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Attracting Investors

5 Critical Questions You Need to Ask a Potential Investor

Ask how future funding decisions are made and understand the process for when you need to raise more money.

Bryan Stolle

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You’re about to give up a substantial amount of ownership to an investor or investor group.  You’re thrilled to get funding, but how do you know if you’ve selected the right investors?

While it may seem like raising capital is all about winning over investors, it’s really a two-way street. Just because someone has money they are willing to invest does not mean that person and firm can add substantial value to your business or that they are the right fit.

You are choosing investors as much as they are choosing you, and you are likely going to have to live with them for many years.

Beyond the obvious reference checking (especially with fellow entrepreneurs), here are five questions that you should and need to ask yourself and potential investors.

1. What value can the investor really add?

Let’s be honest: There are investors out there that don’t seem to have a clue. It may sound funny, but I’ve witnessed this first hand – more than once as both an entrepreneur and an investor.

Entrepreneurs need to be very thoughtful about what they want and need in an investor (other than just the money).

  • Do you want someone that understands what it means and what it takes to build a valuable business from scratch?
  • Do you want someone that knows the inner workings of venture fundraising over multiple rounds and can help you do it right?
  • Does the person need to have strong operational experience in a particular area, such as sales, marketing or product development?

Choosing an investor is a lot like getting married. This person will be in your life and sit on your board for many years. There are a lot of great investors out there, but there are also not so great ones.  You need to make sure it’s going to work for you and your company.

2. Does the investor know anything about your business?

It’s not all about the money.  Consider whether it’s important for your investors to understand your business model or have experience in your particular industry. Sometimes it’s crucial, other times not so much. Take a look at the firm’s current portfolio and focus areas. What does this indicate about the investor’s broader knowledge of your business?

Let’s say you are starting a digital-marketing business. Is this the first investment of that type for the investor or the third?Without prior experience, the investor may not have the right networks in place to help you or the right context for advice and decision making. Besides looking at the VC’s portfolio, LinkedIn is a great tool to help you understand who potential investors really know.

3. How committed is the investment firm to your type of business?

Just as it may be important for the specific investor to understand your business, you need to understand how committed the firm is to your particular area or business category.

Do they have other portfolio companies in the same space? Determine if it’s a major focus area for them.

  • Is your company an experiment to test out a new thesis?
  • Are they planning to invest in more companies like yours or are they beginning to get jaded and back away from the category?

You want your investor and their firm to be strong advocates and committed to the category.

4. At what stage is the potential investor in his or her career?

Most venture capitalists have a 15- to 25-year career in the business. Where they are in both their VC career and overall career can have a significant impact on your success.

For a partner in the first few years of his or her VC career,  the lack of experience could be a real issue (especially if they haven’t had a successful established track record in a prior career) Her networks, understanding of the venture business and experience getting a company from start-up to success is not as strong as it could be.

Also her influence in the firm is also likely less than ideal – you may not get as strong an advocate as you may need in the future.

Try to understand their motivations. When someone is feeling pressure to establish his career or “brand,” his agenda may not be perfectly aligned with yours.  This can result in unpredictable behavior at inopportune moments.

For example, he may advocate a follow-on investor or board member who ‘looks good’ on his resume but may not be the best fit for your business. Or he may advocate a course of action that is currently ‘cool’ in the VC or start-up world, but isn’t a viable, sustainable direction for building value in your business.

On the flip-side, if an investor is starting to scale back, his influence in the firm will start to decline. That influence is really important because when it comes time for follow-on financing, your advocate in the firm is a big factor in whether or not the firm participates. Someone late in his career may also not put as much time and energy into helping you become successful as you might expect.

When you give up a substantial amount of ownership in a company, it’s not just for the dollars. It’s for the access, the advice and the help. Make sure you understand where the investor is in his or her career.  The individual’s investment should be about your company, not the person’s needs.

5. How much capital is the firm allocating or reserving for your company?

Think ahead to the next round of capital. Find out where the firm is in the life of the current fund and how much capital they are allocating or reserving for your company.

Have they fully or tentatively earmarked dollars for follow-on investment? Some firms don’t reserve any funds, and it’s a decision made at the point in time of the next investment – depending on available funds and other investment opportunities (a.k.a a jump ball).  Others have a hard reserve or soft-allocated future funds.

