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.)
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.
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.
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.
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:
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.
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.
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.
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.
I was reminded yesterday that sometimes the best financing for an emerging startup is innovative loan financing, from savvy investors, rather than straight investment or commercial borrowing.
The reminder came in an email from an entrepreneur named Terry (not the real name) who included two PowerPoint pitch decks: one for seeking venture capital, the other for a bridge loan. I’d met Terry in person three years ago, after we’d struck up a friendship in Twitter. I was impressed then with the commitment to the new business despite financial woes and family sacrifices of Terry and spouse, a young couple, with a new baby on the way, their first.
Three years later, Terry’s slides show 85 percent growth in revenues per year, cash flow break even, and a strong management team. Sales will roughly double in 2011. And the company has a convincing growth plan based on expanding into very closely related markets. I’m very impressed. The illustration here is taken from Terry’s deck. You probably can’t read the numbers and years, but it’s showing sales growing to about $1 million since 2007 and a more conservative growth line in the future, but that’s just to show what it would take to repay a proposed loan. My guess is that growth could be much higher than what’s shown here.
Which brings me to the reminder about the loan idea instead of investment. Here’s the situation:
Terry probably can’t just go to a bank and get a big pile of money to finance the expansion, simply because banks are governed by laws that protect depositors and discourage banks taking risks with startups.
On the other hand, Terry might not be able to show venture capitalists or angel investors quite enough growth, scalability, and defensibility to make this a great investment for outsiders.
Furthermore, Terry may not want to take on investors as partners. That’s like getting another marriage to deal with, great if it works, horrible if they are not compatible. And it means giving away substantial ownership, becoming a partner instead of just a plain owner.
So the innovative loan from savvy investors is a great compromise: if it works, it gets the funds for growth, but if the company repays the loan, the founders still own the significant majority of the company.
So what does Terry do? Find savvy local investors with a loan package. The loan offers the investors an interest rate several points higher than what they’d get with banks, CDs, or bonds, plus a small share of equity to give them a shot at a share of a big win if there is one, and a much bigger share of equity if the company fails to repay the loan.
This is a very real alternative, can be attractive to both sides, and it actually happens a lot more than what you’d think from reading startup blogs.
My advice to Terry: go to www.gust.com, register your company, post your loan proposal there, and contact the local angel groups you’ll find there among the 600 angel investment groups.
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.