So many of you aspire to start your own company, and the one thing holding you back is you don't know where to start, how to get funded, that sort of thing.
Here's where you start - right here.
Growing up in the high-tech industry, I had the good fortune to be involved in some successful startups, a few well-known growth companies, and one or two pretty spectacular flameouts. Hey, it comes with the territory.
Another thing that comes with the territory in Silicon Valley is working with venture capital firms and investment banks on private funding rounds and public offerings. Now, I'm an old pro, but that wasn't always the case.
About 20 years ago, full of nerves before my very first due diligence presentation to a room full of investment bankers, analysts, and lawyers, I decided to open with a joke:
"I couldn't wait to meet the people who were crazy enough to underwrite this IPO."
I guess that's when I learned how to move things along when you tell a horribly inappropriate joke that falls flat. Lucky I didn't get canned on the spot.
Anyway, I'm never surprised when entrepreneurs look at the venture funding process with more than a little shock and awe, like it's some sort of mystical or supernatural event. It isn't, but it's certainly understandable that novices see it as more than a little bewildering and tough to navigate.
That's where this post comes in. You see, when you've been around the block a few times, you come to realize that there's a pretty systematic and methodical process to getting your idea or startup funded.
The most important thing you need to know about the process is this: If you've got the goods and some guidance, you'll probably find it easier than you expect. If not, you'll find it impossible. That's because, in my experience, companies that should get funded generally do; those that shouldn't get funded generally don't.
This isn't just a step-by-step guide to what you need and need to know to get your idea or startup funded. It's also a litmus test for you to determine if you've got what it takes. The journey starts here:
Part I. The Three Deliverables
You'll need three things before you send your first email or make your first phone call:
Deliverable 1: The Pitch
A 20-slide (max) pitch that answers four questions (see next page) sufficiently well to entice potential investors to take the discussion to the next level. The presentation is for your initial meeting with a potential investor or VC.
It's okay to have "deep dive" slides as backup if needed to help answer questions, just keep in mind that first meetings are usually an hour, tops, and it's up to you to make sure you get through your pitch in that time. Above all, make sure you answer the four questions in 20 slides or less.
Deliverable 2: The Business Plan
Whatever you've heard about needing or not needing a business plan, it's probably wrong. No, you don't need some formal plan so don't pay someone to do one. What you do need, in the vast majority of cases, is this:
A 3 to 5 year business plan spreadsheet - nothing fancy - that includes all your capital requirements, expenses, and revenues from start to at least break-even or cash-flow positive. List all your assumptions - there will be a lot - as appropriate. Include two graphics of that spreadsheet - one for revenue, the other for P&L - that's two slides and only two slides, in the above pitch.
Deliverable 3: The Executive Summary
A one or two-page executive summary document that crisply and concisely summarizes what's in the pitch, i.e. answers the four questions. Make sure it's clean and error-free. Once you've been referred or introduced to a potential investor, attach the summary to your initial email. If they like it, you'll get a meeting where you'll get to deliver the pitch.
Now, here are the four questions that every VC or potential investor will need answered to even be interested in funding your startup:
Part II: The Four Questions You Need to Answer ... Read >>
Image:ImagineCup via Flickr
Part II. The Four Questions You Need to Answer
In one form or another, you've got to have the answers to these questions and their sub-questions or you're not going to get funded, it's that simple.
Question 1: Who's the Team?
Sure, investors are very much interested in your idea, your technology, your solution, and the problem you're trying to solve. We'll get to all that in a minute. But first and foremost, they're investing in you, the founders or the team. And they'll want to know your backgrounds, capabilities, and why you're uniquely qualified to solve the problem.
There are three reasons why the team is so critical to a startup: :
VCs or investors and their entrepreneurs or portfolio companies are like a marriage and each party needs to know whom they're getting into bed with and that it's a good fit.
The percentage of companies that end up successfully going to market and accomplishing some sort of exit or payoff for investors based on their initial idea or technology is slim. Success is therefore a function of how well the team can react and improvise in response to changing market conditions and customer feedback.
Every company runs into all sorts of hurdles and bumps in the road along the way. Investors will want to know what kind of people you are, if you're committed for the long haul, and if you've got what it takes to make it through thick and thin.
That's right, it's a relationship ... not unlike marriage.
Question 2: What's the Problem?
