August 27, 2008

Speed Pitching

I am really excited to go my my first speed pitching event today.  I have talked to a lot of people who have been to one before, and I helped with the practice round on Monday.  Truthfully, however, I don’t think I will understand the magnitude of the event until after I experience it–

  • Seeing the excitement of the entrepreneurs
  • Hearing the difficult questions of the investors
  • Potential deals being discussed

If you are in my boat and haven’t experienced a speed pitching event, or if you are a future participant wanting to get a better idea of what you might encounter, check out this link.  This comes from a show called Dragon’s Den.  Full episodes are available online, but only in the UK.  Elsewhere, you can find clips like the one above on YouTube.

Okay, so our speed pitching events aren’t quite like that, of course.  You espeically shouldn’t expect investors to get in a bidding war over you at the event–or even bids made on site.  This clip focused a lot on the negotiation process, which will occur after the event if an investor is interested in your business.  (There also won’t be stacks of bills laying around–Brock, can we try that next time?!:)…but there were certain things you should take note of–

  • Entrepreneurs are optimistic with their ideas and investors are cautious with their money.
  • A company without revenue and without letters of intent has very little traction in the minds of an investor and will significantly lower perceived value.
  • Confidence in your product/service and passion for your business are valuable (just remember these things can’t stand alone, but are a supplement to a good idea.  This gentlemen seemed to have all three).
  • Investors will ask difficult questions so be prepared and don’t take questions personally.  This is their money you are asking for.
  • Expect a gap in how you value your company and how they value your company.  (That’s okay though, they probably wouldn’t like you as much if you weren’t so optimistic).

Happy pitching!

Lance

For entrepreneurship topics and tips not related to fundraising see Lance’s blog Entrepersonal.




August 21, 2008

Consider a Loan

Is it just me or is Angel/VC funding really exciting?  Seriously, could there be more of a professional self-esteem boost than getting funded?

…but as with most “perfect” scenarios, equity funding has its trade offs.  Let me give you a very possible scenario with Angel funding…

The Story

Okay, say you have a really great high tech idea that you are going to build and sell to Google someday.  (Don’t we all?)  You are pre-revenue, but have such a good business plan and pitch that an angel investor has valued your company at $2MM and is willing to give you $500k for 25% of it.  Great, right?!

So you get to work and bring in $1MM of revenue in your first year with not much profit, but great traction and you are ready for year two.  In year two you double the revenue to $2MM and make $400k in profit.  Now you find yourself in a situation to fund your business with cash it generates.  In year three, you double again with $4MM revenue and the profit continues to scale.  You keep up this rapid pace with internally generated cash in years four and five with $8MM and $16MM revenue respectively.

At this point, your business is valued by Google itself at $40MM, and the hoped for day actually happens when Google mails you a check for that amount and you hand over the keys.  Victory!

The Real Cost

Just as you rent out Disney Land for a day for all of your, now former, employees; you open your mailbox and find a bill.  The bill is from your angel investor–$10MM due upon receipt.

Commentary

Okay, so yeah, things wouldn’t work quite that way.  First, the whole mailed $40MM check, $10MM bill thing–that was just to make you laugh.  Although, the economic consequences might be similar.

Second, to have a business with that kind of success is rare, but having a business that needs some seed money and then rises to prominence with its own cash can happen.

What To Do

Make some good five-year financial projections.  You’ll want to anyway if you want an investor to consider you.  Angels typically want five to seven times what they put in, and they want it in five to seven years.  In the case above, however, the angel would get 20 times in five years.

If you really do have a company that needs a significant sum to get started, but should be able to fund itself into doubling every year, consider angel debt (or other forms of debt) instead.  Let’s look at the same scenario again.

The Remix

This time let’s say you get an angel debt deal for $500k with a three year, 25% APR, annual payment terms.  Just to make things simple–let’s say that translates into you making a $125K payment at the end of year one, a $125k payment at the end of year two, and a $625k payment at the end of year three.   By that time, you are internally funded and you have paid a total of $875k back to the angel.  The angel is happy with the 25% APR return, and you you just saved yourself a lot of your company when you go to sell.

The Third Alternative

It may be hard to get a loan that size so you might need to do a debt/equity combination deal, which also could be a better scenario than a pure equity deal.

Conclusion

Angel equity is awesome!  Angels help make the small to medium business world go!  Sometimes, however, we should probably look at debt (possibly angel debt) instead of angel equity.

Go to www.fundinguniverse.com for helping determining your best plan of action to getting funded.

For entrepreneurship topics and tips not related to fundraising see Lance’s blog Entrepersonal.




August 15, 2008

Networking

I have recently had a lot of fun researching the best way to get in front of any equity investor. This post is a list of some of the creative ideas I have seen. Additionally It provides some general council.

First off let me say that if you are looking for an equity investment, don’t automatically assume you have to go to some institutional fund or firm. Look at it as a networking opportunity. Likely hood is that your investment will come from someone you know or a friend of someone you know. Guy Kawasaki says if it is more than 2 connections away you probably have as good a chance going direct.

Here are some key individuals I would think about that could refer you to the right kind of money.

1. An accountant that has dealt in equity deals.

2. If you know a lawyer that puts equity deals together, get him/her to refer you.

3. If you have a friend that has raised equity, tap his network.

4. If you were an extraordinary performer in college and it hasn’t been to long, get a professor to refer you.

More generally I have found that two actions in particular are consistent with raising money.

1.  Hang around the arena of individuals and events that are consistent with entrepreneur ism.  Don’t be a groupie, but be a professional participant in your communities entrepreneurial events and try to be places that investors might be also.

2.  Be an advice seeker.  Seek professional advice in all the avenues that were outlined in the beginning.  Everybody you know that is well connected should see your plan and give you some feedback on it, after you have the feedback, see if they no anybody who might be interested in the deal from a funding perspective.  If the plan and everything is compelling, you probably won’t even have to ask, they will just volunteer the information.

Well I hope this helps, It may seem to simple but the fundamentals if consistently followed almost always produce results.  If you take issue with that, ask any professional athlete what is most important on game. day.