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What are the five indispensable steps to opening the hearts, minds — and wallets — of financiers? PROFIT asked financing expert Sean Wise, who has trained more than 2,000 entrepreneurs in the art of fundraising through the Entrepreneurial Bootcamps offered by his Toronto-based company, Wise Mentor Capital.
Write your own plan
Some people say investors don’t read business plans. But it’s not just the outcome that matters; it’s the process. When you sit down to write a business plan, you’ll ask yourself the same questions investors will later ask about competition, possible upsides, the pain your clients face and the solution you’ll provide. To answer those, you first must have full knowledge of them.
I’m always dismayed when people ask consultants to write their business plan. You should have someone knowledgeable review your plan. But when it comes to writing it, there’s no one who knows as much about your business as you, and no one who needs to know as much. You can’t rely on a plan put together through a consultant, because you won’t have all the information or have gone through the decision-making process to formulate that plan.
Assemble an “A” team
Investors would rather back an A team with a B opportunity than a B team with an A opportunity. A business will evolve over time, and a good management team can ride and drive those changes. Also, most investors want a team they can work with over the five- to seven-year window for their return.
They’re looking for the “talent triangle.” One-third is business acumen: someone who knows how to lead a high-growth firm. That’s usually the CEO. One-third is domain knowledge: someone who not only understands future clients’ needs but has a Rolodex full of their numbers. That’s often all the partners, but especially the VP sales. And one-third is operational experience: someone who knows not only how to do R&D and build the product but how to implement the solution. That’s usually the chief operating, scientific or technology officer. Without all three, it’s very hard to convince investors that you can deliver on the opportunity.
Use a rifle, not a shotgun
Too often, people try to pitch to every single person they’ve ever met in hopes something will stick. For venture capital, there are usually only four or five players per type of opportunity. There’s no point trying to sell a life-sciences opportunity to Telus Ventures [the VC arm of telco Telus] — unless you’re putting a phone inside someone’s head.
So, first figure out what sort of opportunity you have. Are you pre- or post-revenue? Are you looking to expand globally or still developing your proof of concept? Do you have returns that would attract a private-equity player — say, five or 10 times ROI over five to seven years, or just 10% to 20% per year? Do you have your management team 100% in place? If not, you may be an angel play, not a VC play.
Then zero in on people with an appetite for your type of deal, as shown by their most recent transactions. Find out by reading the press releases on their websites.
For banks, which are willing to accept lower returns for a lower risk than VCs, research each bank’s product offerings. RBC, for instance, has an SRED [Scientific Research and Experimental Development tax credit] program to forward you the money ahead of the government releasing the funds.
Build out your network
Last fall, my firm surveyed several VC funds about where they prefer to get deals, and we found that almost all of them started with an introduction from a trusted third party. They gave only a one in 1,000 chance of funding an unsolicited plan, versus one in five for referrals from someone with whom they had already developed a relationship.
Develop your network by joining an economic development group such as Calgary Technologies Inc., the Ottawa Centre for Research and Innovation or the Toronto Venture Group. Build relationships, not just with investors but also lawyers, accountants and mentors who have deep relationships with investors. To help with bank financing, find a lawyer who has worked with the banks on due diligence for capital investments, so you can not only gain their knowledge, but also tap into their network.
Say it in 30 seconds
Your “elevator pitch” should be the first thing out of your mouth in your investor presentation. It has two components: a pain statement — how big is the opportunity, the problem you’re attacking? — and a solution statement — what will you do to solve that pain?
It must be succinct, preferably 30 seconds and never more than a minute. It must be greed-inducing, so people will say, “That’s going to make some money.” And it must be irrefutable, so they’ll think, “I can’t argue with that right away.”
Most important, it must be understandable to your grandmother. No one makes a financing decision without someone reviewing the proposal, whether it’s a banker whose boss must sign off on a loan or a VC reporting to an investment advisory board. Your elevator pitch must be so clear and tight that it doesn’t get fouled up as it’s passed along, as in a game of broken telephone. For instance, think of a possible pitch for Viagra — which shouldn’t include the chemical composition: “People want to have sex longer than their bodies will allow. Our aspirin-sized, government-approved tablet is extremely effective at letting them do so.”