strategic consultant to:  

Today begins a 5-part weekly series, posted each weekend, on strategies and tactics for raising capital, from preparation through presentation.

• Preparing to raise investment capital, part 1 of 5: How much, from whom and when?

• Preparing to raise investment capital, part 2 of 5: Creating your unique value proposition

• Preparing to raise investment capital, part 3 of 5: Mastering your 30-second sound bite

• Preparing to raise investment capital, part 4 of 5: Writing your pitch piece

• Preparing to raise investment capital, part 5 of 5: Presenting your pitch to investors

This information has been well received (“I haven’t seen anyone lay out the realities and pitfalls of raising institutional funding so succinctly before, and I always love a contrarian perspective.”) and generated some compelling conversations when I last presented it.

So, part 1, “How much, from whom and when?” follows.

Thanks again for your interest in and contributions to this blog. Your comments are always welcomed.

There are several questions you must ask yourself before you decide to go out for private or professional capital.

How much and when?
Do you need investment capital now, or can you continue to bootstrap your company from your own resources, and from friends and family?

Can you reach initial, sustainable revenue (or early profitability) without outside capital? Do you have customers pending that might close soon?

What are the a market conditions and pressures that indicate you must move or grow faster than you are at this time, and therefore need significant capital now?

What if you wait? What do your realistic projections show (burn rate, potential revenue, access to strategic funding that does not dilute your equity position?) about when you might need this additional funding?

Most technology startups follow a pattern about funding. Where does your company fit in this pattern of investment?

• Seed capital: $750K (ranges from $100K – $1.0M) usually from private sources (your savings, friends & family, individual angels)
• Series A: up to $3M (ranges from $1.0 to $3.0M) usually from individual angels, or groups of angels
• Series B: up to $7M (sometimes this round is $3-5M, or more) from boutique or larger venture capital groups.
• Series C: up to $15M (this is your growth round) often syndicated among several boutique and larger venture capital groups.

Capital efficiency and the real “how much”
Look at these numbers and consider all the talk about capital efficiency, a recent buzzword that investors mention as a criterion for funding. Essentially, it means: how far can you move your company along with how little capital? Can you build and launch your company by bootstrapping and controlling your capital tightly?

The expectation of capital efficiency has evolved from the lower cost of creating Internet and software applications due to the availability of so many off-the-shelf tools for product development, and the availability of agile software platforms and low-cost offshore labor.

Notice that, for all this talk, it really does take more than $20M to build a company that can be positioned for a significant exit.

From whom?
Your next question is: what do you mean to do with this company? Do you have a clear exit strategy? Without this, your strategic steps may wander off the path of the exit you have planned.
• Keep it as a “cash cow” that generates continuing revenue, profits, distributions and annuities to the key players?
• Sell it to a strategic buyer?
• Put it on the public market for an IPO?

The answers to these questions will help you to understand both how much capital you will need between launch and exit, and what kind of capital you should be pursuing.

Investors come in various flavors (and combinations): private, angel, venture or strategic/corporate.

Since professional investors (usually angels and VCs) require a return on investment (ROI), they are usually assuming you will sell or take the company public, and they do not participate in companies that plan to remain in the hands of their founders creating cash or annuities.

Certain private investors may be interested in a long-term annuity return from a cash cow company.

Strategic investors tend to be corporations that can gain from some alliance with your product and company, and may want access or first look for acquiring your company later.

When?
With all this said, the temperament of investing changes year-to-year, and sometimes quarter-to-quarter, depending on many economic and market conditions (often out of your control and the investors’ control). So, in addition to these issues, you must assess the investment climate (boom? bubble? bust?) and the best timing for gaining capital.

For the current conditions (Q1/2011), see my earlier pieces:

• Venture capitalists get optimistic again in 2011: news from chairing the venture panel at Consumer Electronics Show http://bit.ly/f2b9yH
• Where will your startup be in 2020, when you have the chance to create your wealth? Startups in an unknown economy http://bit.ly/i7W37g

Next weekend: part 2: Creating your unique value proposition

Your value proposition must be unique, and state your value to the investor. This is not the same as your product’s value to your customer, and it is not a feature or a benefit (both of which are focused on your product). What you pitch to your customer has little to do with what you pitch to your potential investor.

