The Perfect Pitch Works

“He cared; more than Harvey Ramos” – quote from this blog’s author.

I know what you are thinking – he has run out of quotes so now he is quoting himself. So before you get the wrong impression, let me explain.

As part of instructor training at EY, we were told at cocktails when we arrived that the next day, we would be asked to introduce ourselves with the proviso that our presentation had to end with what we wanted scripted on our tombstone. (BTW I suggest you try this sometime.) Well I tossed and turned that night and after trying what I felt were thousands of iterations, I finally settled on “he cared.”

The next day we are going through our presentations and preceding me is Harvey. He comes to the end and announces that his tombstone will read “he cared.” The instructor thanks Harvey and immediately calls on me. My readers are pretty smart so you know how this concluded. So why the long lead in?

If nothing else, this exercise caused me to reflect deeply on what I really wanted to say about my life in simple terms and owners do the same for their company each time they make a pitch for investment. Lately, I have been through a couple of failed funding attempts and I wanted to better understand why investors said “no.” I reached out to some of the investors that passed and also saw a couple of recent articles on the subject. Always searching for a new angle, I gathered about a dozen or so different reasons but was disappointed to find they really had not changed in the last four decades. Some common culprits:

  • Barriers to entry not highlighted
  • KPI failure – either don’t know them, they are poorly defined or poorly measured
  • Shallow knowledge of competition – and the always fatal “we have no competition”
  • Economics – not clear how investment will be used or no “paying” sales channel presented
  • All OPM – where was founders’ buy-in?

I then looked at our “Perfect Pitch” guidelines (available @ withum.com) and realized all these points would have been addressed had the founders done a deep dive into what they were presenting. To draw the analogy, had they invested the same level of thought into what their pitch “said” as I had in doing the simple tombstone exercise, all of these points would have been addressed.

Your “pitch” is your chance to show your best. I really do not care if you use what has worked for us over the years or another guide, when you are preparing it, invest the time to completely address what is suggested – – there is a reason for it. This is not the same as being at a New Jersey diner and spending the time figuring out what you want from the hundreds of items on the menu. This is not a checklist; it is a starting point for you to shape the future of the economic life of your company.

So please when you put the meat on the bones of your pitch, think about what it says about you and your company; what it stands for and what it represents. Don’t get turned down just because you did not do your homework. Think about how an investor sees it, because properly prepared, the Perfect Pitch does work. Good luck.

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Congratulations; You Got Funded – Now What?

“The future ain’t what it used to be.”  famous quote by Yogi Berra

The closing of an early round of funding is certainly a milestone event in the evolution of any company, but after experiencing temporary euphoria, reality soon sets in. The extra capital, (while fending off the Ramen noodle diet) brings an added dynamic to your organization; you are now obligated to devote some of your time to communicating with and listening to investors. I don’t mean to simplify the paradigm, but here are three “musts” in that relationship:

Manage Investor Expectations

On your journey to getting funded, there was a great deal of information you shared with potential investors who are now your shareholders. Hopefully the financial projections, the milestones you planned to achieve and the “current state” of your company were honest and realistic, as they were a significant part of what set the expectations of your new partners.

For many entrepreneurs, it is a rude awakening that now, for the first time, there are other individuals to whom they have to report. Since most investors are passive, the only real information they will get is what you decide to share with them. In the early going, there is a real need for increased communication between you and your investors. Without a steady flow of data, an ugly “expectation” gap can form between how a company is performing and how investors think it is performing.

So start by outlining a basic communication plan showing how you will work together. You should be proactive in making sure they clearly understand the company’s current state and the critical issues you are facing. Relevant information allows you to paint a realistic picture and helps to manage your investors’ expectations.

Generate Timely Reports

Whereas in the past you may have not generated detailed monthly financial statements, investors in the early stages of a relationship will likely expect timely financial data from you. Thus, a new initiative should be to establish a more rigorous reporting of monthly financial and operating results; say 10 to15 days after the end of the month.

Also, many early stage companies are at the beginning of the revenue cycle, meaning their level of revenue most likely does not cover operating costs. A company’s “burn rate” has to be closely monitored and reported so investors understand the status of their investment, which is often meant to take a company through its developmental stage. Keeping track of the burn rate versus the cash available allows you and your investors to understand if and when a follow-on round of financing will be required.

Track Progress Relative to Milestones

Often, the most important information is how your organization is operating relative to milestones. Many owners tend to focus on financial parameters, while investors typically look for some measure of organizational progress. While financial success is usually a part of every investor’s expectations, other measures may be equally important and should be included in your periodic reporting.

If the expectation when you received funding was that your company would build out a management team, it is critical to communicate progress in this area. The status of candidates, progress toward expanding the team, and even upcoming interviews should all be communicated to the investors. If another milestone is to improve and quicken the pace of product development, give a clear picture of the current state of your product, a path of steps you hope to accomplish in terms of functionality and usability and your progress toward completion.

