October 18, 2011 4 Comments
Venture Finance – Reality vs. Rumors with Dick Brown
Our blogs always contain one of our columns or commentary on events affecting our entrepreneurs … all part of AW’s services that provide you the best tools to raise funds and to make your venture a success.
Over the last few weeks I’ve reviewed many Executive Summaries (ES) and Business Plans (BP) for Clients that need capital and want to use the Entrepreneur’s Edge services of our company, American World (www.amerwld.com).
I keep running into the same mistakes and thought I should point them out to help all the other entrepreneurs that are also trying to raise money. First of all, these fund-raising documents are targeted at VC’s, PE’s and Merchant Banks, a sophisticated, jaundiced crowd that see even more ES/BP’s than I do.
BIGGEST ERROR (BY A MILE)
Further, I’m always amazed when I ask the BP author why anyone might consider writing a check to their company. I get answers ranging from total silence to “it’s such a great product” to “we really need the money” to “it’s an ideal extension for Facebook and everyone knows how successful they’ve been”.
If you don’t know this and avoid banging away at the potential ROI throughout your documents, you might as well stop work and instead begin writing “a great, successful book” and try competing with the Dan Brown’s, Stephen King’s and Hemingway’s of our world.
“QUOTATIONS OF SURRENDER”
Classiest: “From where the sun now stands, I will fight no more forever.” – Chief Joseph, Nez Perce, on October 5, 1877 in the Bear Paw Mountains of the Montana Territory.
Most Stupid: “I don’t know, what do you think is fair?” – 95% of all entrepreneurs when asked by a VC what percentage of their venture are they willing to give up.
Not only is this about the dumbest response possible, but even worse – rarely do entrepreneurs prepare realistic financial projections that also contain ownership percentages along with projected profits. Then, they act hurt and accuse the VC’s of avarice when the VC answers: “90% for me!”, but have empty pockets for ammunition to shoot back.
OTHER COMMON BOO-BOOS:
There are other glaring errors that repeat themselves in mind-numbing predictability.
1. We Don’t Really Need All This Capital - History shows that 90% of the time, first year sales and gross margin do not reach the projected expectations. Under-capitalization is the single largest reason that companies fail. Investors know this and expect that the funded entrepreneurs will return with their tails between their legs, seeking more money (and yielding the rest of the ownership pie for the investors.) When you do your pro formas and forecasts, try to be very realistic, extremely conservative, and lay aside a large, safety reserve.
2. “We Don’t Have Any Competitors!” – I will bet anyone that uses this phrase “serious money” that I can find at least 5-10 competitors in less than 30 minutes, just using Google. On the rare occasion that I can’t, the venture has invented a totally useless, over-priced product that nobody living outside an institution will ever buy.
3. Variation: “Microsoft, Google and Facebook can’t compete with us because they’re too big and slow-moving!” Try making a list of all the companies Bill Gates has put out of business.
4. “If We Get Only 1% of the Market, We’ll Be Wildly Successful.” – There’s a marketing strategy that says to be successful, you have to own a leadership position in the market (at least in some specific segment). You’re not going to get there at 1% and most professional investors want to back the leaders, not the also-rans (that exist on the dregs and with low margins). Further, the big competitors have a tendency to take nearly all the market and then leave the “crazies” and marginal operators very slim pickings.
Looking at one “now-mature” business that was once a start-up market – there were over 1,800 automobile manufacturers in the United States from 1896 to 1930. How many now remember Pontiac, Oldsmobile, Plymouth, Valiant, Geo, Studebaker, Kaiser or “the biggies” such as Cord, Excalibur, Henry J, MG and De Lorean?
5. “We’re demonstrated our product to John Hancock Life Insurance, DOD, MGM, Boeing and Texas Instruments.” All gave us rave reviews and we expect purchase orders shortly.
“Come on, kid: How many have you sold, delivered and been paid for?”
6. “I Can Sell It Cheaper” - The blood of any investor runs cold upon hearing this strategy. Selling anything cheaper means less gross margin. Smaller margins mean smaller profits and potential losses … this is not the basis for a good business investment.
7. Low Barrier-to-Entry Businesses - Sub sandwiches, bagels, boutique coffee and quick oil-change shops are good examples of hot businesses that were once relatively cheap to enter. Often these are new concepts or franchises that burst onto the scene and explode. Any time that the visibility of a new kind of business is high and the barriers-to-entry are low, the growth rate of the supply can quickly exceed the growth rate of demand. Ultimately this means that price-cutting and discounting become the norm. The failure rate soars. Ask me about the “Computer retail business”.
YOUR SMARTEST MOVE
When you’re trying to raise money, you’ve begun a quest that is difficult and frustrating. Only a complete idiot would believe that they can succeed without a slick, professional effort. Complementing this, do not mimic the mistakes of your predecessor capital seekers. Distinguish yourself by being different and never repeating losing strategies. Be “the brightest and the best” by acting that way. Good Luck!!
THE PERFECT XMAS GIFT?
This month’s column is typical of the straightforward, no-nonsense coverage that’s contained in our new book, How To Raise Money, Insider’s Edition. It covers everything from how the VC business works to how to write a killer Business Plan to creative ways to sell your ideas.
In fact, one of our Clients who purchased and read it sent us an email saying this was “the perfect Xmas gift” for all entrepreneurs. We thank him for the idea and we’ve reduced the price to enable more people to elect to give this as a present to all their friends that want to become entrepreneurs. (Click “How To Raise Money” at the top of this page.
AW has also introduced the “Entrepreneurs’ Edge” (EE) – a complete service for entrepreneurs that seek funding. EE begins by providing a real-world “Investor’s Review” of your Executive Summary and Business Plan followed by the creation of an appropriate “Financing Strategy”. Next, AW distributes “your story” with a unique, eye-catching introduction to 800+ of our world-wide list of qualified investors. AW will then continue to work with you to close your financing.
If you have questions, comments or suggestions, send them along. Contact Dick at American World, email@example.com). You’ll get an answer.