(Editor’s Note: For the past 25 years, Matt Pierson has been starting or funding businesses in NH. He is a founder and partner at 10X Venture Partners and a managing director at Dunn Rush & Co., a Boston-based investment-banking firm. We asked him to give us an inside perspective of what gets investors excited about a company and what turns them sour on a deal.)
Raising capital is often one of the most time consuming and under-estimated steps in launching a new business. Few entrepreneurs have the financial capacity to simply write a check to fund their dream. Knowing how investors think about investment opportunities will help you manage the process to a successful conclusion.
One of the first steps is to understand what type of business you are planning from a funder’s perspective. There are many types of companies, but they often fall into growth companies and lifestyle companies. Growth companies share common characteristics, including the ability to have sustained growth and profitability, employ many people, and serve large geographical areas. Lifestyle companies place a priority on the entrepreneurs’ individual preferences, such as an affinity for cooking, a love of the outdoors, or providing a specialized service they enjoy. All of these types of businesses can be profitable and grow if managed well.
However, most angel and venture capital funders look for growth companies, which will ultimately be acquired or go public at a much higher valuation than the original invested capital. Lifestyle companies are perceived as having the investors’ upside limited by the personal preferences of the entrepreneur, not the size of the market or opportunity. Many lifestyle companies don’t think about a liquidity event where investors’ capital is returned. Friends, family members or local banks often fund life-style companies.
Regardless of whether you are seeking funding from an angel investor, venture capital firm, local bank or rich uncle, there are some common themes you should consider as you raise capital.
Investing in Teams
Investors write checks to companies but they don’t really invest in companies. These funders invest in people, often preferring a team with shared values and complementary skills. As you think about pitching your company or idea, make sure to pay attention to the people involved.
Why is this important? Chances are your market size estimation is wrong, your product idea is incomplete, your pricing model will prove to be challenging, competition is stronger than you think, and inevitably it will take longer to get to market than you ever imagined. But, if you have the right team, you can adapt, modify, regroup and succeed. If you have the wrong team, your chances of success are vastly diminished. Provide the funders with information about your background and a resume of all key team members after you pitch.
Vision Statement
Being able to clearly communicate your vision for the company is critical. What products and/or services will you provide? Why will people want or need to buy them? How will you make money? What does the company look like a few years down the road? Investors want to have confidence that you know what you are trying to build, recognizing there will be many zigs and zags along the way.
Be able to communicate your vision in 30 seconds or in a tweet. You never know when you’ll run into a prospective funder, or customer, and it helps to sharpen your value proposition. When we founded DTC Communications, we met our venture capital backer via ship-to-ship radio communications on a sailing race from Boston to Bermuda. (That was not contemplated in our original business plan!)
Appropriate Financial Projections
All funders have “pull your hair out” moments. Nothing gets to me more than a startup with a brief concept, no prototype, no customers and no revenue, but has a 20-page detailed financial model projecting growth out five years with every possible cost itemized in Excel. This is a full stop situation. If you don’t have a product, costed bill of materials, pricing model and customers, keep your projections to a thoughtful one-page summary. Tie it to the total available market.
There is no such thing as a “pretty” financial model. On the other hand, if you’ve been in business for a year or two, have prototypes in customer hands and are confident of your other expenses, a more detailed financial model is helpful.
Why? It’s less about getting an accurate sense of your financial future, but more about probing how you think about revenue, expenses and profitability. We’ll make a judgment call on your business acumen based on the how, not the numbers themselves.
No Competition? No Opportunity
It is surprising how many entrepreneurs think they have a new product or service that is so unique that there is no competition for it.
Nonsense! This is not Coke versus Pepsi competition we’re after; it is where else can your prospective customer spend their dollar instead of spending it with you? If there’s not an alternative you can identify, chances are prospects will keep their dollar in their pocket and not spend it at all.
Making the Pitch
Investors have wildly different ideas about what makes a good presentation. Some investors prefer a PowerPoint slide deck, often called a pitch deck or simply the “deck.”
Generally, decks with 12 to 20 slides are preferred. More than that, investors think you can’t communicate your opportunity, or more likely, it is too complicated an opportunity for them to grasp.
Either way, you walk away without the capital needed. Other investors prefer a true business plan. I like both, but if you choose a written plan, I haven’t seen one that merits more than a dozen pages, including all attachments.
Raising capital is always challenging, but knowing which funders may be interested in backing your venture is a good starting point. Understanding their hot buttons and pain points will increase your chances of success.
Pierson is an active angel investor and one of the founders of the Entrepreneurs Foundation of NH. He sits on the board of directors of Nanocomp Technologies, ApplyKit, the NH High Technology Council and the NH Charitable Foundation. He can be reached at mpierson@dunnrush.com.
Current Issue - April 2024