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The following article gives candid advice on what is required to woo investors. It is a good starting point for developing a strategy to obtain funding.
by:Jim Charlton, Senior Vice President, Investments GrowthWorks Capital Ltd.
As published in Business in Vancouver's Money Guide.
The scenery has changed in today's hunt for capital - but the rules have not. Venture capitalists are still looking for the same things they always have. And, the time you spend addressing their fundamental questions makes the difference between leaving with funding, and just plain leaving. Yes, by all means, develop your elevator pitch, wear your best suit, speak clearly and articulately, get a snappy new haircut and a power point template. But a slick presentation isn't enough. To draw capital you'll need to spend some late nights hashing out a few other things before making your pitch.
The good news is investment dollars are still available, but the market environment has shifted. A venture capitalist's primary objective is still achieving a superior rate of return. And, investors need to see when revenues and earnings are going to enter the picture. Companies that explain why their product or service is a necessity, with projections that make sense, will get the funding.
The first key to unlocking the venture capital treasure trove is to articulate the value your business brings to its customers. Before you even try to set up a meeting be sure you can effectively describe the need for your product or service. This is an exercise in defining the problem your business solves and the timeframe. For example, no one disputes we require a clean energy source, but when do we need it? Next year? In ten years? When defining the need for your product or service, be sure to place it into a broader context, which includes your industry environment.
Addressing potential threats demonstrates your understanding of the competitive environment, and showcases the need for your product or service. Place your business into context with the other solutions that exist for your intended customer. Can they get these better, faster or cheaper from somewhere or someone else? Ideally, the answer here is no, but just because your solution is better, faster or cheaper - does it matter? What's wrong with the status quo anyway? Your first job will always be to demonstrate why a need exists for your product.
Once you've defined the need, move on to answer the next burning question on the mind of your investor audience. Do you understand what it will take to grow this product or service? At this point, be ready to discuss the components of your operation. How will you market the product? Are key members of your business team in place? Is their experience relevant? Do you have capital and operating budgets? How do all of these pieces fit together? In three years? How about in five? An investor needs to be confident you understand what is required to take your business to the next level. If you don't you won't provide a superior return for them. Period.
Proving your understanding means breaking down the milestones in your business plan and budgeting to meet them. Figure out where you expect to be in the next five years and the activities required to get there. Once this is finished you should have a rough timeline of the significant events along the road - these are your milestones. Using the milestones, assess your capital requirements at each stage of the development process. This is crucial because in today's environment half the battle is conserving enough cash to get to the next financing round.
Managing cash flow means setting your financing requirements strategically around business development milestones. The idea here is to plan the completion of significant milestones within each round of financing. Give yourself enough time to advance the business by maximizing available cash. As rule of thumb, try to plan your capital requirements in 18 - 24-month cycles. And remember, the timeframe for raising capital is approximately six months. Don't short-change yourself by trying to raise money at the same time you're advancing a key milestone.
In today's market, it is critical to give yourself enough time to raise new capital - live today so you can fight tomorrow. So, if an activity isn't critical to completing the next milestone, extend your cash reserves by delaying or scaling it back. Having a few accomplishments under your belt before you need to raise money increases your chances of success. After all, investors are still looking for superior returns. And, demonstrating you can give them what they're after is the key to opening the cheque book.
Many entrepreneurs choose to build their business by bootstrapping-growing customer-by-customer and sale-by-sale. While this strategy avoids the risks associated with using other people's money, it brings with it the stress of relying on your customers to pay you on time.
If you choose this path, your most important constraint will be capital. A customer who does not pay you is limiting your growth and even destroying your business. You owe it to yourself, your shareholders and your employees not to let this happen.
Unfortunately, there are people in organizations both large and small who fail to pay. At least one percent of the general population would do so without ill conscience, maybe more in the business community. Accordingly, we've prepared the following hints on getting paid to help you manage the risk.
Since you rely on timely payment to survive and thrive as a business, it is useful to consider the collection of payment as essential work. To carry it out effectively and efficiently, Acorn Partners suggests that you divide it into three parts: prevention, amelioration and recovery.
Prevention
A sale is a gift until you are paid. Since bootstrapping means you rely on incoming funds to meet your needs for payroll, rent, etc., it follows that the first thing to do is to make sure that a potential customer can afford your goods or services. We suggest that you do a credit check on the payment history of any new customer: big and well known does not mean has cash. Timing is important-don't wait until you have the order.
For those who sell custom goods or services, try the Peter Kiewt approach-get your customer's banker to be yours. Early in the sales cycle obtain an advance upon signing the order or shortly thereafter. The key is to retain funds from your customer in sufficient amounts so that at all times you have enough to get to the next payment.
Your prevention strategy should also ensure that your invoicing is accurate and fully aligned with your customer's expectations. Make it easy for them to pay.
