On Venture Capital
Investors are smart people. They are constantly looking for good investment opportunities. The best way to get the attention of investors is to come up with a really good, disruptive idea. Document it well, develop compelling strategies for taking it to market, and build a top quality management team with a blend of entrepreneurial enthusiasm and past success - all managed by a high-quality CEO with a track record of previous success.
Investors are risk-aware, so you need to do everything you can to reduce the risk of your proposition. Prove the concept, develop your product, make a few sales. Create a happy pill for a survey contract for a few happy customers.
The farther you can take the company without capital, while reducing risk and creating value, the better your chances of raising equity capital and the higher your evaluation is likely to be.
Think like a Venture Capitalist, you must get inside their head and understand the frequent stumbles and pitfalls in business plans as well as strategies.
Marketplace
Entrepreneurs say: "we only need to capture 1% of a $10 Billion market to have a $100 Million business."
Investors hear: "Our competitive position will be too weak to be profitable."
Best message: "Properly segmented, our served market is $200 Million, and we expect to capture a 50% share.
Competition
Entrepreneurs say "we don't have any competition."
Investors hear "we don't know how to assess the competitive dynamics within our industry."
Best message "the present basis for competition is 'X'; our sustainable competitive advantage will be 'Y'; future competition could come from 'Z'."
Product
Entrepreneurs say "our product is better than anything available today."
Investors hear "we don't know how to quantify 'how much better' a product would have to be to compel sales."
Best message "our product is X better than existing choices, and our research shows that this advantage will excite buyers."
Advisory Board
Entrepreneurs say "we have an impressive group of industry luminaries on our advisory board."
Investors hear "we have a bunch of rich guys on our advisory board, but they aren't that involved, so we still need your money."
Best answer "our experienced advisers have helped us accomplish the following goals..., and each has invested seed capital."
Capital Requirements
Entrepreneurs say "we can get to cash-flow positive with just $1 Million."
Investors hear "we're building a bridge half way across the river."
Best answer: "Our detailed operating plan shows that we can get to positive cash-flow with $X Million with at least nine months of 'cushion' remaining."
Leadership
Entrepreneurs say "we make decisions by consensus of our founders."
Investors hear "we have no leadership, and we really don't want any."
Best answer "our CEO is an experienced executive with great leadership skills."
Entrepreneurs say "our CEO ran a large division of IBM."
Investors hear "our CEO is used to having six staff people to make decisions."
Best message "our CEO ran a similar company that made a lot of money for investors."
Intellectual Property
Entrepreneurs say "we will be protected by our patent."
Investors hear "we're not all that proud of the precise protection our patent will offer."
Best message "our patent protects a large segment of the market, because it prevents competitors from doing 'X'.
When you write your business plan, make sure your capital requirements are tied tightly to specific milestones that need to be achieved. Identify major tasks and put them on a timeline. Figure out how much capital is required to achieve the major milestones and run the company for about 18 months. This way you'll be achieving your major milestones, creating as much value as possible, and reducing risk as much as possible. You will raise enough capital, won't raise too much, and if you achieve your milestones, you increase the value of the company at every capital raise.
Investors are risk-aware, so you need to do everything you can to reduce the risk of your proposition. Prove the concept, develop your product, make a few sales. Create a happy pill for a survey contract for a few happy customers.
The farther you can take the company without capital, while reducing risk and creating value, the better your chances of raising equity capital and the higher your evaluation is likely to be.
Think like a Venture Capitalist, you must get inside their head and understand the frequent stumbles and pitfalls in business plans as well as strategies.
Marketplace
Entrepreneurs say: "we only need to capture 1% of a $10 Billion market to have a $100 Million business."
Investors hear: "Our competitive position will be too weak to be profitable."
Best message: "Properly segmented, our served market is $200 Million, and we expect to capture a 50% share.
Competition
Entrepreneurs say "we don't have any competition."
Investors hear "we don't know how to assess the competitive dynamics within our industry."
Best message "the present basis for competition is 'X'; our sustainable competitive advantage will be 'Y'; future competition could come from 'Z'."
Product
Entrepreneurs say "our product is better than anything available today."
Investors hear "we don't know how to quantify 'how much better' a product would have to be to compel sales."
Best message "our product is X better than existing choices, and our research shows that this advantage will excite buyers."
Advisory Board
Entrepreneurs say "we have an impressive group of industry luminaries on our advisory board."
Investors hear "we have a bunch of rich guys on our advisory board, but they aren't that involved, so we still need your money."
Best answer "our experienced advisers have helped us accomplish the following goals..., and each has invested seed capital."
Capital Requirements
Entrepreneurs say "we can get to cash-flow positive with just $1 Million."
Investors hear "we're building a bridge half way across the river."
Best answer: "Our detailed operating plan shows that we can get to positive cash-flow with $X Million with at least nine months of 'cushion' remaining."
Leadership
Entrepreneurs say "we make decisions by consensus of our founders."
Investors hear "we have no leadership, and we really don't want any."
Best answer "our CEO is an experienced executive with great leadership skills."
Entrepreneurs say "our CEO ran a large division of IBM."
Investors hear "our CEO is used to having six staff people to make decisions."
Best message "our CEO ran a similar company that made a lot of money for investors."
Intellectual Property
Entrepreneurs say "we will be protected by our patent."
Investors hear "we're not all that proud of the precise protection our patent will offer."
Best message "our patent protects a large segment of the market, because it prevents competitors from doing 'X'.
When you write your business plan, make sure your capital requirements are tied tightly to specific milestones that need to be achieved. Identify major tasks and put them on a timeline. Figure out how much capital is required to achieve the major milestones and run the company for about 18 months. This way you'll be achieving your major milestones, creating as much value as possible, and reducing risk as much as possible. You will raise enough capital, won't raise too much, and if you achieve your milestones, you increase the value of the company at every capital raise.
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