What big market or customer problem are you proposing to solve? Who (what types of customers) currently faces or suffers from this problem and what's the nature of their "pain?"
If you solve the problem with your solution, what's the market opportunity, market potential, the size of the opportunity? How long will it take to penetrate the market? Don't just show the broad total market; get specific and be sure to include all your assumptions.
The dichotomy here is that investors won't be interested if the opportunity isn't big enough, but if your market potential isn't credible - it's too far reaching and includes customer segments you really have no chance of winning - that won't fly either. It's a balancing act.
Question 3: What's the Solution?
What concept or technology do you propose to solve the problem? What specific products, services, or solutions do you plan to offer and what type of business model do you plan to employ?
Describe the competitive landscape you expect to face in the market. What's your value proposition, differentiation, or competitive advantage versus other current or potential solutions to the problem and how do you plan to position your offering in the market?
Describe your intellectual property - patents, trademarks, trade secrets or know-how - that you have or expect to develop to create barriers against competitors.
What's your go-to market strategy, i.e. what market segment(s) do you plan to target first, second, etc. How do you plan to capture them? What competitive barriers will you face? Do you have a unique marketing, sales, communications, or channel strategy?
Question 4: What's the Plan?
What's your business and financial plan? What are your capital requirements to demonstrate your concept or technology, develop your solution, bring it to market, and reach cash-flow positive or break-even?
What are your projected volumes and revenues, profit margins and P&L, over the next 3 to 5 years? What assumptions did you use to generate those forecasts?
Contrary to what you might think, you need to be as accurate as possible here. If you overreach you're just delaying the inevitable since it'll all come out in the due diligence process and, by then, you'll have wasted a lot of time and possibly burned a bridge.
Don't forget to close with a summary (one slide in the pitch and a short paragraph in the summary) that crisply states why this is a great opportunity. As a guideline, think one simple bullet for each of the four questions.
Part III. The Seven Tips
Above all, be genuine and credible. This is hard to do when you're in "selling mode," so it helps to put yourself in investors' shoes and get a feel for their perspective. They want you to reach but not overreach. They're looking for a big idea that'll change the world but they don't want you to BS them or yourself. It's a strange dichotomy, but it actually makes sense, if you think about it.
Know your pitch cold. That especially includes all the assumptions and how to crisply and decisively answer all four questions off the top of your head. You're the subject matter expert and they'll expect you to have thought things through and act as if you know what you're doing. Many will observe your thought process and behavior under fire, just like in an interview.
Get to the point, the hook. "Keep it simple" applies bigtime here. Since you're excited about your idea, you'll want to take everyone through dozens of slides explaining all the gory details. Don't. You need to resist that urge. Instead, you need to boil it all down to a very crisp and simple explanation and lead with that as your solution. There'll be plenty of time for details later, but not if you don't hook them first, and quickly.
Remember that VCs and investors are generalists. They see lots and lots of opportunities that span relatively large market segments. Sure, they may focus on software or biotech, but that doesn't mean their eyes won't gloss over if, in the initial meeting, you go down a rat-hole of minute details and technobabble.
Test your pitch with "friendly fire" first. It's a very good idea to get feedback from folks who are willing to take the time and be honest with you about what they think. That can serve a dual purpose if they also have investor connections and are willing to make introductions. Remember, you'll only get one shot at the real deal so you've got to make it count.
Get personal introductions. These days, most major angel investors, VCs, and strategic investment groups of big corporations, have websites, guidelines, and contact information for submitting ideas. That's fine, but you'll have a far better chance by getting introductions to specific individuals through your network. And make sure it's a "partner" of the firm.
The goal is called a "term sheet." Once you get past the initial pitch, the firm may sick some analysts or specialists on you to "dig in." Then there's a due diligence process that includes lawyers. The process varies from firm to firm and can last from weeks to many months. Some investors may say they're interested once you get a "term sheet." That means they might invest if someone else "leads" the round. That's common. A term sheet is like a letter of intent that describes the material terms of the deal, most notably the price or valuation, how much they're investing, and for what share, voting rights, etc.
Finally, if you've got any specific questions, contact me (there's a button to the left) and I'll see if I can help you. In any case, best of luck.
Also check out:
- Advice For Budding Entrepreneurs
- Innovators Don't See Different Things - They See Things Differently
- The 7 Habits of Highly Innovative People
Image: stevendepolo via Flickr