Thursday, November 20, 2008

Tips for dealing with VCs.

Here are some tips that may mean the difference between VCs showing you the money - or showing you the door!

“It's the market, stupid!”
Investors want expanding and profitable markets. VCs dream about market sizes that will ultimately produce in excess of $1 Billion in annual sales. Yet, many business plans either shoot way too low, or worse yet, don't provide believable market size estimates in their pitch

It's a team game.
The management team that will drive the company is key to many investors. However, many plans only identify the CEO and rarely do justice to other team members whose track records can often stand out as major selling points. Don't make that mistake. Also, specify key people or alliances whose involvement is contingent upon funding. Investors know that hiring good people is expensive and that having a solid team at the beginning is a big plus.

Few startup companies can do one thing well and almost none can do more than one thing well. Don't arrive at a potential investor's office with three simultaneous product development schedules for three different markets. Show the discipline to pick the best one or you'll be dead in the water.

Have a great story.
Investors are looking for a reason to believe. Give it to them, fast, before they get bored. Most VCs, even if they like your plan, need to sell their other partners before they can make an investment. Provide a simple, compelling story they can use to sell you and your ideas.

Will the dogs eat the dog food?
Be sure to answer the fundamental marketing questions; “Who is the customer? What needs do you satisfy? What are customers willing to pay?” Do your homework. Always connect your product with the customer.

Unsolicited plans are rarely read and almost never funded. Use your friends, accountants, lawyers and bankers to open doors.

Time is money.
Most investors are very busy. Make it easy on them. Executive summaries should be two pages or less, business plans should be under 20 pages. Plans are never too short and almost always too long. Stick to these topics: - Size of market - Product / customer experience - Management team - Competition. Never say, "We have no competition." You are either naive or there's no market. Neither is attractive to investors. Find your competition and argue why you're better.

Realistic financial projections.
Very few companies have ever done $100 million in sales their first year, but many forecasts include overly optimistic projections. Build your financials from the ground up and compare them to other companies in the industry to ensure that they're reasonable.

Valuation is more an art than a science and will generally be established by the market. Many VCs talk to each other behind the scenes. As a result, you end up with a fairly narrow range of valuations, so you can rarely pit them against each other effectively. Focus more on finding a firm that can help you by bringing more to the table than money - industry knowledge, business expertise and contacts, and time to work with you as well as capital. And remember, you’re not likely to generate a lot of interest or get a lot of sophisticated advice at less than a $5M level of funding.

Exit strategy.
Many entrepreneurs focus on an initial public stock offering (IPO) as the only viable exit strategy. Most networking companies would rather sell to Cisco than do a public offering. Investors don't care, as long as the price is right, and neither should you.

Sales tool or operating plan?
Ultimately, a business plan ought to be a document you can use to run the business. Investors expect you to be prepared to turn your plan and projections into reality. Commit yourself to living your pitch. Otherwise, that problem will fall to your successors and you'll be looking for work!

Next week, I'll write about how to build a great startup team. But first, poetry tomorrow!

No comments: