By Jack Mixner Key Points
2. Revenue is a Good Idea – Profits Are Better 3. Ten Minutes – Ten Slides 4. Nuances of Strategy 5. What Middle Market Companies Forget 1. Have a Plan Some entrepreneurs say they don’t need a business plan. They tell me that an executive summary or one page plan is OK with investors. Only occasionally are they correct. If they have a track record at successfully raising capital and launching a business they might have a chance at not writing a business plan, especially if their last name is Gates or Jobs. Otherwise, they need a plan. When Angels are just getting to know you, they may not dwell on your plan. Their first step is to see if they like you. Then they start to build trust in your management abilities and business sense. Ultimately, however, they want to see how you plan to use any money they might invest in your company. That means you need to write a business plan. Statistics for success at raising venture money are dismal. In a good year maybe two per cent of venture deals get funded. Maybe three per cent of angel deals get funded. That means ninety five per cent of deals are not funded. Of that ninety five per cent a good portion deserve to go forward. That is where the business plan comes in. Use the plan to take your project to the next step, that of actually going into business. Start operations and begin to generate revenues. Entice a team to join you. Operate with minimal funds until things start to click. In order to do that, especially with a team, you need a plan. Describe your technology plan first. Take maybe forty pages to start. Summarize in three pages. Then draw a picture. Two things happen as a result. The first is that the easy part is now done. All technologists can describe their technology. They forget that investors do not really care about the technology portion of the plan. Investors care about how many people are actually going to buy your technology. The picture may suggest a patent at the intersection between all the different attributes of the deal. A patent can be valuable. Once the technology portion of you plan is done, focus on the marketing plan. Angels want to know who is going to buy what you are making. Finally, finish the financial plan (all the way to internal rate of return) and summarize the people who are involved in the deal. Build an advisory board along the way. If yours is a medical technology, it probably makes sense to have two advisory boards, one for the medical side, and the other for the business side. What model business plan do you use for writing your plan? It doesn’t matter, as long as your plan is complete. A complete plan has five main deliverables, the business plan per se, the financial projections, power points, an executive summary and a thirty second pitch. Do the plan first, and then create the rest. Score your deal in two additional ways beyond financial performance. If you have a complete team and you are already in revenue yours is a more desirable deal. Are you all by yourself with a great idea? You have a less desirable deal. Understand that investors care about the progress you have made and will invest more for a smaller portion of your company if you are further down the path. 2. Revenue is a Good Idea – Profits Are Better Anecdotal evidence from the Tech Coast Angels in Southern California says that eighty per cent of deals that are funded by the Angels are already in revenue. You increase the odds of funding even more with profits as well as revenues. Use the business plan you wrote to actually go into business. Aim for a profitable business in the short term. Profitability increase the odds of you success while making you deal more enticing to investors. An interesting thing happens at the same time. If you do it right, you may not even need outside investors, as you may be able to self-fund your deal with internal cash flow. If you want we can waste time lamenting the fact that the Angels are looking for less risk in their deals. Suffice it to say, the Angels do want to make investments. They are looking for deals that make sense. Revenues make sense. Profits make even more sense. 3. Ten Minutes – Ten Slides A well-diversified Angel portfolio includes at least fifty deals. That means, in order to properly diversify their portfolio, Angels are always looking for deals, maybe even your deal. Many Angels invest in groups to limit their risk. In a perfect world, you would be introduced to an Angel investor who would champion your deal. She would introduce you to a bunch of her buddies who all would invest in your deal, almost sight unseen, mainly because they know that your champion wouldn’t bring a deal to them that wasn’t perfect. In the real world, it probably works somewhat differently. Your initial screening may be at some sort of website. If you (or, more likely, your business plan) pass the website’s muster, you are invited to present your deal to a screening committee that may or may not recommend the deal for presentation to the larger body of investors. You present your deal using a Power Point presentation of some sort. Be ready to present your whole deal in ten minutes using only ten slides. Think that’s impossible? That’s why you spent all that time writing your plan and then summarizing it in your executive summary. A concise presentation is crucial. It includes a description of your technology, the market place, your team and the financial return an angel could expect. Angels are looking for lucrative deals. If you have a true hockey stick in your projections, absolutely include it. There seems to be some disagreement about valuation. For now, I suggest you give a simple valuation of your deal. Angels want to make sure you are reasonable. Venture capitalists may not listen, anyway, and will want to fix the price for themselves. Now a crucial point: be very careful that you don’t expose your deal until it is ready because you only get one time to make your presentation. We say, “Don’t shop your deal.” A shopped deal becomes shop-worn. Shop-worn deals don’t get invested in. Make sure you are totally prepared for your presentation before you present. That includes a complete patented technology, a marketing plan, a financial plan and a management team. It also probably includes revenues, with maybe profits. If you find a champion for your deal, strategize very carefully about your presentation and the steps beyond. Your champion will help you proceed through the initial screening all the way to final funding by seven or eight angels working together. 4. Nuances of Strategy We’ve talked about the presentation, the market, technology, financials and your management team with advisory boards. There is one final nuance that is crucial. In every discussion or presentation you make to anyone about your project, remember that the most important thing they are looking at is you. Come prepared. Know your product. Know your market. Make sure you want investors in your deal. Come willing to take advice from all sorts of people. And finally, come prepared to negotiate a win-win deal. 5. What Middle Market Companies Forget Middle market companies normally finance growth with debt, sometimes to their disadvantage. With proper structuring and plan, financing growth with equity may be a useful way to go. Equity could include sales to angels and venture capitalists if growth is expected to greatly exceed the norm. In instances where the owner of the company wants to sell the company, equity may make sense, especially in a sale to company employees. ESOPs work in certain instances, sales to senior management in others. Food for thought. Either way – debt or equity – a plan makes sense. COPYRIGHT 2006. JACK MIXNER. ALL RIGHTS RESERVED. JACK MIXNER 714 449 1040 jmixner@mixnerstrategy.com |
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