“Around the globe, investors complain about a lack of investment readiness among their potential investees. What they want to hear is a compelling impact story based on a sound financial bottom line – preferably in a language they can easily understand.” ~ as reported in “The State of Social Enterprise Survey 2017”
For almost every entrepreneur, the decision to raise capital can be a stressful one. Beyond the obvious – raising capital is not simple and can be very time consuming – their often more immediate concern is how to effectively prepare themselves to attract the right investor. In other words, what’s the “right stuff” they need before they approach and pitch their opportunity to an angel or venture capital investor? Great question!
Presuming you have an awesome product or service and you can demonstrate “why your product, why now, and why from you”, it’s now on you to build a great case for growth. If you’re raising capital, it all boils down to one question every investor asks: “How much is your deal worth?” Your “pre-money” valuation — the present value of your company’s potential before investors put in their money. (The greater this number… the less you give up!)
To get there from here, you must build a compelling case… based upon the market, your strategy, business model, the story you tell, the information you provide, the people on your team, the realistic promise in your projections, and your personal gravitas — your knowledgeable presence when pitching. Mistakes can be costly! But this is why business planning is crucial.
Only 3-5% of startups get funded. Why?
Because a summary plan and a pitch deck just aren’t enough…
Raising capital is hard
You must build trust with investors and others, with what we sometimes call “ways of being.”
Do you realize… Before an investor decides to dive into your 10 or 20-page document, s/he wants straight answers to a few basic questions about your business and your plan.
They listen to what you say and your confidence behind your words.
They want to believe, but they most trust those who’ve made money for them before, planning gives you that “way of being” or “gravitas” they’re looking for.
Then, if they’re interested, they’ll take a meeting, indulge your “pitch” and ask a lot more questions…
Investors are often considering multiple very compelling deals so they’ll ask a ton of questions. Whether or not they read your business plan cover to cover, the fact that you have the details when others do not, gives you a tremendous advantage and credibility.
Finally, they will often spend as much as 20-30 hours on “due-diligence” — fact checking, feasibility analysis, competitive comparison, background research — as well as comparing your deal to all of their other interesting opportunities…
“You won’t be presenting your operating plan to investors in your first few meetings, but you’d better understand how you are going to run the business once you raise capital. A well thought-out operating plan will reflect your ability to allocate resources—people and money—to the highest priority objectives.” ~ Bill Reichert, Garage Technology Ventures
Having everything done right and all together keeps them focused and moving forward on your deal!
In most cases, investors will expect to review your presentation materials in this sequence…
1. 30-second Elevator pitch
2. 2-page Executive Summary
3. 20-minute “Pitch” Presentation
4. Comprehensive Business Plan
However, many experts suggest that you prepare your investor package in the reverse order:
1. Comprehensive Business Plan
2. 20-minute “pitch” presentation
3. 2-3 page Executive Summary
4. 30-second Elevator pitch
When you begin the process by developing a comprehensive business plan, you’ll consider the interconnection of all the moving parts. Investors will have questions. Your plan is the strategic blueprint that will layout a complete roadmap for what you intend to do. Rather than thinking of it as just a “document to get money”, instead focus on how it will better prepare you to answer any questions thrown at you by investors, lenders, partners, etc.
Most investors remember the the dot.com crash!
Whether you choose to purchase a business plan software product (I, of course, recommend our BizPlanBuilder), you hire a consultant, or you decide to write it on your own, the process of preparing a plan is where you will derive the most value.
With your plan mapped out, you’re in a much stronger position to develop your investor “pitch” presentation. Done well, this tool will enable you to quickly step through a logical sequence of information aimed at selling your concept as a viable business with a big future. Investors will have questions. Your preparation and research will make a huge difference here.
Your Executive Summary (2-3 pages) should now be a breeze to create. The Executive Summary highlights the key features of your business and why it is a great investment. It’s your intro document that will get you the opportunity to give your presentation. (Remember investors don’t want to buy your product, they want to invest in your business. You’re selling the coke machine not just a can of coke! So it’s crucial that you focus on why yours will be a successful business.)