So congratulations on getting funded; let us rejoice and be glad. But please follow these simple post funding guidelines and you will have even more success if you need another round. Good luck.

How Do I Prepare My Business for Sale?

Quote – “Nobody expects The Spanish Inquisition!” – Cardinal Ximenez, Monty Python Series 2, Episode 2

spanish-inquisitionFor those who have heard from a friend or colleague who successfully sold their business, certain details surrounding the process itself sometimes get omitted.  The endless series of questions, the mountains of data and the seemingly infinite number of meetings seem to all be a blurred memory when one hears that another “got the deal done.”  Now, unless this is a very small transaction, few buyers these days, financial sponsors or strategics, write a check of any size without performing the dreaded due diligence.  And, much like this humorous sketch from Monty Python, the requests for information seem to always include one or two additional items that were originally omitted.  Trust me, there is a strong parallel between this process and the Spanish Inquisition.

Having said that, there are a series of steps one can take to help ensure a successful transaction.  In fact, we have a registered process called TransactReady® which we use to guide you through the most critical steps to help ensure a transaction is consummated. For purposes of this blog, I would like to focus on just a few of the hard-core items that should be your priority as you enter the diligence phase:

  1. First and foremost, one should “know thyself.”  Work under the assumption that any warts you have will be found out, so it is best to perform your own SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis and understand how you will address any issues which come up.  Potential buyers appreciate the honesty and knowledge you have of your business when you volunteer this information versus having to address it in a findings meeting.
  2. Expect requests for more information than you may have provided to anyone before – probably by a factor of 10. Set up a Virtual Data Room and work with your professional team to monitor this process.
  3. Perform your own Quality of Earnings calculation.  No, this is not a test to determine if your dollar of economic performance is better than any others but an assessment of the items for which earnings should be adjusted as they may be non recurring or not required for the business to sustain itself.
  4. Investors buy growth, so do not try to somehow capitalize on all future growth in the business.  This may seem counterintuitive as most believe growth means higher earnings which generate more EBITDA and thus a higher price.  However, if an investor sees all of the growth sapped out a target, they might lose interest.
  5. Finally, a business being sold should be an ongoing an entity.  New products should be in the pipeline and your team should be ready to manage increasing growth.  Buyers have less of an interest in a business that appears to have reached its twilight.

Remember, while you may think a sale is the end of the line for your company, the buyer should see it as an opportunity to take what you have developed and bring it to the next level.  Ongoing viability commands a good price and helps ensure a transaction gets completed.

Why Investors Say No

Lloyd: Hit me with it! Just give it to me straight!  I came a long way just to see you, Mary.  The least you can do is level with me.  What are my chances?
Mary: Not good. lloyd-300x300
Lloyd: You mean, not good like one out of a hundred?
Mary: I’d say more like one out of a million.
[pause]
Lloyd: So you’re telling me there’s a chance… *YEAH!* Lloyd Christmas – Dumb and Dumber

So being in this space, I hear a lot of stories (too many, unfortunately) about how some startup crashed and burned a la Tom Cruise in Top Gun at an investor presentation.  Some have gotten the polite – “come back when you are further along” and some just the “we will get back to you.”  With hindsight, when you then ask some pointed questions to these teams, you realize they might have been a tad optimistic based upon how they approached the fund raising process.  Like old Lloyd Christmas, they thought they had a chance, but did they?

So, boys and girls,  what lessons can we learn that will perhaps make us have a better chance with a financing source?  What are the reasons investors say no?  Here are my top five.

  1. Right pitch; wrong investor.  Two big errors here.  The first is talking to the wrong investor for your stage of development.  This is most common with early stage companies – they wrangle a meeting with a VC when what they need is an angel or seed-funding source.  Make sure you talk to an advisor to get in the right pew.  Second, don’t assume because they did one deal in your space (you should know your investors’ portfolio) they are interested in your deal.  Like all smart investors, diversification is part of their strategy.
  2. Wrong or incomplete team.  You do not need your organization dance card filled, but two or three key slots should be hired or known.  And, as much as I love CFO’s, that is not a key role at this juncture.
  3. No sustainable business model.  I love my daughter but her model is selling a device to veterinary practices that only need one or two units, has no replacement parts and lasts forever.  The good news is she wanted a “franchise” business – the type that just provides some additional income – and this fits the bill.  But, she will never go beyond that stage of growth.  If this is your model, think again about approaching investors.
  4. Too “me too.”  You need to cure a pain and if someone else has done that and your differentiator is that you can do the same thing with one less step, think again about your model.  If you always describe your product as “it’s just like a Xerox” (dating myself badly here) well then…
  5. No traction.  This happens especially with multi-channel revenue streams.  Concepts are not enough – the “build it and they will come” syndrome is not a winner.  If you are getting less traction than bald tires on an icy road, solve that problem first.  Money is not going to help you.

While there have been many entrepreneurs who have failed with investors, perhaps you can learn from their mistakes and improve your chances of being successful.  Stay positive and keep innovating!