August 21, 2001 - Strengthen Your
Venture Worthiness
by
Bill Snow
There are three types of
companies seeking venture funding: 1) Grade A - those that are venture worthy
and show it, 2) Chaff - those that will never be venture worthy, and 3) Hidden
Gems - those that are venture worthy, but act and look like Chaff.
This article will deal with
ways for Hidden Gems to emerge from looking like chaff, and better position
themselves as Grade A opportunities.
Grade A companies know how to
talk to VCs – they speak the lingo. They rarely ask for NDAs, they know
what hurdles they need to clear (product launch, sales, etc.), they are
realistic with their projections, and they are concise and to the point in their
plans and correspondence. Grade A companies are far and few in between –
traditionally only 1000 companies receive venture funding in a given year.
Companies considered chaff are
not necessarily bad companies; they merely do not fit into the narrow
requirements of VCs.
Then we have the hidden gems.
These are companies that might be venture worthy, but because of poor
presentation, they appear to be chaff. The warning to the hidden gems is that
VCs will not dig for answers. VCs are looking for one reason not to invest in
your deal.
The “One Reason” Rule:
During the first step of a
review process, investors rarely read business plans: they scan them. They are
not looking for reasons to invest; they are looking for reasons
not to invest.
Some of these reasons may
include:
-
A request for the reader to
sign a non-disclosure agreement (NDA). VCs generally do not sign NDAs.
-
Plans lacking sales. If a
deal is “pre-revenue,” most VCs will take a pass. Such deals would more likely
benefit from angel investors.
-
Plans that show unrealistic
sales growth. (see “Be realistic” below.)
-
Management teams without
industry experience
-
Management teams that have
not previously built and/or run substantial businesses or business units.
(Running a $3 million tuckpointing business usually will not count.)
-
Products that are difficult
to sell and difficult to scale.
Only if the plan passes this
initial screening, will VCs dig deeper and seriously consider the investment. If
the plan reflects any of the points above, it will never get past the quick
scan.
Get to
the Meat of the Matter
Do not waste time showing off
your encyclopedic knowledge of the history of technology and communication. Most
VCs are familiar with the introduction of the printing press, the telegraph,
etc.
What the reader does NOT know
is how your company will make money. What do you sell, who do you sell it to,
how do you sell it, how do you price it, how much have you sold, what is the
compelling reason to buy your product, who are your competitors and how are you
different from them?
You must immediately and
explicitly address each of these questions. Failure to do so will likely prevent
your deal from escaping the scan pile.
If, for some reason, you decide
to disregard this advice, at least get your facts right. Recently (July 2001) I
reviewed a plan where the author talked about “the booming stock market” and how
“corporate earnings are at record highs.” With the NASDAQ 60 percent below its
peak and company after company announcing enormous losses, this entrepreneur
effectively demonstrated his lack of knowledge.
When
Writing, Think of Napoleon
In other words, keep your plan
short, powerful and to the point. The plan should be in an electronic format.
While pdf files are preferred, Word docs are acceptable as well -- just make
sure that all of your information is contained in one comprehensive document
(rather than a collection of disparate files. Also, always make sure your
plan does not exceed 25 pages or 2 MB.
These 25 pages (or less) should
include management bios and detailed financials (historical and projected).
Financials should include "full set" (income statement, balance sheet and cash
flow statement information) with REALISTIC projections for the next three to
five years. As back-up information, have white papers and sales funnels
available upon request.
If you cannot make a compelling
case for your deal in 25 pages, ramping up to 100 pages won’t make a difference.
VCs do not have time to read long plans.
Are Your
Historical Financials Relevant?
Many entrepreneurs submit plans
for companies with existing sales. Good, right? Well, not if the company’s past
sales represent technologies that are not part of the company’s future plans,
and not if the future technologies have not yet been fully developed.
In this case, the company will
be considered “pre-revenue,” since no revenue has been derived from the
technology of the future. A better option for entrepreneurs in this position
might be to contact an attorney, incorporate a new company and finance it with
the proceeds from selling the old company or old technology.
Be realistic
A plan that shows a company
going from zero to $2 billion in sales in only five years -- with only $3
million of paid in capital -- is extremely unlikely. Do your homework and
research other companies in your space. What kind of sales growth did they
achieve? What sort of investments was required to grow those sales?
What is
Your Company’s True Revenue Ceiling?
If your sales have leveled off,
chances are an additional investment will not yield higher sales. All companies
have a revenue ceiling. Most companies gross less than $5 million per year; much
fewer gross between $5 and $10 million.
Finally, Do Not Confuse Good
Manners with Interest
Most people learn good manners
at an early age. For example, it is not polite to hang up the phone on someone
else. No matter how irrational or long-winded the caller, most people try to
politely end a conversation before hanging up the receiver.
In other words, just because an
investor is giving you a few minutes, it does not mean he’s interested in your
deal.
The Takeaway
The main thing to remember is
investors will not “dig” for answers when reviewing your plan. If your
opportunity fails to grab someone’s attention, the cause is likely to be one of
two reasons: 1) the opportunity is not venture worthy, 2) you have not concisely
and simply explained your opportunity. You have to make things simple, easy to
read, powerful, and to-the-point. Complexity for complexity’s sake will not
impress.
About the author
Bill Snow runs this site. If you haven't figured that out yet, I can't
help you. |