Bryan Stolle is a general partner at Mohr Davidow Ventures, focusing on financial, marketing and education technology investments. Stolle founded his most recent company, Agile Software, in 1995, and led it to both its public offering and eventual acquisition by Oracle.

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Attracting Investors

The 3 Most Essential Points To Keep In Mind For Your Next Accelerator Pitch

No surprise that a great source for inspiration and lessons on speaking technique are TED talks.

Dan Lauer

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Startup accelerators have been around since about 2005, when Y Combinator was founded in Cambridge, Mass. Since then, they’ve exploded in popularity – expanding from start-up hotbeds like Boston and Silicon Valley to assorted locations around the globe.

Milwaukee, though not traditionally known as a tech hub, is home to Gener8tor, an accelerator that recently launched an artist fellowship program. Sydney is an international city in its own right, but it’s also attracting tech entrepreneurs with its Future Transport Digital Accelerator.

And, while Cairo certainly has a rich history, it’s also preparing for the future of innovation with the Flat6labs accelerator, which celebrated its 10-year anniversary in 2018.

As the number of accelerators has grown, so has the number of applicants. For example, for the Ameren Accelerator, our own 12-week program for energy-tech startups here in St. Louis, we went from about 200 applications in 2017 to in excess of 330 this year. Such explosive growth, however, can be a double-edged sword for those hoping to earn a spot in an accelerator:

More opportunity may abound, but the competition is also stiffer than ever.

Related: Why You Need A Million-Dollar Pitch Before Your Start a Business

Standing out in a sea of applicants

Responding to the increase in applicants, accelerators these days are asking tougher questions: “How close are you to revenue?” “What’s the business model?” “How do we [investors] ultimately make money?” Therefore, if you’re one of the applicants, you need to not only know the answers to all these questions, but to deliver them clearly, succinctly and in a way that sets you apart. That’s a tall order, to be sure, but if you follow these three key steps, you’ll be on your way to nailing your pitch.

1. Cut out the “maybes” – focus on the facts

Most startups fail because they don’t solve a problem. Just look at Juicero, the now-famous startup that raised about $120 million before it shut down last September. That $400 juicer simply wasn’t filling a need, and as a result, couldn’t find a solid customer base. Juicero is not the first or the last company to make this mistake. According to an analysis by CB Insights, 42 percent of start-ups go under due to “no market need.”

Accelerators always want to know that there’s an actual customer need. In fact, this is critical. Don’t recite a laundry list of problems your solution might solve; instead, focus on the most important one – and detail step by step how you came to that conclusion. The best way to prove your problem exists is through market research. Engage directly with potential customers by conducting surveys on pain points, wants and needs. When you come with hard research in hand, accelerators will take you much more seriously.

2. Lay your cards on the table

cards-of-table

Once they’re convinced of the problem, accelerators want to understand your solution. That sounds simple enough. Yet according to research from Marketing Experiments, companies often struggle to identify and articulate their value proposition.

A good value proposition is easy to understand, concrete and unique; it doesn’t rely on fluff, superlatives and jargon. So state your solution, and more importantly, state how it’s different from all the other ones already out there. Ideally, people will be able to understand your value proposition in fewer than five seconds.

Take Uber’s value proposition, for example: “The best way to get wherever you’re going.” This simplistic copy accurately captures its offering. And its homepage copy expertly sums up what makes the service more appealing than a traditional taxi: “Tap a button, get a ride; always on, always available; you rate, we listen.”

Additionally, accelerators want to know what you, as the founder, bring to the table. Show up, add to the chemistry and culture and be an active participant. At the Ameren Accelerator, we specifically look for leaders who come in ready to roll up their sleeves and drive growth.

Related: 3 Components Of The Perfect Elevator Pitch

3. Stay on track and weave a story

There’s nothing worse than an applicant who drones on and on. Try to keep your pitch clear and simple. For inspiration, look at TED Talks. Though those speakers pitch ideas rather than businesses, they are coached to become master storytellers. Most talks are fairly brief – they can’t be longer than 18 minutes – but more importantly, they’re succinct. An analysis of the top 20 TED Talks showed that all speakers stated their “big idea” within the first two minutes. Follow this format in your accelerator pitch.

Additionally, rather than spouting off statistics to make your point, try telling a dynamic story, lacing supporting facts throughout. Stanford University professor Jennifer Aaker tested the power of stories through an informal study. She asked her students to give one-minute pitches and then had the others write down what they remembered from each pitch. Sixty-three percent of participants could remember the pitches that were stories, compared to the mere 5 percent who could remember statistics.

