Raising money in today’s startup environment is widely considered to require Herculean efforts, only accomplishable by elite entrepreneurs who have had multiple exits or have navigated the hallways of Stanford, Harvard and MIT.
This couldn’t be farther from the truth.
Most startups have horrible ideas, horrible teams, or horrible plans: sometimes all three. For the ones that meet the minimum standard in those areas, the next hurdle is a lack of knowledge around fundraising, trends, and valuations.
Robert Okabe, an Angel Resource Institute Trustee, recently coached attendees of the Council for Entrepreneurial Development TechVenture Conference on what they needed to know. Below is the quick and dirty guide to Okabe’s thoughts around “Meeting Investor Expectations in the Capital Raising Process.”
Most entrepreneurs hold a hyper-local view when fundraising, which might help navigate the local investing landscape. But this becomes fatal when trying to raise larger amounts of money. With few data sources and poor filters available, they just don’t have enough resources or information to fully understand the expectations on the other side of the table. And so they get lost in the wild forests of high-risk investing.
Great entrepreneurs find sanity in the chaotic world of fundraising by gaining introductions to investors through fellow entrepreneurs or previously known investors. According to the Angel Capital Association Member Survey, investors value referrals from other investors and entrepreneurs over deals discovered through incubators, service providers, technology transfer offices, economic development organizations and websites.
After gaining an audience with the potential investor, entrepreneurs are asked for an executive summary. This unassuming document is equivalent to the startup company’s online dating profile. All the essentials are listed in ink – the problem, solution, market opportunity, go-to-market strategy, team bios, accomplishments to date and financials.
To highlight the importance of this initial contact between entrepreneur and investor, Okabe said “The executive summary is an entrepreneur’s primary outreach document, but it is also the most efficient screening tool for investors.”
Fumble the ball in the executive summary and entrepreneurs can kiss any face-to-face interactions goodbye. Want to prevent being the punch line at the next investor dinner? Keep the executive summary short at 2 pages or less, be concise and honest, deliver the document as a PDF, and don’t list the amount of money you are raising.
Follow these rules and the founder will reach first base. Don’t make the mistake of celebrating too early though; the road ahead will not be easy. Next, investors will ask for a business plan or want to schedule a meeting.
If they ask for a business plan, make sure you use the longer document (15-30 pages) to tell the company’s complete story. The ACA reports that only 19 percent of business plans stand out and majority, 64 percent, are rated “okay.” Instead of becoming discouraged like a 7-year-old who doesn’t get an allowance, conjure up a killer document that helps you get a leg up on the competition.
Main points of consideration for the business plan include addressing any deficiencies in the company rather than ignoring them. This helps answer investor skepticism. Also, explore your competitive advantages in more detail. Keep in mind that the business plan is a necessary evil and should be a living document. Things will change at a rapid pace in the startup environment so you need a flexible plan to emerge as a winner.
Those that survive the forest of investor filters will be rewarded with an allocated amount of time to make a presentation. This is where an entrepreneur can show their passion and conviction for why they quit their day job and decided to join the dark side of startup founders. Using supporting data, Okabe claimed that the presentation is the “first interactive engagement and is highly valued by investors.”
Although 28 percent of presentations were rated “excellent” or “very good”, a majority of 58 percent left something to be desired. Every good entrepreneur smiles because this is an opportunity to capitalize on the ineptitude of others and win the hearts of investors.
To be effective, presentations should be kept under 20 minutes, be extremely engaging and leave time for questions at the end. There are many perspectives on how to create a great presentation but a few constant themes persist in all. Presentations should include a slide deck, contain one topic per slide and use text large enough to be seen by everyone in the room, 30pt font is usually a good minimum.
Having a great slide deck gets you set out on the right foot. However, great entrepreneurs use slides as a reference but allow their confidence and charm to seize control of the room. A wise man once told me, “If ya got it, ya got it.” Those who don’t have “it” better figure something out before they get eaten by wolves disguised as investors.
These wolves will almost always get worked up about one aspect of your presentation – the much-hyped financial model. The beauty is that every person in the room knows the financial model is a wild ass guess (WAG) and will drastically change as the startup learns more about their business. Even with this in mind, investors want to see a well thought out model that includes identified assumptions and some form of sanity.
The financial models that stand out and are popular with investors use graphs and summary statements together. This is a perfect time to unveil the Excel spreadsheet ninja warrior you’ve been grooming. If you haven’t found one yet, scoop up a finance executive to add to your team. Pass this test and you are on your way to the final stage of assessment before receiving the desired funds.
Due diligence is the final chasm that needs to be crossed by an entrepreneur in pursuit of funding. Some of the most promising deals have been left to die in the graveyard of due diligence. In this stage, investors exert a considerable amount of effort, 20+ hours, to investigate all aspects of the deal.
Success is easily attainable if the founders have been transparent, honest and collaborative in the previous stages. With an investors money at stake, it is not uncommon for the due diligence period to include investigation of financial statements, corporate and IP legal documents, technology, background checks and market and customer validation. If it were your money, you would probably want to talk to the founder’s 3rd grade teacher if it meant you could make a better decision.
Entrepreneurs are some of the most passionate people in the world. They obsess over building their business and solving a problem. The fundraising process can be intimidating but you don’t need to be a wizard to strike gold. Gather knowledge and find experienced entrepreneurs to leverage as a guiding light. If done right, you might join the secret society of elite entrepreneurs.