To speed up and ensure the likelihood of payment, offer a discount if the invoice is in the six figures or more. For example, two percent if paid in five days by wire transfer to your account. It may take a thousand or two to motivate your customer but if you see more money in the end, it's worth it.
To make this strategy effective, you have to pre-clear it with your customer's controller-not just the person getting the goods or service. And be sure to state that the terms are what you and your customer really expect. For example do not use net thirty days when your customer says we pay in sixty days. Price it to carry their receivable for sixty days. Don't let your customer use your bank for free!
For larger invoices, use courier delivery to get a signed receipt and thus proof of delivery of the invoice. Doing so gives you a strong hand if payment drags. It of course goes without saying that you should mail the invoice out as soon as you can. Many small firms hurt their cash flow by not preparing the invoice as soon as the work is completed. Delays of a week or more are common.
Amelioration
Even when you have ensured that you only sell to those that can pay and have placed the invoice in their hands as soon as possible, the question is will they pay? Were they satisfied in full with every item? Just one small question mark and they may put your invoice in the "deal with later file."
Usually this means that you will have to call and complain. Your best approach is to phone about ten days after the invoice has been sent. Think of the call as an opportunity to do quality control on your part. If the party is fully satisfied with the work they have been billed for, there is little real reason for them not to pay. Some companies actually call before the invoice is sent and inquire. This is the best time to do this. Your follow-up call should be to Accounts Payable to ensure that your cheque is in their hands and will be sent on the agreed date. If it is a large cheque, pay for courier delivery.
Recovery
No matter how disciplined and proactive you are about taking the steps to prevent or ameliorate slow payment, some invoices will not be settled as agreed. The key to success here is to push hard and consistently each and every day until you get your money.
A collector is a monomaniac with a mission-to get paid. Not only is this time intensive, it also takes a special personal approach to be effective. You have to have a blend of customer service and a strong sense that the money is yours and not your customer's. When necessary, legal proceedings are effective and should be used. As a firm you must have a policy of "firing" customers who do not meet their payment obligations and are effectively using you as their bank.
All of this takes a lot of time per dollar obtained. It is far more expensive than prevention or amelioration work. Yet if you do not get paid, it is your equity that suffers: it comes right off the bottom line. Thus you should consider contracting this out to some one who is a licensed collector. (Acorn Partners is not in the collection industry and does not offer this service to clients.)
Business Development Bank of Canada: Steps to Starting a Business.
http://www.bdc.ca/en/my_project/Projects/starting_business.htm
Ottawa high tech for entrepreneurs
http://www.geocities.com/notnortel/ent.html
Profit guide
http://www.profitguide.com/
Building a company that investors, including yourself, would love to invest in is tough work. For example consider that the Dow Jones Industrial Average, introduced in 1896, has only one of the original firms still on the list: General Electric.
The following books tackle this problem and in our view are helpful to entrepreneurs who wish to build better businesses.
The E-Myth Revisited: Why Most Small Businesses Don't Work and What to Do about It by Michael Gerber. The book makes the fundamental distinction between the work of the business making the product and the work of managing the business. It also contains a helpful device for setting up an organizational chart for each role, even if you are performing all of them. This is the starting point for any entrepreneur wanting to build a great company, even if you have done it before.
Now Discover Your Strengths: by Marcus Buckingham and Donald O. Clifton. The book presents information on how to manage people based upon their strengths. It bases its conclusion upon empirical results showing significant increases in business performance upon placing people in roles that use their strengths. It also contains an access code to a web site that permits you to build the profile of your top five strengths. At Acorn Partners we have made use of the profiles so that we work together more effectively.
Good To Great: Why Some Companies Make the Leap and Others Don't by Jim Collins. Collins considers empirical differences in the stock prices of firms over the long-term with the firms selected on a paired comparison basis to show what the performers do that the others do not. Collins reveals that the winners concentrate on putting the right employees in the right places.
The Alchemy of Growth: Practical Insights for Building the Enduring Enterprise by Mehrdad Baghai, Stephen Coley, David White. The book introduces the idea of managing in three time horizons: extend and defend current core business; build emerging businesses; and create viable options. The book is an excellent follow up to Good to Great. In our view it helps early stage firms see the organizational challenges ahead. It is highly recommended for technology firms who have to create viable options in terms of new products and services to avoid being a one trick pony.
Winning Angels: the 7 Fundamentals of Early Stage Investing, by David Amis and Howard Stevenson. If you believe that your business needs capital from investors, this is your starting point. The book provides you with an understanding of what your early investors want and how they will value your opportunity. The valuation rules are used by many successful investors.
Living on The Fault Line: Managing for Shareholder Value in Any Economy (Revised) by Geoffrey Moore. Written particularly for technology companies, this is an essential read for any company faced with new product introduction issues, and today that is most.
Taken together, these books provide an excellent map to navigate the road to growth so successfully traveled for more than a 100 years by General Electric.
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