Archive for the ‘Angel / VC’ Category

Seven Important Rules for Prospecting for Capital Sources

In Angel / VC on November 23, 2011 at 9:43 am
The lifeblood of all companies is capital. Whether it is money from sales, bank loans, or equity from investors, a business cannot do anything without the money that it takes to build its products and establish distribution.Acquiring capital is often the most challenging aspect of a business. Very few companies are lucky enough to establish and maintain a steady source of capital that can fund its growth. Lack of capital is the primary cause of failure for companies – even very successful companies. There is a wasteland of companies that are victims of their own success – these are the companies that had big sales and opportunities, but they could not get the money in place to fulfill their orders. Just last month I met a nice small business that lost a $1 million order because they could not secure the capital required to fill the order in a timely fashion. Do you think the owners had a bad day when their existing banking relationship said “no”? Today there are a lot of these stories as banks are constrained on tight lending covenants and lending limits.The key to growing any business is ensuring it has enough capital to grow – and – to survive the times when profitability is elusive. It takes dedication to identify and maintain relationships that will ensure these sources of capital through good times and bad. To achieve this crucial objective, you need to prospect.

These Seven Rules will make it easier to identify and open new capital sources to fund your long-term success.

  1. Identify your WHY and let it be known. Your mission and vision may change overtime, but your purpose should not. A strong “Why” of your organization will tie the interests of capital sources to your organization through changes in personnel and revenue streams. When your capital sources know “Why” you exist, the “how” you do it and the “what” you do can change and you shouldn’t be penalized.
  2. Be curious. If you hear about new sources of capital or new players, make phone calls and find out what they are doing. Ask questions. New sources of capital have notoriously been the linchpin to many successful companies. Savvy business people will try to locked up these new capital sources to gain an edge on competitors. Private equity plays this game all the time to fund their deals and so should you.
  3. Be original. You need to be unique, especially if you are in a highly competitive market. You need to get in the door. Even if you are the CEO of a great company, some sources of capital may not be easy to warm up to. Tell them why you and your organization standout from the rest – your “Why” should reflect this.
  4. Load several arrows in your quiver. It will likely take several attempts and strategies to achieve your relationship-building objectives. Use the tricks that your sales people do (or should!). Use a CRM to track conversations. Use newsletters or company press releases to keep your company’s name in front of budding relationships. Send packages or gifts. Make phone calls when you have news to share or you have seen news about the contact or of interest to the contact. Bottom-line: systematically execute “touches”.
  5. Block Time. You need to dedicate time to this process. No excuses. It is easy to put this off. The first five don’t matter if you don’t dedicate time required to execute.
  6. Ask. When you have built your relationship and trust: Ask. Ask if they can get you access to more capital. Ask if they can get you better terms on capital. Ask them for a term sheet.
  7. Stay the Course. Prospecting for new relationships requires persistence and patience. When times are good, you are at greatest risk of falling into the trap of believing you will never need capital again. When times are bad, you are at greatest risk of being desperate since you had not procured enough relationships to provide you with choices.

Capital is available. Always. It is available to those that have procured trusted relationships. Despite advanced communication tools, the act of identifying and procuring these relationships takes old-fashioned networking and prospecting. Some of the identification can be expedited by surrounding yourself with advisors and influencers, but its up to you and your team to cement the relationships.

Patrick E. Donohue, CFA

Special “Thank You” to our friend Jeffry Brown (Twitter: @IdeaWhiz) for his mentor-ship and education on finding your “Why”!


Tactics to Avoid Telling an Investor “I Don’t Know”

In Angel / VC on November 16, 2011 at 5:09 pm

In the securities business, if a customer refutes a stock trade, they can come back to the stockbroker and claim they Don’tKnow “DK” and the broker has to eat the trade. DKs famously annihilate trust. Don’t DK a potential investor! DKs are penalty points in building trust!

When I was in a military academy, we were taught to answer: “I don’t know Sir, but I will find out for you!” Since you can’t know everything on the spot, here are some preparation tricks to avoid DKs.

– Maintain a list of industry resources. If you get asked a technical question, offer the document and any insights that you have on identifying the answer.

– Be confident. When you are looking in to the future, there is only so much certainty you can have. Be confident on your current plans and convey points that you are confident about today. Prepare yourself to answer forward-looking questions with a modifier like “Here’s what we know today….”

– Avoid taking meetings alone. Even if you have to conference someone in, it is best to have the safety net of another point of view when answering questions.