Your value proposition to your potential investor is about your company and its position in the marketplace. It is about your company’s likelihood to scale its revenue, profitability, and market share. And ultimately, of most importance to your investor, it is about your company’s ability to grow its valuation towards a significant exit through M&A or an IPO.

So, what is your company’s uniqueness, its secret sauce? Some of this uniqueness may indeed lie in your product or technology. Or it may be that your company targets a unique market sector that few others can penetrate without your personal contacts. Or your technology is so disruptive that it will actually displace major companies or business models, and change how business is conducted in that sector, and you have deep experience and a powerful rolodex in that market.

If your company is a service business, for example, a SaaS application, what is your secret strategy or technology platform, which will dominate your target market? And, what reseller and OEM channels have you established, to combine your product with other applications, to reach more deeply into your own market, or to open and penetrate tangential markets with your partners? What strategies do you have in place to weaken your competition and defend your market share?

In all cases, you need to be offering some unique value, even if you aren’t the first to market.

iTunes, for example, offered a unique solution: it solved the music industry’s pricing, payout structure, and digital assets management issues. With this unique value, iTunes acquired the rights to the music, and built an online distribution channel for the downloadable songs (and for many others applications).

Twitter introduced a unique kind of blogging, microblogging in 140 characters, offering ease of use and worldwide distribution across many platforms. This combination created ubiquitous Tweeting.

Identify what is unique about your company, its potential for success in its market, and your team’s ability to execute this vision of value to a liquidity event and a return on investment. Then you are ready to prepare your pitch for investment (part 3, next week).

Now that you know how much capital you want to raise from what kind of investor and you have settled on your unique value proposition (UVP), it is time to master your 30-second sound bite, based on that value proposition.

It will take some time to get comfortable with the language, and how succinct you must be, but start with what sounds awkward, and then, still following the recommendations below, begin to “soften” the language so that it is more casual and can be spoken easily.

Let’s assume you are speaking to a potential investor at a networking event. He asks, “What do you do?”

Here’s the exercise:
1. State your unique value proposition, and an interesting success fact. Your goal is to get the potential investor to ask, “How do you do that?”
2. The next 60 seconds (maximum 60 seconds) allows you to tell a brief success story (with valid success metrics) as an example of how your unique value proposition creates successful results. The goal of this first story is to have the potential investor ask, “Tell me more.”
3. This answer gives you yet another 60 seconds to tell one or two more illuminating (of your value proposition) stories with success metrics.

Now, of course, all this has to be prepared in advance, especially the really short stories and metrics.

Here is one of mine:

“What do you do?”

“I create wealth for early stage technology founders and investors.” (UVP).

“How do you do that? (create wealth – the success fact).

“I consult to CEOs on what capital to accept from what source at what valuation at the best time, and then stay with the company to ensure success, exit and wealth.”

“Tell me more.” (remember, only tell one or two of these stories – don’t recite a laundry list of wins)

“I once raised $2.2 million in seed capital with no loss of equity, by reversing certain parts of an international distribution agreement, in exchange for access to the Chinese market in the mid-1990s.”

“I once wrote a pitch piece to help my client raise $1.6M in Series A funding, and with it he sold the company within 8 months.”

“I consulted with one software company in its early days, a husband and wife team in their 20s, and we sold the company 4 years later, despite their divorce, for $50M.”

Now, this is a pitch about consulting services, but product companies are actually easier to pitch, as there is a tangible product that targets a specific market, and offers some specialization over its competitors.

Look at the elements and the pattern of language in the stories:
• State what value you (your product) provided
• State what the value given was used for (context)
• State the outcome and timing of the result.
• Use action verbs (raised, wrote, consulted)
• Use real results (don’t exaggerate or lie)
• Use numbers and metrics to show the results and value.

