while medians increased slightly to $530K.  Meanwhile, mobile Seed deal averages grew to $830K with medians also increasing to $520K.

Average and median Internet Seen deal size from The Startup Garage

Average and median mobile Seed deal size from The Startup Garage

Within Series A, median deal sizes in the mobile sector are also growing faster than the internet sector:

Average and median Internet Series A deal size from The Startup Garage

Average and median mobile Series A deal size from The Startup Garage

All data and graphs thanks to CB Insights.

 

Whether you have a question about early-stage tech financing or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!

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!

Seed VC Funding in Silicon Valley On The Rise

Venture Capital Investment Trends from The Startup Garage

Seed VC Funding in Silicon Valley On The Rise

Seed VC Funding in Bay Area on Pace for Record Year

Seed funding in the San Francisco area appears to be on pace for another record year.  Seed deals in 2013 have seen a massive push towards the mobile sector with a contraction to the online sector.  Seed funding to both San Francisco and Silicon Valley reached over $192M across 242 deals in the first half of 2013 alone.  To put this in perspective, this is more than all of 2010 and nearly comparable to 2011 investment funding and deal levels.

Seed funding in the San Francisco area appears to be on pace for another record year. The Startup Garage

 

Funding By Sector

The Bay Area seed investment portfolio has seen a steady increase in internet seed deals since 2010.  Though, unless there is a large push in the back half of 2013, it looks like internet see deals will be less than 2012.

Seed funding in the San Francisco area appears to be on pace for another record year. The Startup Garage

On the other hand, mobile deals are already at 75% of the funding levels seen in all of 2012 and is poised for a steady growth trend.

 

Most Active Seed Investors in the Bay Area

The following chart depicts the largest investor groups in the Bay Area.

All data and graphs provided by CB Insights.

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

Questions You Can Expect From Investors

Questions to Expect from Investors from The Startup Garage

Questions You Can Expect From Investors

The Most Common Questions Asked by Investors

Statics show that investor receive thousands of plans a year and will only proceed to the next round with 10% of those at best.  Regardless of the type of investor you are targeting (sophisticated individuals, angel groups or VC firms), it is important to be fully prepared to answer every question that they may come up with.  Some of the most common questions that you can expect to hear are the following:

  • Why should I/we invest in you?
  • What are your competitive advantages?
  • What is your current market traction?
  • Is this business scalable?
  • At what point do you break-even?
  • What is your exit strategy?
  • What are some comparable exits of other companies in your industry?
  • Do you have intellectual property such as a patent?
  • What is your valuation and how did you derive it?

Time and time again unseasoned entrepreneurs’ presentations fall flat when they are not prepared to answer these types of questions.  Take the time to make sure that your business planning is complete, that your business plan is dialed in and that you are prepared to answer these and related questions.

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

How Startup Valuation Works

How Startup Valuation Works from The Startup Garage

How Startup Valuation Works

A valuation is simply an estimated value of a company and is often based on assumptions surrounding the company’s current and future potential. There are several factors to consider when valuing a company including the startup stage that the company is in, prior successes, how much money is needed and for what purposes, the type of investor that is being targeted, how similar companies are valued, the management team of the company and the exit strategy…just to name a few.
 

How Startup Valuation Works

The following infographic by Founders and Founders details how startups are valued:

A valuation is simply an estimated value of a company and is often based on assumptions surrounding the company's current and future potential. The Startup Garage

 

Whether you have a question about Startup Valuation 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!