Since I started working in this field, I’ve seen enormous growth in the number of accelerators across the country and around the world. However, those who wish to participate in these programs are up against fierce competition, and gaining one of these accelerators’ coveted spots will take more than passion and a potential patent. By following these three tips, you’ll set yourself up for success on your next pitch.

This article was originally posted here on Entrepreneur.com.

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Attracting Investors

3 Components Of The Perfect Elevator Pitch

Can you clearly demonstrate value when faced with a time crunch?

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After filming two seasons of Entrepreneur Elevator Pitch, I’ve come to realise that there are three key elements to delivering the perfect pitch.

Our show is unique when it comes to pitching: Potential entrepreneurs have just one minute to pitch their idea, service or product. Those 60 seconds have added pressure because the contestants are being filmed, and they are talking to a camera (instead of people) while riding up to the penthouse suite in an elevator.

Related: 6 Tips for Perfecting Your Elevator Pitch

In real life, with a different set of distractions, it’s essential to know how to deliver a convincing elevator pitch. Whether you are pitching a product, a service or yourself, here are the three essential components in a pitch:

  1. Stimulate interest
  2. Transition that interest
  3. Share a vision.

Can you stimulate interest?

The first step, stimulating interest, is the most important. In fact, an “elevator pitch” is usually determined by the limited amount of time you have, and circumstances may only give you the opportunity to stimulate interest. If you do a good job of stimulating interest, this can yield a second opportunity, where you transition that interest and share a vision with those you are pitching to.

Keep in mind that people generally buy based on emotion, using logical reasons as their impetus for action. So, make a point to connect with them emotionally in order to stimulate their interest. Don’t be afraid to show your feelings; demonstrate high energy and excitement for your idea, business or service. Your passion and belief need to come through in your pitch!

Use the 100/20 Rule to your advantage: Have the energy that you are providing R100 worth of value and only asking for R20 in return. This attitude will generate enough attention, giving you the opportunity to transition the interest that you’ve garnered.

Make the transition

But people don’t buy exclusively on emotion. There needs to be some logic in the decision to make a purchase. Therefore, you must address some sort of pain, fear or guilt in your pitch, that those without your product or service may experience. And if you can illustrate how you (efficiently) solve a big problem, you’ll have more statistical success in your elevator pitch.

Making a genuine connection can help you transition interest. Learn to make yourself equal, then make yourself different.

Simply having connections to the same people or a point of similarity in your backgrounds will help bridge the gap with those you are pitching. Then you can emotionally connect, following that up with the logic portion of your pitch.

Related: (Video) Crafting Your 30 Second Elevator Pitch

Transition the interest you’ve generated with a clear explanation of what differentiates you. Build credibility by discussing your sales, distribution, revenue, awards and/or successes. All of these different ways to “attract” allow you to segue from emotion to the logical reasons to buy.

Of course, it is of the utmost importance to be honest when you are pitching. The truth always comes out, so ensure that you aren’t over-promising with your pitch. Don’t create a void that you are unable to fill.

What’s your vision?

Finally, in order to excel when sharing a vision, you need to have a value proposition that backs the 100/20 Rule. Make the value that you bring to the table as clear as possible. The value you’re asking for in return also needs to be clear. If you don’t display confidence in what you’re asking for, you won’t instill confidence in those you ask.

Tell others exactly what you want, why you want it and what you’re willing to give in return. You should have already proved your valuation when transitioning interest, then reiterated that valuation as you progressed in the pitch.

Take the people you are pitching through the reasons why you can be of value to them, the impact that you can have on their life or organisation and the capabilities you (or your product/service) possess that makes working together beneficial for all involved.

Practice your pitch, then get rich

After following each of these three steps, close with one simple question to gauge whether you are aligned or not: “Can you see any reason you wouldn’t want to move forward?”

If you utilise your pitch to stimulate interest in your product/service/self, transition that interest, then share a vision with those you are pitching to, the answer is almost always a resounding “no.”

And if you get objections or rejections, so what? Address whatever objections there are and if you still can’t get aligned, that’s OK. Take the perspective that the universe has a set number of rejections you need to get to before you find the right partner.

Related: How To Pitch

Be grateful for an opportunity to prove others wrong, and believe that if you keep working on your pitch, product, service or self, everything will come to you in the right way at the perfect time.

