Venture Capitalists look for bets that would have the potential for outsized returns. Because they assess a very large number of potential deals, they are very protective of their time. Their screening process progressively increases the investment of their own time and effort as they decide that a deal merits further investigation. The first step in that process is to listen to a concise summary of your business proposition delivered in the notorious elevator pitch. Articulate a concise and compelling summary that would motivate the VC to listen to your story. Deliver it in 3 sentences within 60 seconds.
If a venture firm in Alaska chooses to proceed with your company, they will want to know more about you and your business. If all goes well, they will provide you funding for growth in return for an equity share in the business, often a controlling share. At one point, they will ask you for a business plan.
Venture investors are interested in your business and how you will build it but they do not want to see the same plan that you might write as an operating guide to building the business or that the American Management Association might recommend. It does not matter that you may have written and submitted such a plan with great success perhaps in an earlier career as a corporate executive. Venture investors are very straightforward in what they want to learn from a business plan:
- What is the investment proposition?
- Do you have a convincing plan for business growth?
- Can the management team execute the plan?
Investment Proposition
Remember the distinction between your focus and that of the VC. Your primary concern is business; the VC’s primary concern is money. You want to succeed at launching and building the business of your dreams. The VC wants to invest money and extract multiple gains. To the VC, your business is important, indeed it is essential to achieving his own objectives, but don’t be misled – your business is a means to his end. In your business plan you must define the investment proposition by answering three questions:
- How much money are you seeking?
- What are you offering in return?
- What are the exit options for the VC?
The easier you make it for them to get their answers, the better disposed they will be toward you.
Be very clear and sure about how much funding you are raising. This number should tie into your business plan projects. How do you intend to use the money and over what timeframe? Usually businesses seeking early stage capital will have to offer a share of the business in return. This is one of the trickier, more contentious, and emotional issues with which the fund raising entrepreneur will have to deal because you are being asked to put a value on your life work and dream. To calculate the share, establish a valuation for the business and divide the amount of money raised by that valuation to yield a percentage. For example, if you are seeking $5 million and you and the VC agree that your business is worth $15 million, then you would have to give up 1/3 of your business. It is challenging to value early stage businesses if they do not have earnings or revenues and VCs will frequently want in excess of 50% of the company. When can the investors expect to cash in their investments and how? Do you plan to take the company public in 5 years in an IPO or initial public offering? Or will it be sold in a private placement to a strategic buyer?
Business or Project Growth Plan
What is your business model? What kind of growth do you expect, how will it be achieved, how will funds be applied, and what are the expected results of each investment subproject? A valid reason to raise money is to accelerate your growth plan. Identify the major steps in the growth path over the next 1, 2, and 5 years. For example, we plan to automate and expand our production capability to 10 times current within the next three years, we will build three regional distribution centers to service a national business, and we will invest in sales and marketing to achieve the revenue growth that will support it all. Two very important questions to address are: how will the business be scaled for growth and how will the pacing and timing of expenditures and revenue impact cash flow and profitability? For a business to rapidly expand by 5 or 10 times, management and management systems must be put in place. Financial reporting and control must be of the standards required for a public company. The infrastructure of the company must be able to support and control rapid growth.
Management Execution
Identify the management team and demonstrate that they are the right team to execute. The skills required to take a company from start up to public are very different and sometimes are not available in the start up team. As a company grows, the skills and management practices required change. Continual transformation is required. The book keeper and family accountant is replaced with a financial information system and an accounting firm. The back of the envelope is replaced with strategy meetings and formalized planning activities and processes. Passion will always be an advantage but articulation of a mission, vision, strategy and clear operating plans will enable smooth and steady growth. Who will provide the management skills to do it all? The VC will want to explore in depth whether the current management team has a growth vision and the execution skills to actualize the investment proposition. No matter how brief, view every interaction as an opportunity to demonstrate command and mastery of the knowledge and skills your investors are seeking.
You would be well served to address the above questions in a concise and clear investment summary of 2 to 4 pages as the first part of your plan. View it as an extension of your elevator pitch. Speak directly to your VC keeping your sentences simple and to the point. If your summary is clear and compelling, you will be off to a good start!
Not sure where to start? Venture North Group will provide a business owner a clear understanding of what next steps to take and how to raise Venture Capital in Alaska and beyond.