Category Archives: Business Financing

Tell Your Story Well: Resonate

Business Pitch, ,

This last Sunday I bought three copies of Nancy Duarte’s book Resonate and sent one each to three adult children. That’s the best review I ever give a book. I’m sad to admit that it happens rarely. But I love this book.

If you ever – ever – get up to speak to a group of people, and if you give a damn about what that means, to you and them, then you want to read this book.

It’s all about the story and telling it well. The ups and downs, the communication, the results, and the caring about the people listening, plus the caring about effectiveness, entertainment, and change.

Then this morning, thanks to Petra Pollum, I discovered Nancy’s presentation about resonating at a recent TEDx East. What better summary than the author herself?

In case you can’t see the video embedded here, you can click here for the original source on Youtube.

And the book, again: Resonate: Present Visual Stories that Transform Audiences

Don’t Confuse Optimism with Business Potential

Angel investment, Business Pitch, ,

Overheard:

I love your optimism. What I don’t like is the complete lack of experience that’s causing it.

Ideally, a business pitch is exciting because the business potential is exciting. Optimism ought to be a combination of potential market, product-market fit, scalability, defensibility, and management experience. Better yet, early sales, initial growth rates, proof of concept in buyers or users or subscribers or signups or something equally concrete.

Frankly, in a business pitch, I mistrust shows of undue optimism, passion, and resolve. I worry that early-stage entrepreneurs are working towards some mythological promise that they have the will to succeed, as if will alone can make a business successful. I don’t want to invest in passion unless it’s tempered by experience and based on a solid business plan. 

You’ll find people talking about showmanship in business pitches. Absolutely. Tell your story well. Tell the story of the market, the need, the solution, the steps along the way, and the team that’s driving it. But it’s about your business, and you fit in as the manager who will drive it. Angel investors will frequently talk about betting on the jockey, not the horse. In that case, it’s betting on the jockey’s skill and experience, not just optimism or passion.

It’s a fine line. Sell your angel investors your business, not your optimism.

(Note: I posted this first at gust.com earlier this week. I’m posting it here for convenience of my readers here.)

Is Your Startup Positioned in The Funding Gap?

Angel investment, Starting a Business, Venture Capital,

Nice post by Bill Payne called The Funding Gap on the Gust.com Blog. Here’s the summary:

It is clear from this table that Friends and Family, Angel Investors and Venture Capitalists provide 95% of the capital for new ventures. Friends and Family typically invest a few thousand to perhaps $10,000, and only a small number of investors provide more than $50,000. Angel investments range from $100,000 to $1.5 million with a small fraction below and above this range, while venture capitalists fund rounds of investment from $4 million to $100 million with a few above and below this range. So, generally, these three major sources of capital are complementary, not competitive.

After examining the details, he draws the bar chart below, showing the funding gaps he identifies.

Clearly, there is a funding gap between $25,000 and $100,000, and another capital gap between $1.5 million and $4 million. This simply means that there are fewer investors who are willing to provide investments in these two capital gaps than for rounds of investment larger and smaller than these two ranges. To elaborate, seldom can entrepreneurs accumulate $50,000 from Friends and Family, while angels are infrequently willing to provide as little as $75,000 for new ventures. In the gap between $1.5 and $4 million, angels only occasionally fund rounds larger than $1.5 million, while VCs are hardly ever interested in investing less than $4 to $5 million in startup companies. In fact, we estimate that less than 200 investors in the US are routinely investing $2.5 to $3.5 million in entrepreneurial ventures.

bar chart

Interesting discussion. I think I see this in the real world. And what do you, the entrepreneur, do about it? Here’s what Bill says:

So, how should entrepreneurs use this information? Clearly, new companies need to design their achievement milestones with the capital food chain in mind. For example, entrepreneurs who anticipate needing $4 million to achieve positive cash flow need to carefully plan to hit important milestones with perhaps $1 million, and then plan to raise two additional rounds of $1.5 million to eventually achieve positive cash flow. What might these milestones be? Milestones are accomplishments that demonstrate the viability of the business; hence, they increase the valuation of the company. Depending on the company, important milestones may include being granted a patent, receiving a 510k FDA approval, completing a prototype, receiving positive customer feedback on a beta test, achieving first revenues, hitting the goal in annual revenues of $1 million, etc.

(image: from gust.com)

Only Two Numbers Matter

Angel investment, Starting a Business, Web/Tech, , ,

This is Howard Morgan, managing partner at First Round Capital, serial entrepreneur, and former professor at Wharton. He says:

If you have a business that’s based around the internet, there are basically only two numbers you need to know: what’s the cost to acquire a customer, and what’s the lifetime customer value. If the lifetime value is higher than the cost to acquire a customer, then you have a business. If it isn’t, then you don’t.

