October 2, 1002 - How to be Prepared
for a VC Call Back
by
Bill Snow
Online investment news sources seem to be flooded lately with articles aimed at
determining whether or not a deal is venture worthy. And, more often than not,
these articles tend to focus on those opportunities that are not ready for
funding. On a more optimistic note, I felt it would be beneficial for our
readers to provide some tips on how entrepreneurs can be prepared, should they
receive that long-awaited call back from a VC, investor, agent or investment
banker.
1. Do Your Homework
Before you send out your plan
out, narrow your search to logical investors. Raising capital is not necessarily
a numbers game; it’s a quality game. Learn what recent deals a VC firm has
invested in, and make sure your investment matches the criteria of targeted
VCs.
Because most VCs will not
review plans “tossed over the transom,” you need to utilize every connection you
have. Attend as many industry events as possible, and if warranted, engage
top-tier legal and accounting firms, as they are often conduits for venture
firms. Hiring an agent to assist with your capital raise is often a good idea,
as the fee charged (usually under 10 percent) is well worth the doors the agent
can open. If you feel these fees are excessive, keep in mind that IPO
underwriters are usually paid seven to eight percent. It is merely the cost of
doing business.
2. Know Who Has a Copy of
Your Plan
If you do not immediately
recall the name of the investor or VC firm you’ve sent your plan to, this often
means you are sending the plan to everyone. This will give investors the
impression that you are not serious about your proposal and that you are hoping
the quantity of your business plan submissions will make up for the lack of
quality in your preparedness. It won’t.
3. Provide Direct Answers to
Direct Questions
A frustrating and infuriating
situation is dealing with someone who cannot, or will not, answer direct
questions with direct answers. Entrepreneurs are often so excited to receive a
call back that they inadvertently leap 10 steps ahead and try to answer
questions before they are asked -- often at the expense of not answering the
original question. Learn to listen carefully and provide precise and full
answers.
Failure to provide direct
answers may also give the investor the impression that the entrepreneur is
hiding something. Your answers should be a reflection of your current business
situation -- not what you hope your business will look like in one, three
or six months. A projection is an estimation, and everyone knows projections are
not worth much. Actual results are gold, and these results will be the basis for
the valuation of your company. To commingle these separate worlds means you risk
confusing and insulting a potential investor.
If you tell a VC that this
year’s sales will be $2 million, this should mean you’ve already booked $2
million, or that you have a reasonable expectation of achieving those
numbers. For example, a reasonable expectation of achieving those numbers would
mean you’ve booked $1 million in sales for the first six months of the year, and
you have a strong sales pipeline with more than $1 million in pending sales. It
is unreasonable to say you will generate $2 million this year if you’ve only
booked $100,000 through the first nine months of the year. Do not blur the
distinction between talking to sales targets and actually booking sales. Provide
accurate and honest answers, and do not embellish your results.
4. Memorize Your Deal Facts
During the call back, you should be prepared to answer the following questions
-- clearly, concisely and comprehensively. Commit your answers to memory and
rehearse them often. The answers to these questions should roll off your tongue
in a very fluid and natural manner.
-
What is the value proposition
for the investor?
-
What makes your deal
different?
-
Who are your competitors and
why are you better? Why are you going to win?
-
What is your revenue model
and what is your current revenue run rate?
-
What events will positively
or negatively impact revenue?
-
How does the current
business/political environment affect your business? Will your opportunity
benefit, suffer or experience no real impact? And, why?
-
What is the ROI for your
customers?
-
How do your customers measure
the results of your product?
-
What is your sales cycle?
What is the length of time from identifying customers to receiving a signed
contact?
-
What is the average cost per
unit?
-
Where does this funding round
get you? (Breakeven, cash flow positive, etc.)
-
What were your sales last
year?
-
What are this year’s sales?
-
How much money has been
invested?
-
Who are your investors?
-
What is your burn rate?
If you cannot provide direct
and simple answers (i.e., three sentences or less) to each of these questions,
you still have some homework to do. Beyond rote memorization, you need to make
sure your answers sound natural, not “canned.” Investors are not going to be
patient or give you the benefit of the doubt. Failure to provide direct and
complete answers means you are unprepared, and your deal is not venture worthy.
Special
thanks to Jerry Hug, vice president, Redwood Partners, New York City, and Michel
Feldman, partner, D’Ancona, Chicago, for helping with the preparation of this
article.
About the author
Bill Snow runs this site. If you haven't figured that out yet, I can't
help you. |