A friend asked me last week if I know an investor interested in the T-shirt business. I don’t know him well, I don’t know his business, but I’d like to help. So it occurs to me that there’s a predictable series of questions to ask to point a plan in the right direction.
1. Is your business plan investor-friendly?
To interest arms-length investors (meaning not friends and family but people who don’t know you and don’t believe in you already), a business plan has to have an experienced management team, a product and market focus that offers real growth potential (like at least 10X, but preferably 50X or 100X growth in three to five years), and a believable exit strategy. These days the only credible exit strategies are about being acquired by a larger company.
2. If no, you have two realistic choices.
If your business plan doesn’t have all of these qualities, stop here. None of the rest of this applies to you, so don’t waste your time. You have two options:
Focus on people who know you and believe in you to get friends and family investment
Scale down so you can bootstrap.
3. If yes, do your homework; find friendly investors
Never, ever use the shotgun approach–mass mailing, e-mails or postings–to find investors. That’s about as bad as taking out “spouse wanted” ads. Instead, use the internet. Look for the right kind of investors, preferably local, preferably interested in and knowledgeable about your type of business.
Never think of investors as money; they are partners. It’s a relationship like a marriage. An incompatible investor, like an incompatible spouse, is a shortcut to hell. One of the biggest fallacies in startups is the myth that getting the money is the goal–not if you have bad partners.
Refinement: Does your plan have VC potential?
Do you have a strong team, strong product, strong market, clear exit, defensible business and a good use for several million dollars? Do you have a good shot at generating a huge return on several million dollars in three to five years? Like 20 or 30 times the initial investment?
If and only if you can answer “yes” to every one of these questions are you looking for professional venture capital.
If not, then you’re looking for angel investment.
And either way, whether VC or angels, turn to the web to find investors who are either local, know and like your industry or, better yet, both.
The professional VC firms are relatively easy to find. Do an internet search. You can refine it to add geography (for example, search for “VC Atlanta” or “VC Texas“). You can also find free venture capital directories with searchable entries for geography, industry, deal size or stage preference, starting with the National Venture Capital Association at nvca.org, which has a good directory of other resources.
Another great site for a VC search is thefunded.com, a database of entrepreneur reviews of dealings with venture capitalists and angel investors. Membership is free for entrepreneurs.
(Hint: you probably don’t want to buy lists of venture capitalists, because most of this information is available free. Sometimes a hundred or so bucks can save you time, which might make it worth the expense; but unfortunately there are a lot of sharks in the listings-for-sale market. Be careful.)
Angel investors are harder to find but still findable. Do a web search for local angel groups, talk to your chamber of commerce, ask the nearest Small Business Development Center, ask at local business schools at nearby colleges and universities.
It’s still easier to get an investor’s attention if you first get an introduction from somebody he or she knows, no doubt; but even without that, if you do the research first and find investors with local or industry interest, the odds of getting a hearing increase dramatically.
And for angel investors, there’s also the Harold Lacy strategy of asking everybody you can think of who they know who might be interested. It takes the edge off asking directly for an investment and, if you know enough people, it can actually work.
Every startup has its own natural level of startup costs. It’s built into the circumstances, like strategy, location and resources. Call it the natural startup level or maybe “the sweet spot.”
1. The Plan
For example, Mabel’s Thai restaurant in San Francisco is going to need about $950,000, while Ralph’s new catering business needs only about $50,000. The level is determined by factors such as strategy, scope, founders’ objectives, location and so forth. Let’s call it its natural level. That natural startup level is built into the nature of the business, something like DNA.
Startup cost estimates have three parts: a list of expenses, a list of assets needed and an initial cash number calculated to cover the company through the early months when most startups are still too young to generate sufficient revenue to cover their monthly costs.
It’s not just a matter of industry type or best practices; strategy, resources and location make huge differences. The fact that it’s a Vietnamese restaurant or a graphic arts business or a retail shoe store doesn’t, by itself, determine the natural startup level. A lot depends on where, by whom, with what strategy and using what resources.
While we don’t ever know for sure–because even after we count the actual costs, we can always second-guess our actual spending–I do believe we can understand something like natural levels, somehow related to the nature of the specific startup.
Marketing strategy, just as an example, might make a huge difference. The company planning to buy web traffic will naturally spend much more in its early months than the company planning to depend on viral word of mouth. It’s in the plan.
So too with location, product development strategy, management team and compensation–lots of different factors. They’re all in the plan. They result in our natural startup level.
2. Funding or Not Funding
There’s an obvious relationship between the amount of money needed and whether there’s funding, and where and how you seek that funding. It’s not random; it’s related to the plan itself. Here again is the idea of a natural level, of a fit between the nature of the business startup and its funding strategy.
It seems that you start with your own resources and, if that’s enough, you stop there, too. You look at what you can borrow. And you deal with realities of friends and family (limited for most people), angel investment (for more money, but also limited by realities of investor needs, payoffs, etc.) and venture capital (available for only a few very high-end plans, with good teams, defensible markets, scalability, etc.).
3. Launch or Revise
Somewhere in this process is a sense of scale and reality. If the natural startup cost is $2 million, but you don’t have a proven team and a strong plan, then you don’t just raise less money, and you don’t just make do with less. No–and this is important–at that point, you have to revise your plan. You don’t just go on blindly spending money (and probably dumping it down the drain) if the money raised, or the money that can be raised, doesn’t match the amount the plan requires.
Revise the plan. Lower your sites. Narrow your market. Slow your projected growth rate.
Bring in a stronger team. New partners? More experienced people? Maybe a different ownership structure will help.
What’s really important is that you have to jump out of a flawed assumption set and revise the plan. I’ve seen this too often: You do the plan, set the amounts, fail the funding and then just keep going, but without the needed funding.
And that’s just not likely to work. And, more important, it is likely to cause you to fail–and lose money while you’re doing it.
Repetition for emphasis: You revise the plan to give it a different natural need level. You don’t just make do with less. You also do less.
If so, prove it. Get recognition for it. Publicity is good, right? Give it a try.
Go to visit Forbes.com’s America’s Most Promising Entrepreneurs. Take the survey. You may end up on the Forbes.com list, coming later, to be developed using the survey that you just took.
A survey which, by the way, was developed especially for this Forbes.com use by the Venture Alliance, whose CEO Jim Casparie has an excellent article on the same site about getting angel investment. Jim’s post there fits rather neatly with my post here on Up and Running, earlier this week, about questions to ask yourself before you start looking for angel investment.
A Twitter friend (Matt Riopelle) asked me to help his friend (call him Ralph) find investors for his business.
Offhand, even without knowing either of them, I’m sympathetic. After all, if you keep up with this blog, you’ll know it’s a topic I care about. And I’ve posted here about my recent experience as an angel investor (and if you’re wondering, no, I’m all tapped out at the moment), so I’m not surprised by the question.
I looked at Ralph’s website. It’s an interesting business, local to me, with new technology for an otherwise traditional and low technology business. New materials, a new take on old products. And they’re making a product I use.
So I’m interested in the problem.
(And if you wonder why I’m not being more specific, I don’t have anybody’s permission to mention the business, and seeking investment can be sensitive. Besides which, it’s also possibly illegal (depending on interpretations) to mention a business that’s looking for investment on a blog like this; could be taken as soliciting investment improperly. That’s why I’m not giving details.)
But first, some questions:
1. Are you really sure you want to go that way?
Sometimes I think we all (we entrepreneurs, that is) move too quickly to the investment alternative. Having investors is like having a spouse. No, it’s like having a spouse who is also a boss. Your business is not going to be yours ever again.
Oh? What? You want minority investors who give you a lot of money without attaching any strings? Fat chance. You mean you want somebody who has a lot of money (they have to have a lot of money, to make the transaction legal) and is also relatively naive? And really generous? Good luck with that.