Here’s the quick video, from gust.com, one of a rich collection of short videos from angel investors. It’s a great resource:

If for any reason you don’t see that video embedded here, you can click here for the link to the original.

You Can Take Your IRR and Shove It

Angel investment, Business Mistakes, Venture Capital, Venture Contests,

In pitches and presentations everywhere, bright young entrepreneur tells cynical skeptical investors, usually with great pride and flourish, about their fabulous IRR for their great new startup. I get a gag reflex.

IRR stands for internal rate of return. You can check wikipedia or investopedia for what that’s supposed to mean and how it’s calculated. It’s supposed to compare cash spent on an investment, over several years, to cash that comes back, which spits out as a percentage. The higher the IRR, the better. They teach it in business schools. It’s kind of an MBA parlor game. It has some very limited usage in comparing past performance of investments, if you can hold all the definitions stable; think of it in a large company context, corporate investments, and corporate budgets.

IRR in a business pitch insults my intelligence. It depends on projected sales, costs, expenses, financing, investment, and some hypothetical valuation at some hypothetical time some years in the future. That, by definition, is a crock. Show me the projects, yes. Show me Sales, costs and expenses. Show me cash flow. Go ahead, guess at a future valuation, what the heck. I’ll look at how the assumptions come together and realism, or lack of it, on how the pieces mesh. But the IRR, which summarizing multiple layers of uncertainty as one single percentage number, is totally irrelevant at best, and downright annoying when entrepreneurs act like a projected IRR actually means anything.

And it gets worse, too: there’s the widespread misunderstanding that angel investors and venture capitalists have IRR targets. There’s the unspoken but felt thought: “jeez, what do these investors want? They turned down an IRR of 105%!” And you’ll see people, all over the web, asking what kind of yields they have to give to interest investors. What are the targets?

Talking of IRR if a projected shows me only that you’re too close to the academics. Investors will look at your plan, your team, your product/market fit, and your projections; and they’ll decide what they guess about your future. Stop sooner, before you get to IRR. Let it go.

3 Financial Statements and 3 Angel Investment questions

Angel investment, Business Financing, Business Planning,

I’ve been busy elsewhere this week, but managed to post two things I’d like to make available to you on this blog, because this is my main blog:

  1. My monthly column on entrepreneur.com came out today, summarizing the three financial guestimates every business plan needs. That one gives you a quick summary of the income (also called profit and loss), the balance sheet, and the cash flow. There are a lot of other tables a business plan might have, but these are the most useful, and the most important. These three put your projections into the same financial format analysts, investors, bankers, and managers are used to seeing.
  2. On Tuesday I posted the three essential questions you have to answer for angel investors, on the angel investment site, gust.com

I hope you find one or both of these useful, and have a great weekend. I’m in New York again this weekend, heading home to Oregon Tuesday, still enjoying a delightful taste of what makes Silicon Alley a high-tech startup hotbed.

1 Great Tip for Better Story Power for Business

Business Pitch, Personal Productivity, Presentation skills, ,

Here’s a great tip for anybody presenting anything to an audience:

Skip the boring preamble. Many times we feel like we have to do a lot of prefacing, but four minutes goes by quickly. If you spend two minutes on background, you’ve lost an opportunity to grab attention. Far better to leave the identifying bits until the second paragraph, or to the overhead PowerPoint image, or to the person charged with giving the introductions.

Start in the middle. Start at the most interesting point. Choose powerful first words, with immediate interest. Grab your audience quickly. The worst ways to start a presentation (or any story) is “My name is ___ and I’d like to talk to you about…”

That’s from JD Schramm, Stanford business school communications lecturer, in How to Tell Your Story for Impact. The session is also posted on YouTube, Make sure you get to about 27 minutes in, where he starts talking about 7 habits of concise storytelling. That portion, the 7 habits, takes less than 20 minutes.

Yes, there are seven. I put one into this post but I recommend you go through all seven.

True Stories: One Good and One Bad Answer to Investor Q&A

Angel investment, Business Pitch, ,

We talk about the slides, and what they cover, but some of the more important moments in business pitches I’ve seen are not about slides, or plans, but rather about the people themselves, and how they respond. pitching

For example, I posted last week on gust.com about two radically different ways to handle questions about financials. In both cases investors had interrupted a business pitch with complaints about financial slides. One response worked perfectly, and the other was disastrous.

A really good answer

A smart woman had a financial summary slide showing when one of the investors complained:

Those numbers are different from what you show in your plan.

She answered immediately, no pauses, no reflection, as quick as a heart beat:

Of course not. That version of the plan was submitted to your deadline, three weeks ago. We’re not static ever. Things change. This chart is from our latest projections.

That was a total win. Everybody in the room understood.