Keep these stories succinct and brief, so you are not dominating the conversation. Your listener can ask for more details later.

My Daddy once taught me, “Always leave them coming back for more.” So, drop these tidbits without over-explaining them, and let your listener ask for a follow up meeting to talk more.

Investors have limited time and short attention to focus on your pitch – they are very busy, and receive thousands of pitches each year.

Many have a screener, often called a “D-Girl” (regardless of gender – this term from Hollywood, when the Development Girl screen potential film ideas). Your pitch, if not “walked in” by someone who knows an investment partner (always the best way to get considered by the partner), must get past the screener and handed along to the partner.

So, here are the strategies for writing an effective pitch piece, from my years of working with entrepreneurs and investors, and from reviewing and re-writing so many pitch pieces.

I must admit that founders have real difficulty creating a short and effective pitch – as they are too close to the information and want to tell the whole story. And they are usually under time pressure, which makes everything worse. I understand their dilemma, and they have my sympathy. Years ago I tried to train my clients to do this, but soon I simply took on the task myself, as it is easier for a writer outside the company, with industry experience, to create this for review by the founders.

So, here goes:

1. You get 12 slides or 3 pages of text. The 12 slides are actually 10 slides, because one is a beginning cover slide and one is an ending “call to action” slide at the end with your contact information.

2. If you are writing 3 pages of text, then you must sound bite the entire business plan (each chapter gets one or two succinct and assertive statements) into those pages, with a summary 5-year projection. Detailed financial projections can be additional.

3. You must focus your value proposition and information on what the investor wants to know, not what you want to tell him.

4. You must focus your pitch to the investor, not to the customer or the strategic partner, or the development team. Each one of these others gets a different deck with a different focus.

5. You must minimize your focus on the product (1-2 slides only) and maximize your focus on the return on investment (ROI) that your company will create for the investor.

6. It is helpful to have researched the investor and his other portfolio companies, so that you might suggest some synergies or strategic alliances between your company and his other companies, to drive up the value of each.

7. It is useful to remember that investors (particularly venture capitalists) are the brokers of other people’s (actually, institutions’) money, and so have an ROI to bring to them in order to justify the funding of their next Fund. So, no matter how personable or involved your investor may be, he likely reports to someone else about the performance of your company.

And here are the issues that investors care about, which should become the content of your slide deck or 3-page summary.

1. The ROI that your company can bring to the investor’s portfolio.

2. Your product is unique in an empty or near-empty market sector, which minimal competition. Here you can define your product in one or two slides, including this uniqueness, market sector, and competitive advantages.

3. Your product is defensible against the Big Guys duplicating your idea after you have proved its worth in the market and its revenue model. This may include a patent (which takes years to obtain, and which reveals details about your product to the world), but rarely includes the “first to market” argument, unless you have access to significant marketing funds or a strategic ally who will access that market for you.

4. Your product will prove that your company is scalable – it will grow fast on the top and bottom lines, minimizing the risk of the early capital. This includes understanding what market segments you can penetrate in your market sector, the size of the segments and the sector, and how you will reach that market.

5. Your management team has deep expertise in all the areas that are needed for all the above issues. Preferably, some of the team have had successful exits in prior companies in the same market space.

6. You are asking for enough capital to succeed. This indicates that you understand how to use the capital you will receive, and have delineated in your financial projections the uses of the capital, and the costs and results of achieving various benchmarks. It may be wise to ask for your current funding needs, and suggest an amount and timing for the subsequent round, defining what benchmarks you will reach in what timeframe with the second infusion of capital.

7. You can demonstrate your ability to control your capital. Recently capital management (this means getting a long way along the risk curve on bootstrapping) has become a key criterion to investors.

Adding to these issues a slide on summary financials (and full projections ready to be sent along if requested), and perhaps a slide on competitive advantages or market size (see #2 above), and you have used up all your slides.