This article was originally posted here on Entrepreneur.com.

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Attracting Investors

Alan Knott-Craig Answers Your Questions On Finding a Funder To Managing Your Staff

What you really need to know to land an investor.

Alan Knott-Craig

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Focus on one customer at a time. Make that customer happy. Move to next customer. Aim for ‘1 000 true fans’, then keep them happy.

The rest will come.

1. How do I find an investor?

You have 4 options:

1. Angels

Applicable if you only have an idea, and you need cash to make your idea a reality. Usually between R500 000 and R1 million. You need to milk your network: Parents, friends of parents, colleagues, parents’ friends, friends. If you have no network, you need to build a network or use your savings. There is no math to these investments. You get money because they believe in you, not because they seriously expect a return.

2. Early-stage VC

Applicable if you already have a working product with traction, ie: users and/growth, and you need cash to build out. Usually between R1 million and R2,5 million. There are a number of early-stage VC’s in South Africa, just ask around. Knife Capital are amongst the best. Ideally you want an introduction from a trusted party. Failing that, just email them directly. Give a simple pitch. They’re looking for 15X return on investment.

3. Late-stage VC

Applicable if you have a critical mass of users and meaningful revenue, ie: R10 million a year, and you need cash to grow. The late-stage VC’s are the likes of 4Di, hard to get access without an introduction from a trusted third party, usually one of your existing investors. They are looking for a 5X return on investment.

4. Private equity

Applicable if you have a cash-generative business that requires capital to either exit a shareholder, or to grow profits exponentially. Looking for 25% IRR.

There are also state-sponsored sources of capital for entrepreneurs from previously disadvantaged backgrounds, for example the Technology Innovation Agency. This is ‘soft’ money, requiring no equity or personal surety. If you can get it, take it.

Investors are looking for return on capital. If I invest R100 in an early stage company, I want to get R1 500 (15x) back within a reasonable period of time, ie. no longer than five years.

The key metric is Total Addressable Market (TAM). The size of the market you’re targeting determines the potential size of your business.

Assume you target a market with a TAM of R100 million (profit), and you assume you can get 10% of that market by 2020. That means your business will have R10 million of profits in 2020.

A private company is valued at a maximum of 7x profit, so your company will be worth R70 million in 2020. If you ask me to invest R1 million today, I need 21% of your company in order to realise a 15x return (R15 million) by 2020.

Start with TAM, work from there. Remember, every assumption you make will be questioned. Minimise your assumptions. Maximise the evidence for your assumptions.

Related: Alan Knott-Craig Answers Your Questions On Money And Partners

2. If you are a start-up, what’s the most important thing you can do to grow?

Focus on one customer at a time. Make that customer happy. Move to next customer. Aim for ‘1 000 true fans’, then keep them happy.

The rest will come.

For consumer products, always make it easy for your customers to share. Friction-free sharing is the easiest marketing tool you can have.

Feature-creep is a big risk and can be a big distraction. You need one single value proposition that is enough to get customers. Having fifteen cool features will never compensate for the lack of one killer use case.

Related: Alan Knott-Craig Weigh In On Living Your Entrepreneurial Dream

3. Our staff is growing, more than 20 now. Any tips on management? 

Having four or five staff is not hard. You don’t need to be a good manager or leader. You can muddle along. It’s when your team starts growing past the twenty number that management becomes a skill rather than a word.

There are hundreds are articles written on the art of management, but Jack Welch (former GE CEO) broke it down to this:

  • People want to know who they report to.
  • People want to know how they’re being measured.
  • People what want to know how they’re doing.
  • That’s it.
  • One boss. Clear KPIs. Regular feedback sessions.

Read this

13-rules-for-being-an-entrepreneur-coverAlan Knott-Craig’s latest book, 13 Rules for being an Entrepreneur is now available.

What it’s about

It’s easy to be an entrepreneur. It’s also easy to fail. What’s hard is being a successful entrepreneur.

For an entrepreneur, there is only one important metric of success: Money. But life is not only about making money. It’s about being happy.

This book is a collection of tips and wisdom that will help you make money without forgoing happiness.

Get it now

To download the free eBook or purchase a hard copy, go to www.13rules.co.za.  To browse Alan’s other books, visit bigalmanack.com/books/ 

Ask  Al

Do you have a burning start-up question?

Email: alan@herotel.com

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