How do entrepreneurs raise money for their new business venture?
Discussions About Financing Your Business Venture
We now want to circle back to Financing the Emerging Growth Venture. To set the stage for this discussion, here is what Anita Roddick, founder of The Body Shop, once said: “There are only two ways of raising money: the hard way and the very hard way.” As we said in a previous Article, the world of venture capitalism has its own language, its own process, and its own methods of communication between entrepreneurs and potential investors.
All entrepreneurs must go through a standard process when raising money from outside investors. The three steps are packaging, placing, and presenting.
- Packaging is researching and writing an effective business plan.
- Placing is skillfully introducing the opportunity before the best investors.
- Presenting is communicating and making the deal happen in a formal meeting at the investors’ closing table.
What makes fund-raising so hard is not only understanding this process, but also at the same time putting your deal into a package that can be communicated and shared quickly and efficiently. Venture capitalists, especially those that focus on financing early stage ventures, get carpet-bombed with packages outlining business concepts at various stages of development. Facing such an information glut, venture capitalists have been conditioned to consume data at only two speeds. One is very slow, used when they are reviewing and editing investment agreements and the financials of deals before them. The other is very fast, as they become highly skilled at quickly sifting through slush piles of business plans and scanning thousands of e-mails.
Therefore, your potential investor is likely to make an instant judgment call just on the strength of the first few words you speak at a networking event, or the first few lines in your Executive Summary. We know of some VCs who consider the strength of the contents by looking only at the “Subject Box” of entrepreneurs’ e-mails!
Create Your Quiver of Arrows
So how do you get around this communication problem? How do you get what you want said before the right person, at the right time, and in the right way? First you must “disambiguate” what you are attempting to communicate. Disambiguate, a word the Pentagon actually created, means to simplify and clarify.
We help entrepreneurs disambiguate by having them create what we call a Quiver of Arrows. The arrows in your quiver are your Fast Pitch, Email Quickview, Executive Summary, PowerPoint Presentation, and Business Plan.
– At the highest level of communication is your Fast Pitch. It is used verbally when meeting someone for the first time at a networking event or other business function.
– The next arrow is your Email Quickview. It is perfect for quickly following up with the folks you met. Its purpose is to get people hooked and interested in helping you. If the right person is targeted and is delivered a well-prepared Quickview, they will ask for more.
– Use your Executive Summary as a quick follow-up to the e-mails.
– Your PowerPoint Presentation and Business Plan are used only when you meet in face-to-face meetings with well-qualified senior partners at VC firms and other professionals, or for submitting online to qualified investors.
Perfecting Your Fast Pitch
It is this simple: First moments matter most. The whole point of your Fast Pitch is to get investors interested enough in you to get their business cards and to agree to meet with you at a later date, or at least to get them to refer you to someone else who might be interested in your deal. Jason Salfen, at MIT’s Sloan School of Management Entrepreneurship Center, puts it succinctly: “You don’t need to reel them in, it’s just getting that initial hook.”
Investors know that the way you will engage your initial customer base is through a Fast Pitch. It is the same for attracting strategic partners and even recruiting executives, which means that in general, the investors know that entrepreneurs best suited for funding can usually articulate their venture’s value proposition within a sentence or two.If it is more complicated than that to explain, it is probably not ready to be funded. So once you have your Fast Pitch down, be ready to catch the fruit as you shake the tree. Because a venture capitalist can call at any time after your first meeting, always be prepared to deliver a concise and compelling “Value Line” that succinctly illustrates your venture’s key capabilities.
Honing Your Email Quickview
Internet e-mail has become a key component of communication in the business world today. Think of your Email Quickview as the equivalent of tapping an investor on the shoulder at a networking event and saying, “Excuse me, but do you have a minute to talk?” If you are referred to investors by a colleague, or by an entrepreneur with whom they have invested, tell them this in the first line. Say “Referral from Dr. Smith” in the subject box of the e-mail and be sure to “CC: Dr. Smith.” This is not only a courtesy to Dr. Smith, but it also demonstrates that you have spoken with Dr. Smith, or better yet, know him well.
Prepare your Email Quickview by writing down what you are basically saying in your Fast Pitch. Close by stating something very positive and affirmative like, “Dr. Smith (your referral) was excited by our idea, I know you will be too. I look forward to hearing from your soon.” Be sure to include your e-mail address and phone number. Printed out, your Email Quickview should not be much longer than one page.
Be sure to Google the person that you are contacting. It is very important to learn as much as possible, and then try to personalize what you have learned when you write the e-mail. Remember that many investors will be reading their e-mail via a smart phone-type device, so make sure not to use any HTML, embedded net links, graphics, or attachments with your Email Quickview. Finally, do not sabotage yourself by letting your need for instant approval get the best of you. Do not call to follow up, because you will appear anxious and unprofessional. With a correctly prepared e-mail you have invited a response, so be patient and wait for it.
Nailing Down Your Executive Summary
If you have targeted the right investor at the right time, you will get an e-mail response asking for more information. Have your Executive Summary at the ready in your quiver for quickly following up. Once investors have your Executive Summary, you now have a reason to call them, politely saying something like this, “I’m calling to make sure you got our attachment OK.” And you can add, “I’m following up to answer any questions you might have.”
An effective Executive Summary succinctly highlights your Ten Value Drivers in three to five pages. It is best written in a word-processing application, like Microsoft Word. It should never include graphics, flying logos, HTML, or net links to special Web sites. If the Fast Pitch and Email Quickview are what get customers into the store from the streets, consider the Executive Summary as the brochure that prospective customers take home with them. A well-prepared Executive Summary will give you more than a mere advantage over the other deals on the desk of investors. It will invariably make the difference between success and failure.
Mastering Your Business Plan
As we first discussed in the first lesson, business planning is the process of uncovering and identifying what creates and drives value in your business. The business plan is the document that communicates your value drivers, helps your team measure your progress, and as a roadmap communicates to all your stakeholders where you are going.
The structure of a business plan is as important as its contents. It is important to keep the excitement, interest, and storyline going with your potential investors. You do not want to lose any momentum in the detailed or garbled writing of a business plan. Keep it very simple, and include an expanded discussion of your ten value drivers, the concise financials discussed in Financing Growth, and any supporting documents. Although some investors will request a complete business plan before committing to any formal meetings with senior partners, most will be satisfied with a well-prepared Executive Summary as the basis for an initial meeting over coffee or lunch. Try to limit the number of people who are reading your Business Plan at any one time. It should only be left behind with prequalified investors, such as after a formal PowerPoint presentation before senior partners at a reputable venture capital firm.