Take a good look at your prospects. Do a business plan, not for outsiders, not formal and hard to do, just a business plan with realistic forecasts for sales and expenses. Then ask yourself whether you can get by without the investment. Can you borrow enough to make it work? Can you live with the burden of debt? Have you considered SBA-backed loans (they are moving again), which lessen the debt burden?
Don’t go down the investment path just because everybody says you should. Think about the rewards of making it work without the outside investors, so you own it all yourself. Food for thought: this post on Planning Startups Stories.
2. Do you have a business plan?
The good news is that you don’t have to have a plan you can show to investors tomorrow. You do, however, need to have a plan for yourself, covering strategy, markets, sales, profits, cash flow, all the key points. These factors are all related to each other and you can’t just wing it. You need to have real numbers.
And it’s not about showing the investors your plan. That may or may not come later. It’s about knowing what you need, and why, and what that’s going to produce.
3. Do you need enough money to interest investors?
Angel investors don’t usually want to deal with less than $100,000, and venture capitalists don’t want to deal with less than a couple of million dollars. Sure, there are exceptions, but those are general rules.
And you can’t just say you want it; you have to be able to show you can use that money to grow the business. You have to have a real plan, what you’re going to spend the money on, how it will increase your business.
If all you need is tens of thousands of dollars, then bootstrap. Maybe you have to get friends and family involved, but really, for less than six figures, it’s not worth it to professional investors.
4. Can you grow your business a lot, in a few years?
Investors who put money into small businesses are taking big risks and they deserve big returns. They don’t have to invest in entrepreneurs, they can lose their money just as easily in the stock market, and they can get safe interest with no risk. So you have to give them the hope of a big payoff.
That means big growth. Can you convince them your business can sell five times what it’s now selling in two years? Or ten or 20 times in five years? That’s what they need to make money worth the risk.
5. Do you have a convincing team?
Investors are going to want track records, people on your team who can run the production, marketing, sales, and administration of your business. They want people who have done that kind of thing before, sucessfully. If you don’t have them on your team, then the investors won’t be interested.
If you can answer yes to all of those questions, then you’ll likely be able to get investment (although not from me, but I can point you in the right direction).
Adeo Ressi says entrepreneurship is getting a lot harder.
“Compared to when I started my first company, in 1994, things for the entrepreneur founders have gotten exponentially worse. There’s steadily more regulation, less liquidity, more difficult labor situation; things are always getting harder.”
“When I was a newbie in 1994 it was complicated, stressful and difficult. But it was significantly easier than it is today. The only reason that I could easily start a seventh and eighth company recently was that I have 15 years of experience starting and running companies under my belt. If I were like at ground zero, in today’s market, I couldn’t do what I’ve done.”
Ressi should know. As you probably already gathered from the quote here, he’s been around this block a few times. I posted about his newest venture, The Founder Institute, on my Planning Startups Stories blog last month. And he is the founder of theFunded.com, a site where entrepreneurs can review investors.
“Honestly, I think more and more, these days, the entrepreneurs get a raw deal. They are victims of a lot of predatory and exploitation behavior. A lot of this is on the part of investors, taking advantage of their position with founders looking for capital. But it’s not just them. It’s the whole gamut of service providers, regulations and so on.”
In what feels like ironic understatement, he says TheFunded.com “has tried to address some of the problems of the predatory and exploitative things that happen when founders are seeking capital.”
He goes on quickly, though, to point out that schools aren’t teaching entrepreneurship well. Legal regulations keep pouring on new obligations and the life of a would-be funder gets tougher. Reflecting on The Founder Institute, which offers a three-month educational program backed by some big names in startups, he says:
“If we could eliminate all the headaches that modern bureaucratic layering adds to start a company, and allow these founders to focus on the core business challenge, the likelihood of success increases dramatically.”