A really bad answer

It was another financial summary slide. Otherwise the pitch was pretty good, and the founders impressive, but the numbers were annoyingly unrealistic, particularly the huge profitability, something like 50 percent or more profits to sales.  Several of us objected. The answer was:

We don’t like those numbers either. They were done for us by an outside financial consultant. We’re looking for somebody to come in and revise them.

Ouch. Throwing some anonymous third person under a bus doesn’t impress your investors. You can’t disown your own slides.

On the other hand, just for a note of paradox, bad financial projections are easier to fix than a bad product/market mix. That disastrously bad answer was not absolutely fatal.

(Image: istockphoto.com)

Don’t Give Your Company Away in Pieces

Business Financing, Starting a Business, ,

Too often people in startups think they’re supposed to give pieces of their company away to people who help them. They aren’t. Or they think it’s clever to pay people for services by giving away pieces of their fledgling company. It isn’t.

Reserve the ownership of your company — called equity — for people who are either long-term partners, critical employees, or investors. Never give equity in exchange for a short-term service. Never give equity as a favor. It’s ownership, and it lasts forever.

Unless they are people you want involved in your company, as partners, forever, then you should pay people with money, not equity.

If you don’t have the money, offer to pay them double or even triple later if you make it, and trade that for payment of one third of the value today. I have to admit I’ve never done this as a business owner, but I have taken a deal like that one or twice, as a consultant.

Pay people with percent of future revenues. About 17 years ago my business desperately needed to convert spreadsheet templates to a standalone software application. We didn’t have the money to just buy the programming, but we found a local group willing to do it for a percent of future revenue plus a small monthly guarantee to cover the costs. That worked. They made money, and we made money. But they didn’t own a percent of our company.

That new business your starting is not a cake to be sliced up into random pieces for anything but important reasons.

If you’re building a high-growth startup looking for investment, those random pieces will cause you trouble later on when you try to bring on investors.

And if you’re not building a high-growth startup for investment, then ownership in it is not likely to generate a return. Minority owners don’t get much benefit from their small stake in a stable small business, even if it’s healthy. Return comes when the business sells out to a larger business, or grows enough to become a public company. So what you end up with are partners who have no control, but do have rights, and are yours to deal with forever. Make sure you want them as partners.

And for anybody else, treat them fairly, give them a percentage of revenue until some specified total amount, give them an shot at more money later, but keep your company. You’ll need it.

(Image: istockphoto.com)

Gust Streamlines the Angel Investment Process

Angel investment, , , ,

Are you hoping to find angel investment for your startup? Are you looking to invest in startups? Go look at gust.com. It’s a better-than-ever first step.

Gust, is the new platform launched last week to replace angelsoft.net. The angelsoft.net platform is used by 600 angel investor groups, 35,000 angel investors, and 125,000 startups. Gust.com is its replacement. Angelsoft.net redirects to gust.com.

TechCrunch covered the new gust.com last week:

On Gust, entrepreneurs will be able to create their own profile, update their company information, build an investment relations site for their startup, collaborate on funding, and most importantly, get connected with angels interested in funding their efforts. Investors will be able to filter and search through the startups listed on Gust. And only those who have been specifically granted access will be able to see the details of a startup’s financials and progress.

That same post included this quote from David Rose, founder of both angelsoft.net and gust.com:

We’ve integrated powerful investor relations tools with direct access to the largest community of established, organized investors, thus supporting the entire ‘pitch-to-exit’ business life cycle. What’s most important is that our platform has gained the trust of the world’s most demanding investor and entrepreneur organizations.

In answer on quora, David added:

The enormous change with Gust is that now the *company* creates a single profile, which is always live and under the entrepreneur’s control. That profile stands alone as a protected web site (with both public and private areas) to which the entrepreneur can provide access to any individual investor he or she wants, whether or not the investor is part of an angel group or venture fund.

I have personal experience with angelsoft.net, so I’m looking forward to switching up to gust.com. We used angelsoft.net to organize the submission and filtering process for investment in the Willamette Angel Conference, in Western Oregon, of which I’m an investor member. Companies submitted their information to us as summaries, videos, and business plans, and we reviewed them. It also managed our communication within the group. And it was free, easy to use, and powerful. I’ve also used angelsoft.net as a judge in several major business plan competitions that use it as a convenient platform for managing submissions and information.

This looks to me like a good structured and organized answer to something people have been asking for since the early 1980s. And that’s from both sides of that table, the investors and the entrepreneurs. People wanting funding for new ventures faced a bewildering maze of possibilities, trying to find interested angel investors, looking for groups, forums, and so on. People wanting to invest had to connect one way or another to deal flow.

And for a good 18-minute view of David Rose, watch his 15-minute TED talk on pitching to investors.

Disclosure: I’m going to be posting on the gust.com blog; and Palo Alto Software products, for business planning, are compatible with the platform.
(Image: screenshot from gust.com)