I can safely say that I have never met a founder who didn’t say they needed to raise funding for their business. In my experience, I have also realized that a vast majority of businesses have no clue where to go for funding, much less what they need to do to prepare their business for it to be ready to approach a funding source.
Funding Your Business? Hire a Corporate Attorney and a CPA
After several years of consulting and mentoring several successful startup businesses, I feel that this one piece of advice still holds. The first two people that should be involved in your startup are a corporate attorney and a CPA. Be sure to shop around, but make sure and hire a good one up front, as this may well be one of the best investments that you make in your fledgling business. Be sure that both of these individuals are at least somewhat familiar with your type of business.
The firms you hire should be familiar with differing business entity types and tax ramifications, at a personal level, as well as the state and federal levels. They should ask several questions regarding your plans. Such as, How large do think your business is going to get, are you going to be raising any sort of funding, and if so, how much? How many shareholders might your business eventually have? These are just a few of the questions that should be answered to plan for the future of your company.
Exceptional entrepreneurs are the ones who not only know how to plan for the long term, but they are the ones who know how to execute. On occasion, there comes along a very successful entrepreneur who seems to have tremendous success from their very first business venture. Not saying that this does not happen, but I think we can all agree that these people tend to be a rarity.
Most truly exceptional entrepreneurs are second, third, or even fourth-time successful business owners. This is not to say that they have not experienced a failure or two along the way, but they have learned valuable lessons from their mistakes, and apply those lessons to each new project.
Get Your Books and Records in Order
No matter what size your business is, and no matter if you are seeking financing, or not, there is no better time than right now to get your accounting, record keeping, and your right to transact business in order.
I cannot even count the number of times when a business has submitted a pitch and I feel there is merit in their product, service, and business model; only to find out that there are no records or there is no accounting system in place, and no taxes have been filed. There are no corporate minutes, or worse yet, no stock transfer paperwork or ownership agreements. Even worse, the registration that provides them the right to transact business with their state has expired.
To be considered an exceptional entrepreneur, and a business that a funding source would take seriously, these items need to be in place and done correctly.
Drafting a Business Plan
There are possibly two main camps when it comes to the idea of creating a business plan. There is the camp that says, never, no way, business plans are a big waste of time; and the another that says, a business should not function without one. Although there are certainly good points in camp one, to a certain degree I happen to be in the latter camp.
I tend to feel that business plans – when done correctly – can be an effective tool for a business. Business plans do not have to be lengthy to be effective. An effective plan should define a business, at a minimum it should be able to answer the questions of what the business does and why it does it. Plans should briefly outline the products and the services that they offer. Plans should also include past revenue performance, as well as provide certain quantifiable future milestones, and measurable goals. The key is maintaining quantifiable metrics that can continually be measured to see how the business is performing.
Business plans do not have to take a long time to come up with a good one. In the past, I have written what I would consider a complete business plan in just over forty-five minutes. Can you spend weeks writing a business plan? You certainly can if it is thorough and detailed. These longer plans should be reserved for internal use only, as they are usually too long for an investor. I strongly feel that business plans are an effective way to quantifiably measure your business over time, and if used correctly they can be an invaluable tool.
Creating a Pitch Deck
Let me warn you now, there are hundreds of blog posts and articles, that each claim to know the exact formula to use for an effective pitch deck. There are pitch deck templates, there are pitch deck consultants, and numerous companies that offer to help you create the perfect pitch deck. Am I saying that any of these options are wrong? No, not at all. Do I think that anyone of them is better than any of the others? Perhaps.
I am personally a fan of using Guy Kawasaki’s The Only 10 Slides You Need in Your Pitch as a guide for the creation of a pitch deck. In Guy’s article, he outlines, and further promotes his idea surrounding the 10/20/30 Rule of PowerPoints. His idea proclaims you should limit yourself to only 10 slides. You should be able to present the pitch within 20 minutes, and use no less than a 30-point font. Am I saying that you should not vary your pitch deck from this? Again, no. What I am saying is that Guy Kawasaki has spent a great deal of time within the venture capital industry and has reviewed thousands upon thousands of pitches. He knows what works.
Another excellent resource is a guide to creating a high-concept pitch, an elevator pitch, and an effective pitch deck is the eBook Pitching Hacks by Venture Hacks.
Skipping the Jargon
When submitting your pitch deck or business summary, please do yourself a favor and skip the jargon. You know your business, and hopefully, the investor knows theirs. We are successful in our business, and as a venture capital company, we want you to be successful in yours. No reputable investor wants to take your idea, so please skip the request for an NDA. Unless your product or idea is so cutting edge that it will create a new market, chances are that we have heard of something similar to your idea before. It is up to you to convince an investor to believe you are capable of execution.
Likewise, do not include jargon in your pitch deck or business summary. Terms like disruption or the best are overused. Another big claim for entrepreneurs and a surefire way to get in the trash can is claiming that your business has no competition. I don’t know how many times I have heard something similar to “our business has no competition,” which translates to me that you have not conducted any market research, or worse yet your product has no market.
Please leave out assumptions about the venture capital industry, or claim that your pre-revenue business idea is the next Unicorn. In a previous article, I included a quote by Michael Dell where he is credited with saying, “Ideas are (a) commodity. Execution of them is not.” We all know that Unicorns are mythical creature that only exists in legend. Companies with valuations of over a billion dollars capture quite a few of today’s headlines an unicorn is a rare occurrence.
Know Your Funding Source
A funding source will perform due diligence to determine if it fits its investment criteria and objectives. As such, you ought to do your homework on the funding source. Make sure to ask yourself, is the funding source interested in your industry? For example, if you are an alternative energy company, you might be wasting your time pitching a venture capital firm that deals only in healthcare and biotech. You should also beware if the funding source can provide you with the funding that you are requesting. If your company needs $20MM in funding for your business, you might not wish to pitch a firm with $80MM in AUM. As likely, they will be unwilling or unable to risk 25% of their fund on just one company, no matter how great they think your company might be.
Funding Your Business with the Right Source
When seeking funding for your business, you should know what that funding source usually looks for. In the venture capital space, funds may focus on different industry sectors or concentrate on stages of business. It may also limit their investment activities to a particular region.
To attract investors, venture capital funds must demonstrate an ability to generate high returns and invest in high-growth businesses to help them realize those returns. Venture capital funds invest in companies that have long-term growth potential. The bigger the growth opportunity and the quicker growth, the more attractive it is for a venture fund.
Venture capital firms such as 1839 Ventures™ are selective when reviewing prospective portfolio companies and conducting their initial due diligence. Typically, a venture capital firm is looking for businesses that can generate returns on investment of at least 3x. Under current market conditions, venture capital firms may favor investments in more mature businesses rather than startup companies. Entrepreneurs should know that smaller venture capital firms may make only a few select investments per year. Even a small venture capital firm might review anywhere from 50 to 100 portfolio companies for each one that they invest in.