And this is not about the depression. At least, not specifically. Asked whether that was the reason for starting his new institute, he told me:
“Why now? Well, now is the only time to do it. When things are good, help isn’t all that helpful. When things are bad, the ability to do something like this can have a bigger impact. Hopefully we can help people get companies off the ground that wouldn’t make it otherwise. And everybody knows that what really drives this economy is small business and entrepreneurship.”
So there’s a point of view for you. I hope he’s wrong, that things aren’t harder–at least not in the long term–but then, what do you think?
You might call it “I pitched my business to venture capitalists and lived to tell the story.” Scott Gerber, who wrote this piece for Entrepreneur.com, called it 6 Steps to the Perfect Pitch. He didn’t get the money, but he learned a lot:
As you might have guessed, I didn’t walk out of that meeting with a $15 million check. I later realized, however, that this was one of the greatest educational experiences of my young career. I learned more about real-world fundraising in 30 minutes than many entrepreneurs learn in a lifetime. To this day, whenever I pitch investors for capital, I always remember these six hard-learned lessons:
And as you can tell from the context, he goes on to share six well-written lessons, worth reading.
If you’re at all interested in business pitches and venture capital or angel investment deals, you’ll also enjoy his lively retelling of a pitch session that didn’t work. The interruptions, the questions he answered wrongly and the disappointing result.
I consider this a nice addition to my suggestions on making the business pitch, and perfectly compatible. For the record, that includes a five-part series on Bplans.com, and this short video on making the pitch.
“It’s finally happening. Efforts to get money to capital-strapped small businesses are beginning to work, as banks have returned to making loans backed by the federal government, says Karen Gordon Mills, the new Small Business Administration head.”
I do think I’m feeling an end to the worst of it, the world beginning to come back. I get it in our web traffic and sales flow at Palo Alto Software, and talking to friends who also run businesses. Things are still down, to be sure, but at least they’re not getting worse.
The WSJ post, by Raymund Flandez, adds some real numbers, too:
More than 10,000 Recovery Act loans have been approved, which represents about $3 billion in credit supporting small businesses, she said in her testimony at a Senate hearing Wednesday. The hearing was about the small business provisions of the American Recovery and Reinvestment Act, which was enacted in February.
Since then, more than half of the $730 million in Recovery Act funding has been put to use to make it easier for small business owners to borrow. It’s doing this mainly by reducing fees as well as increasing the guarantee that the SBA provides lenders in case of loan defaults. Weekly loan volume in the SBA’s two most popular lending programs is up 25 percent to $217 million since March 16, when the funds were made available, compared to the $171 million approved in the weeks before mid-March.
So we still have high unemployment, house values in chaos, foreclosures, investors forced to retreat because of lower net worth . . . but at least it begins to feel like things are turning up.
There’s an excellent post yesterday from Steve King of Emergent Research on his Small Biz Labs blog: If You Are Raising Money, You Need a Business Plan. Steve acknowledges that people say venture capitalists don’t read plans, but adds: “that is totally missing the point.” He says:
The goal is not to get a VC to read your plan. The goal is to get a VC to invest so you can build a successful company.
Yes, VCs like to get most of their information through pitches, pitch meetings or just talking to entrepreneurs. But they have to have a plan to make that work.
Steve explains:
I’ve been through this many times. VCs always ask lots of detailed and specific questions that cover all aspects of the startup’s business.
And entrepreneurs [who] cannot succinctly explain the opportunity and show they have thought through the key issues facing the business do not get funded.
In my opinion, the best way to prepare for the pitch process is to develop a business plan. Preparing a plan organizes the entrepreneur’s thinking, requires going through all aspects of the business and helps to identify important issues facing the company.
So I agree with him about the plan, and I think it’s important to not take the fake here: When people say venture capitalists don’t read business plans, most entrepreneurs are tempted to take that as a reason not to plan. It isn’t. Planning isn’t just a document that somebody else reads. It’s how you run your company.
