- Define your Target Market
No business plan is complete if the company cannot identify the target market. I address this subject matter in earlier blogs as the TAM – Total Addressable Market. Why? Because the investors want to have a handle on how large is the business opportunity, how much money they could possibly make if the sales targets are hit. Implied with the identifying the TAM, you have to seek third party confirmation that the market is growing. As one CEO told me, he looks for 2 things about the TAM: Is that Market Growing? Will I make a profit?
- Create a Spreadsheet with Month to Month Numbers, consolidating them from Quarters to Annual.
This pointer is a follow-up from the first tip, the TAM. One has to create a spreadsheet from bottom up identifying the costs of the operations for 3-5 years. A monthly model gives the startup flexibility to break down its costs to chunks. In one startup in Los Angeles, the investors asked that if the company, even though seeking $1.5 million, was offered $500k, what can it deliver for that amount of investment? One can supply an answer in an hour without revisiting the accounting. Another advantage on monthly modeling is that one can focus on specific line items, make changes without altering the whole spreadsheet. Once the spreadsheet is completed, then you can calculate the ROI. Read my earlier blogs on EVA, ROI, etc.
- Identify the Competitive Landscape
It is one thing to build a product, but, unless you identify your competitive landscape, you cannot gauge its success. One has to be honest to oneself and search for that landscape. In an earlier blog, I refer to direct and indirect competitors. You have to research any potential competitor, for your potential investors will be doing the same thing. Once you find them, then you attack each one and see what advantage you have against that opponent, or how the startup will outmaneuver the competition. For example, I have seen a Silicon Valley company develop a breathalyzer device. But it did not truly looked at potential competitors, some selling below its price points. Most smart investors will begin to shy away from that company.
- Set up a well-researched product price and sales projections
Among investors, the issues regarding pricing and sales always comes up in the context of the competitive landscape. Why? The investors want to know whether you will succeed in spite of the competitors. A McKinsey report revealed that 80% of startups fail because of pricing. Do the homework. The same with projections. One must see what others have sold or delivered in a time frame. Your numbers should not be that different. I noted one company project $1 billion in sales in 3 years. When I asked what were the numbers from his competitors, the maximum revenues for the leading competitor was $200 million, a far cry from $1 billion. Most investors would identify this fault and discount this company’s value or capability in that sector.
Moreover, I do reduce a little on the projections, less than 10%, so as to follow the Wall Street adage, “Underpromise, Overdeliver”. It is better to exceed projections, than fall short — for obvious reasons.
- Show a barrier to entry or traction or, best yet, both
The most common barrier to entry is filing an Intellectual Property right. However, even with IP protection, you still have to demonstrate traction — does anyone want this product? Some companies use the crowdfunding platforms for traction. Another approach is confirmable distribution agreements. And there is not better barrier to entry than having the top sales volume in the market sector.
- Demonstrate the ability to hit your milestones
Nothing irritates potential investors than hearing a company stating it will not hit a certain sales target or cannot deliver a clinical trial result within a time frame. Failure to hit milestones is proof of a defect in operational leadership. Again, my earlier blogs discussed that Wall Street analysts cannot sustain a company’s valuation when the company fails hitting them after 3 quarters.
7. Write a complete business plan, with a Pitchdeck and Executive Summary
I have been told by one advisor that no one should bother to write a complete business plan as events change, etc. I disagree. By writing a complete business plan, one covers all eventualities not covered by simple pitchdecks or summaries. I recently had breakfast with an executive asking me questions as to why my current company is not attacking the international market. I replied that my business plan does address those points, while stating facts and figures therein, and I related to him that pitchdecks and executive summaries are not the right vehicles to include virtually every angle of a marketing campaign. But had I not addressed these international marketing points in the business plan, that interviewer-potential investor would have walked away. In other words, a business plan makes sure that you are prepared to reply to points not shown in the standard summaries.
8. When searching for potential investors, make sure that they have the right profile
Many startups believe that since all investment firms have capital to invest, they are all the same. Not true. The adage that people invest in things they understand also applies to VCs, Angels, and Private Equity firms. I met one startup whose CEO stated that he sent his pitchdeck to 81 firms. Since his company had some healthcare technology, I doubted that even 80% of those VC firms would be interested. He wasted time. And, since fund raising is about timing, any time you don’t raise money, there is less time to raise it.
- Be prepared to discuss valuations
Now that you are in the door, everything is perfect. The next big question is what are you willing to give in equity for the investment? Many individuals are never prepared for that interrogatory. By looking at various trends or studies, such as the PwC MoneyTree Report, one can get a decent idea of how investors value their deals. One NYC doctor never raised one cent of VC money simply because he kept valuing his company totally out of the average for his company.
10. Never stop raising money until the check clears
Finally, many startups believe that when they see several VC firms, term sheets offered, they can celebrate with champagne. Wrong. Like my earlier blogs, always expect that sh*t happens. The stock market drops. Your CxO drops out and does something controversial. The lawyers, a common trend, bicker amongst themselves until investment firms drop this headache and look for other deals. There is no cause for celebration until your bank confirms that the check has cleared. Never stop looking for funding. Actually, for a previous employer, I waited to do a closing on another deal, had the board from different companies do lunch, while I awaited that the investment from Soros would clear with the bank. First, given the lengthy negotiations I was not sure whether the investment would be made. Second, I could only close the acquisition with funds in the bank. In another case, an entrepreneur related to me that he found the investor, term sheets were completed, but the investor backed away before closing because of divorce proceedings. Now he has no funds for operations.