Finally, your elevator pitch… Imagine you’re in an elevator with an investor and you have enough time to go about 3 floors (30 seconds?) to make a positive impression and generate some sincere interest in your concept. Are you able to describe your business opportunity in only a few sentences that will inspire them to ask for more information and suggest an in-person meeting to go over the details? Boil your planning down to the highlights. This is your “brochure” to get the meeting… It gets you in the door.
Regarding Diversity & Inclusion
Most investors are highly-educated, well-read, and skeptical of the status quo. Many are very well aware of the obvious benefits of a diverse and inclusive management team because it’s been proven to produce better business results. Nonetheless, no matter who you are, you must offer a good deal that makes solid business sense. Highlight the benefits of your diverse team, it’s an advantage!
Attention Disruptors
Not only do you have to prepare to take on the entrenched special interests of the status quo, but you also must prepare to take on the NEXT wave of disruptors coming behind you. This is also part of your preparation, preparation for a pivot on top of a pivot. (In another blog I discuss, “Competitors – 3 Kinds to Consider…“ Read this part: “If You Win, Who Loses?”)
I can go on about the importance and details behind business planning and raising capital… We are, afterall, talking about potentially millions to fund your company as well as the next several years of your life!
Nevertheless, your business plan is never “done.” Besides being useful for a variety of purposes (see my presentation on “How to Build Your Business Without Funding”), you’ll want to keep it updated for ongoing use. But for now, you will have the organization, presentation, and readiness you need to satisfy even the most detail-oriented and/or jaded investors.
You are absolutely right. When seeking capital you must have some skin in the game. However, money is not the only way to have skin in the game. In fairness, you should have explained that the investment of your time with no pay or your willingness to do a round of fundraising using something such as convertible promisory notes also puts skin in the game. You are on the hook to repay those initial investors or allow them to convert their investment into a percentage ownership in the business.
I know people who have actually had product manufactured with their own funds showing their willingness to invest in their idea. Sometimes if you have a strong enough idea or product that is enough for private investors to seriously consider your project or company. If they think that you are viable, committed and can accomplish the goals you set, they will listen to you.
The other thing I have found is that a 10 minute presentation is better. Investors do get a lot of people asking for their time and money. They are going to have questions so I think it is better to have a 10 minute presentation and leave them 10 to 15 minutes for questions.
These are just my thoughts.
There is one thing that always seems to be missing when someone talks about raising capital. While I agree a great business plan is very important, and a good executive summary is even more important when initial contact is made with any lender, there is one thing that must be emphasized.
The entrepreneur MUST have their own funds to invest or have some “Skin in the game”. Great ideas, business plans and/or executive summaries are useless unless they are willing to invest their own money and Please provide the name of the mortgage holder and the terms of the mortgage which is now due (interest rate etc). Also provide me with a spread sheet reflecting the cost/revenue projections over the term of this project. Thanks
have something to loose if the business does go the way they expected.
I have seen literally hundreds of these “great ideas” and business plans. However, they did not have any of their own funds to invest. They would pay back a lender with the proceeds of the business (Factoring can do this and may be an answer in some cases). Also, they either did not have or would not use their homes as collateral for a lender. They were afraid to loose the home if they had one. Why would they think someone would invest their business if they themselves were afraid of failure?
With the capital markets in the state they are in now, it is even more important than ever to emphasize these points. Too many business plans have great projections of future income or profits but do not explain how the business will pay back the capital they have borrowed. Even existing businesses have to have the cash flow to carry the loan.
The other mistake made is thinking venture or angel capital is easier to get than a bank loan if the bank refuses them. Or, they can get investors that the bank or other lender won’t consider.The opposite is true. An Investors business is money. They want to get a return on their investment and most of them get hundreds of requests every month for money. They are only interested in getting a return on their investment and then have an exit strategy when their goals have been reached. They won’t invest in something that the entrepreneur can walk away from easily. They want the entrepreneur to have large enough stake in the business that will discourage them from quitting and walking away from the project leaving the lender with nothing but a failure. The investors realize there is risk but that also means they want a higher return than a traditional lender. They do invest in projects that traditional lenders won’t but that makes it even more important to have the resources to get the investment.
I hope this information is helpful.
Thanks