And if you are talking to venture capitalists, then the plan is also the backbone of what you have to say. Whether they read it or not.
Many people in the audience were surprised last Thursday when the Willamette Angel Conference announced CenterSpace Software had won the investment decision. It wasn’t the biggest, the newest or the oldest of the ventures entered. It had the lowest projected growth rate of the five finalists and the lowest projected sales for three to five years from now.
I was one of the 19 people who voted Thursday. And I was one of 25 people whose money was at stake. Although CenterSpace wasn’t my first choice, I’m happy with the outcome.
It isn’t always about the biggest market and the highest sales projection. Sometimes investors are also influenced by comfort levels on intangibles, such as being able to dominate a small market, developing very strong positions in new technology and long-term consistent management.
CenterSpace is a software business focused on add-on math products sold to programmers.
I’ve been joining the #sbbuzz chat on Twitter lately, Tuesday evenings. I’m finding it a nice way to get in touch with a lot of people at once with an interest in technology in small business. I guess Twitter is controversial in some circles, but I like it and use it a lot.
For example, click here for the transcript of a recent chat on business planning and funding for new businesses.
And you can click here for instructions on how to participate in the sbbuzz Twitter chat on Tuesdays.
It’s about The Funded Founder Institute, a four-month, $450 program to run selected entrepreneurs (including, by the way, wanna-be entrepreneurs) through weekly sessions with mentors and experts, ending with a certification that should smooth the path to investment.
This is just starting, but it looks like a great opportunity. Adeo Ressi, the founder, has a great track record in startups–with VC funding and successful exits–and what he’s after is getting a few people a better chance at a more level playing field. Learn the ropes before you get in too deep.
If you can’t hack the $450, he’s got a number of Microsoft BizSpark scholarships to offer, too.
So if this sounds at all interesting to you, apply now. Applications close May 9. The application costs $50. The window is closing for this first run.
I think this is likely to be a really interesting opportunity.
Adeo promises that selection will be reasonable. He wants a broad group of potential founders. And they won’t necessarily all be headed for venture capital, not even necessarily for angel investment or even any investment. There’s even some language on the main site inviting bootstrapping startups as well.
Also, he says he doesn’t want just sophisticated, experienced startup people. He’s also looking for people without experience who want to learn.
I’ve been watching a lot of business pitches lately–several dozen in the past three weeks, actually–in my role as angel investor and venture competition judge.
Pitches can be tough, but they are also vital. Your audience is judging your dominance of your own business by how well you come off. They don’t mean to, but they can’t help it.
You don’t want to memorize, because you come off stilted. You do want to know your stuff thoroughly, from all angles, so you can immediately answer any question and so that, as you tick off the main points, you seem confident and knowledgeable. Make sure you cover the key points–which, if you’re talking to investors about a new business, should include market size, your secret sauce, the management team, and how much money the investors can make and how long they might have to wait for it.
And I like thinking in terms of stories. Tell your story. More important, tell your target market’s story. Why do people buy from your company? How do they find you? What problem are you solving?
For example, the best pitches give a customer a name, and talk about how he or she or it (if it’s a business) had a problem that your business solved. Make it a story. Flesh it out. Make it seem real.
I’m grateful to Garr Reynolds for posting this five-minute video with Ira Glass, master storyteller, from YouTube. This is great background for anybody involved in a business pitch. And on his blog, Presentation Zen, Garr adds some additional advice in a post called Ira Glass: Tips on Storytelling.
You should be able to click the clip here to see the video, but, just in case you can’t, you can click here for the source video in YouTube.
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The level is determined by factors such as strategy, scope, founders’ objectives, location and so forth. Let’s call it its natural level. That natural startup level is built into the nature of the business, something like DNA.
There’s an obvious relationship between the amount of money needed and whether there’s funding, and where and how you seek that funding. It’s not random; it’s related to the plan itself. Here again is the idea of a natural level, of a fit between the nature of the business startup and its funding strategy.
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