– Do not provide openings to the unknown in your presentation. And never let a slide be smarter than you! If something can be left unsaid during an initial meeting, let it be. Hit the high points at initial meetings, as these are essentially get-to-know-you sessions. Keep your slides simple. Technical slides are prime opportunities for you to drop several DKs.

– Listen closely to the question and don’t be afraid to ask the person to repeat the question or frame it in a different way. This sounds simple, but I have seen very intelligent and seasoned executives botch this. I have witnessed executives give answers to questions they THOUGHT they had heard. And 99% of the time, the answer to the real question would have been easier. Don’t drop a DK on a question that was not asked!

– Practice. My team works extensively with executives to prepare them for roadshows. When management teams truly understand the value of this exercise, I find the best learning moments are via the role of an antagonizer – that person that inevitably asks all of the tough (and sometimes offensive) questions. My career has been spent in many meetings with Wall St analysts and portfolio managers. The stereotypical Wall St investors do not care much about being polite – they like to throw curveballs and antagonize executives with tough questions. Why? Because the savvy investors have found that they like to see how executives conduct themselves under pressure. An executive’s reaction to antagonizing questions can be more indicative of success over the business opportunity at hand. So find someone you trust and get them to ask you all of the tough questions. Practice your answers. List all of the things that could “throw you off” and have a plan to get through all presentations without dropping a DK with a panicked and irritated look!

Patrick E. Donohue, CFA

Top Four Reasons Investors Write Checks

In Angel / VC on November 14, 2011 at 9:30 am

1. Trust
2. Affinity (Connections to people and/or industry)
3. Comfort (Understanding of the business opportunity)
4. Potential Return

Yes, potential return is on the bottom of the list! Most people naturally want to disagree with this. Your instincts tell you that investors’ top concern is potential return. This is false. Their top concern is preservation of capital – even with start-ups. Investors’ main concern is mitigating risk. This risk mitigation is accomplished with early stage companies through trust in the principals, knowledge of people around the company and/or industry and their overall comfort level with the business opportunity. Investors are willing to take total loss risk, but they need to make a determination about the likelihood of failure. This likelihood of failure is balanced with an estimation on what their investment should return if the company is successful – this is the investor’s required rate of return. When the potential risk of a 100% loss is more than remote, investors require a huge return opportunity i.e. “homeruns” to balance their risk-reward ratio.

Investors care most about trust. Writing checks is always about trust. You put money in your bank because you trust the bank will be open the next day and worst case, you trust the FDIC to repay your funds if the back goes under. Think about when and why you write checks – while not a conscious level, your most likely decision point in your process is a conclusion about trust.

So, when you are raising capital, how are you and your company building trust?

How well are you equipped to quickly build trust with potential investors that you have never even met before?

Patrick E. Donohue, CFA

Raising Capital. Increase Your Probability of Success.

In Angel / VC, Uncategorized on November 10, 2011 at 1:33 pm

Most start-ups fail, and most people, especially investors, are well aware of this risk. There are many things you can do to make sure that your company gets the proper funding in place. The trouble is, to do it right, raising capital takes more time and effort than you can imagine. This is a real problem for most early-stage companies for the simple fact that the founding team is stretched thin trying to prepare product(s) for market.

So what can you to do increase your odds of success and make it less painful?

1) Education. Your team – all stakeholders – that will be raising capital need to take the time to learn where capital is sourced and the process that it takes to be successful. Read up on recent blogs from founders that have recently raised capital. We have come across a number of them that provide valuable insights on their experience. Finally, educate yourself on the basics of corporate finance. It is not that hard to understand the difference between common stock and preferred stock, “C” corporation and LLC, valuation and share price, and so on.

2) Document a Funding Map. Your team needs to visualize where, how and the timing of the capital raise. Do not assume people have a general idea. Put it on paper and make sure everyone weighs in. I have never met a team that raised capital quicker and easier than their original plans. Prepare the team to think about strategies for the long-haul including back-up plans B, C & D.

3) Talk. Talk. Talk. Tell others what you plan on doing. Build your external support network. These are not necessarily your funding prospects – these are mostly people that have “been there, done that”. You need mentors / advisors / “friends” to be a support mechanism and critical feedback loop. This critical support network will hold you accountable to your goals.

4) Prepare. At a minimum, you need an elevator pitch, investor presentation, business plan, executive summary, financial model, dealteam, due diligence items and a subscription agreement ready. Do not start pitching for investments until all of these are accounted for. “One bite of the apple.”

5) Execution tools. Be ready with a data room, project management suite, CRM dedicated to raising money, pitch video, product demo video and relationship management tools like an email newsletter service.

