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Friday, April 13, 2007

Preparing your entrance to the VC den

A short how to article on starting out....have a great weekend

Entering the Dragon's Den
by Nick Hood

Thanks to BBC television’s latest reality show, Dragons’ Den, the general public has seen behind the scenes of one of the commercial world’s most difficult tasks – finding new capital. Sadly, most new business ideas are never turned into reality because they fail to find financial backing. Often, this is not because the proposition is weak; it is because the entrepreneur has failed to communicate the investment argument in an effective way.
Raising capital can be difficult even for those with a decent track record. For new entrepreneurs, the task can be nearly impossible. In the fictional Dragons’ Den, the vast majority of contestants are turned down by the panel of successful business people. This is no great surprise because many entrepreneurs are badly prepared when they go before potential backers. They simply haven’t worked out their story. An outside investor will want to see and understand the facts and figures on costs, the market place and competition before he or she considers getting involved, so the entrepreneur needs to have those ready. Poor preparation isn’t confined to the one-man-band businesses. It happens even with substantial companies looking for investment support from major financial institutions in London or elsewhere in Europe.
The one essential tool for fund raising is a comprehensive business plan. It needs to include a focussed summary of the business itself, supported by financial projections, an outline of the marketing strategy and a thorough evaluation of the market. The figures must be more than just a profit forecast. They need to include a cash flow projection and a prediction of how the company’s balance sheet will look at the end of the forecast period. The business plan must also be brief, or it will be discarded long before the investor reaches the end. It must have an executive summary at the beginning, setting out all the key facts.
One element often missing from badly prepared business plans is a clear summary of the major assumptions on which they have been based. Explaining the underlying thinking makes the plan seem much more professional. Investors may not agree, but at least they will understand the background to the venture.
Another common fault is not including any sort of sensitivity analysis. The only certainty about business forecasts is that they are wrong, the only questions are by how much, in which direction and, crucially, why. Business plans need to recognise this and identify what the impact will be if, for example, the business misses its sales target by five per cent in the first year.

Once drafted, the plan must be shown to an outsider, preferably an accountant or other experienced business consultant, who can ask all those difficult “but what if” questions. The entrepreneur must be prepared to set aside his ego and listen to what they say, no matter how painful this is. If changes to the plan are necessary, then pride must take second place after good advice. Accepting outside input is essential for success in business. Few lenders or investors will simply hand over money to entrepreneurs and wait patiently for the return on their investment. The most active investors, like business angels or venture capital companies, will be actively looking to provide their own skills and experience for the mutual benefit of all concerned. It might seem obvious, but the larger the sums on the table, the more the investor will demand to keep an active eye on it, including sometimes taking a seat on the management board.
When everyone is happy with the business plan, it needs to be turned into a professional presentation, which should communicate memorably what the business does. If the core purpose cannot be explained in 30 seconds, the pitch is too complicated and investors will lose interest before the client has a chance to get into the supporting facts and figures. The old clichĂ© about identifying a “unique selling proposition” still applies even if it may have been overtaken by newer management jargon.
It is essential to practice the presentation several times before seeing investors. I have seen the credibility of some seriously good projects destroyed by a hesitant delivery and worst of all when the technology gets the better of the entrepreneur. Most presentations these days are done in PowerPoint, but there should always be hard copy sets of the slides available in case the projector bulb blows or the PC crashes.
The questions the investors might ask should be anticipated and strong well-researched responses prepared. Once in front of the potential investor, the approach needs to be open and not defensive. There will be detailed questioning and the entrepreneur and his team must be able to demonstrate why their skills and experience will justify the risk the investor is being asked to take.
One regular mistake is not raising enough money. If an idea is sound, a professional investor will be happy to put in a little more, if it gives the business a contingency fund to deal with the unexpected costs and problems that are inevitable with all new ventures. Going back later to ask for more is usually difficult unless there is a very good reason why the extra requirement wasn’t anticipated at the outset.
Entrepreneurs must also be realistic and get guidance about the potential value of the business. They need to be willing to give up a significant share of the action. Investors will want a meaningful stake in the company. They will also want a good return on their investment and a planned exit route so that they can see how they are going to get it back.
Raising money for new ventures is difficult at the best of times, but good consultancy advice and a professional approach can prevent it becoming mission impossible.

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