Remember when writing these slides to use large typefaces and bullets, and do not explain or present details. Just assert the issues and the value. The first pitch is to achieve a face-to-face meeting, or more information, not to close the deal. You all need to pass the sniff-test of looking each other in the eye and wondering if you want to partner with each other for the next several years. Remember that exits are now assumed to be 6-8 years from initial professional funding, so you will be with your investors for a long time. Be succinct, but don’t hurry.

Get that meeting to present, based on your short pitch piece that tells your story without explaining the details.

Next week we will cover how to present this pitch to investors.

Your pitch piece has gotten past the screeners and into the hands of a real investor, and he wants you to present it to him and his partners. He schedules a 45-minute meeting.

You have taken all the steps to this moment and they have worked.

• determining your investment needs and exit strategy

• creating your unique value proposition

• mastering its presentation in a 30-second sound bite with follow up success stories

• writing your 12-slide (or 3 page) pitch piece.

So, how do you present that pitch, standing in front of the folks who can sign a check? Some of my opinions are controversial, but they work.

Here is what you need to master:

1. Calm down. Slow down. You are talking to potential future partners, who will be with you for years, and will share in the wealth you will create with their help.

2. Take a power position, without ego, bragging or attitude.

3. Be confident and assertive and show them your commitment to your vision, and your rational approach to the challenges you will share. Investors call this the “passion of the entrepreneur” but it doesn’t have to be noisy.

4. Introduce yourself clearly – your name and your company’s name (so many founders rush this and make their listeners uncomfortable at the beginning, not knowing how to address you).

5. Do not present your slides. Do not offer handouts. Do your presentation on your feet and make them listen to you. You can send the deck or pass out a “leave-behind” document at the end of the meeting. The worst effect is to have them reading ahead of your presentation, not listening, and making conclusions before you have completed your pitch. With written material, they will do just that.

6. Ignore that you have a meeting scheduled to last 45 minutes. You will get 3 to 6 minutes before you are interrupted with questions.

7. You have prepared an overview in 12 slides (which you are not sharing). This means you should get through the value proposition, the ROI to the investors, and the request for funds in the first 3 minutes.

8. Yes, I want you to define what stage you are in (concept, prototype, beta, launch, initial revenue, etc.), how much you capital you are seeking, at what valuation, no later than slide 3 or minute 3. Why? Because investors are dealmakers, and they aren’t listening until you tell them the deal terms you are seeking. When this comes at the end, they have been waiting for it and not listening, and it seems as if you have your hand out for the money. So tell them up front, and then defend your position. I know this isn’t what you’ve been told to do, but it is effective.

9. Define the valuation you are seeking (this means you have done your homework on comparable companies and their similar-stage investments, as well as successful exits in your market space.)  Use this information when questioned, but not when presenting. Wait to be asked.

10. Now that you have offered the value proposition, the ROI and the request for capital at a preferred valuation, you have a couple more minutes to prove why you believe this is an opportunity for their participation.

11. Use positive calm language and attitude.

12. Do not apologize for your request for funds. Your position is that your company is an opportunity they are looking to fit into their portfolio.

13. Be prepared for questions on every aspect of your business: its market sector and size, its scalability, your strategy for reaching that scalability and its ROI, advantages against competitors, defensibility, management expertise, comparable valuations and exits, all of it. Most of your meeting will be answering the investors’ questions, not presenting. Abandon your presentation as soon as the investors indicate they want to talk. Their engagement with you is more important than your carefully crafted deck. They will look at your deck if you pass the talk-test.

14. When the questioning begins, slow down again, and calm down. This is your moment to create an authentic connection with these potential partners, and to abandon your position as a guy trying to sell them something. Settle in and talk to them as if you are about to marry their child.

And, by the way, practice at pitching makes you more comfortable, so do as much of it as you can. Have someone experienced train you or test you again and again, asking the questions an investor would ask.

Practice and experience build confidence, and that is the secret sauce to success. Everybody wants to get on the magic carpet ride of the one who looks like he will succeed.