6) Develop a dedicated process. Focus on casting a wide net so many people become familiar with you and your company. Develop systematic ways to be in touch with these fans and followers like email campaigns, drip out news stories / industry highlights, send thank you notes after meetings, find ways to help someone before you ask them for help. The goal needs to be that you “touch” a prospect at least ten different times before ever asking for money. Digital media is a great way to achieve this.

7) Stick to your process. This sounds the easiest, but in reality it is the toughest step and the leading fatal flaw in raising capital. You need to establish internal and external support mechanisms to achieve this. Doing this in your head does not count. You need a weekly scorecard that tracks your critical goals that you must consistently achieve to get capital in the door.

8) Guerilla Marketing. Today, you need to be clever where and how you identify and approach potential investors. If you are relying on old school word-of-mouth fundraising via friends and family, you’re dead. You need to hustle and execute innovative ways to build your brand and interest in your company.

9) Guts. Patience. Persistence. As the Chairman of a former employer would tell me: “Patrick, if it were easy, we wouldn’t need you”. That was always a humble reminder to keep your nose to the grindstone! Raising capital is never easy. It takes guts, patience and extreme persistence!

Now go get ‘em!

Patrick E. Donohue, CFA

Seven Steps to a Successful Capital Raise

In Angel / VC on November 9, 2011 at 11:11 am

These steps assume that you and your business are prepared with why you need an investment and what you need! ☺

1) Know the investor “industry”

2) Learn what motivates different types of investors

3) Identify affinities – i.e. – the ties that your business may have with them

4) Track, list, follow, listen & learn. Use digital media as a tool.

5) Network – make yourself and your company known to potential investors and “fans”

6) Touch high value targets several times from several different angles

7) Do NOT ask for an investment until either: 1) you have touched a prospective investor at least five times and you are confident they know who you are and what your company does, or 2) they asked you first about an investment in your company.

And finally, use a trusted financial advisor or mentor to coach your team during the process.

Patrick E. Donohue, CFA

VCs know your gonna blow their money…

In Angel / VC on December 8, 2010 at 10:07 pm

I am following an interesting trend. Venture capitalists know that they historically invest more money in deals than may be required for success. In large part, VCs fall in this trap because they need to put so much capital to work per deal to collect management fees or risk returning committed capital.

It’s hard to make sweeping generalizations about the venture capital community, but at the risk of doing so, most VCs are in the business of raising capital themselves and deploying it so they can collect management fees. Therefore, VC firms have a motivation to raise larger sums of money for their funds and to deploy large pieces of capital because it all takes the same amount of work as smaller sums of capital. Since they get paid a % based on assets deployed, big numbers motivates them.

That being said, I have read and heard first-hand that many venture capitalists recognize and will admit that their incentives are not necessarily aligned with proper deal structures. That’s not a softball statement for VC hawks that proclaim, “no kidding, their vulture capitalists…”.

I am highlighting this insight because I believe there is a strong trend in super angel funds and more pragmatic approaches to achieving business goals for the a) investors and b) the funded. Case in point, do a search on VC and angel investing on YouTube and you will find several videos where VCs and angel investors make statements to the tone of the best deals where started out early with little capital, like Google and Facebook.

My advice if you get VC money: TAKE it and HOARD it. Don’t buy junk with your logo on it or other items that don’t fast track you to commercialization… Go execute and act is if you have lint in your pocket. Your financial backers will be quite impressed, as a matter of fact, they may just submit a HBR article about the experience because you will have been a “black swan” in their world.  You will get investor support for a longtime when you have demonstrated prudence with investor’s capital. So, keep an eye out for VCs getting more active in early-stage investing and the emergence of super angel funds and let me know what you are seeing.

Tis’ the Season for… Angels

In Angel / VC on December 6, 2010 at 11:16 pm

Angel investing in Silicon Valley has been getting a lot of press. Rightfully so.  Seed-stage tech investing is so active that the mainstream media is questioning if it’s a bubble. I am finding this dichotomy of angel activity in the US to be fascinating – Silicon Valley continues to be a world onto itself and early-stage investing in the rest of the US appears anemic, especially in the Midwest.  I think it is simply boiling down to Silicon Valley tech investors hoping to catch the next Facebook and I am not familiar with that level of exuberance anywhere else in the markets. My only recommendation, if you are starting a tech company, you need to be in front of Silicon Valley investors. If you don’t pass that litmus test, it seems you will be unlikely to find enthusiastic funding partners anywhere else.  And… the question du jour – can the exuberance in Silicon Valley penetrate elsewhere?