Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
This is a proven method for improving the chances of success. Not rocket science – nothing very difficult – just a straightforward and logical approach to a recurring challenge. If you are out to win – this has to be one of the tools in your toolbox.
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The beginnings of a good idea
Recently I sat in on a presentation that two founders of a technology start-up made to a front-line venture capitalist. What was most striking about the experience was that, from one point of view, the founders seemed very well prepared. Their presentation was polished and contained all the usual sections, their slide show was professional quality, and they spoke with passion and deep knowledge about their space. The materials which they provided were all neatly and professionally packaged.
But early in the meeting it became apparent that the team was not prepared for what they were encountering. Their pitch was clearly more appropriate for a group of fellow technologists. They had not taken into consideration the predictable concerns and perspective of the person to whom they were presenting. The VC had interrupted the flow of their pitch with a couple of completely normal threshold questions and it went downhill from there.
After the session I asked the investor how frequently this kind of thing happens. He shook his head and responded “More often than I would like and far more often than needs be. The tragedy is that it doesn’t have to.” When I asked what he meant he replied “I’m probably the first outsider that they have ever given this presentation to. As a result their pitch comes to me without any real critical review. But what is most discouraging is that their entire presentation was not focused on my concerns as an investor but on a ‘preaching to the choir’ gathering of their peers. And what they don’t seem to realize is that mine is a very tight community and we talk to each other on a regular basis. What these guys did today was not only establish a negative brand with me but with any others that I end up talking to about them.”
I immediately understood what he meant. One of the services I provide to clients is the establishment of an advisory board designed as a high level, business development engine. I had built such a board for a company that is in the enterprise level software business. One of the company’s proudest achievements was that they had earned a high level of certification for their software development process. This certification was prominently mentioned in all of their promotional materials and on their website.
The senior management team was presenting during the first ever gathering of the board. The advisory board consisted of five very high-level individuals with an average of three to four decades of experience. Most had built businesses or run very large organizations. All of them had risen to the top of their profession. This first meeting was designed to bring the board members up to speed.
The software certification was prominently displayed on one of the earliest slides that the chief operating officer presented. One of the board members interrupted the pitch with a question, “OK, I’m one of your customers. Other than making your software more expensive, what is the value of this certification to me?” It quickly became clear that any answer which the team could offer was focused on the ‘choir’ – those individuals who had already bought in to the value of the certification process. They were not able to provide an answer from a client’s perspective. As a result, they lost the confidence of the board and had to work hard to get it back.
As I related the story my friend nodded and ruefully smiled. “I’m glad to see that this happens to other people. I had taken to thinking that mine was the only profession that encountered this kind of thing.”
As we talked and told war stories, a conversation with a former partner in the movie business came back to mind. Sy had been talking about how much more difficult it was for new talent to get experience since the demise of a vast network of performance venues that used to serve as incubators. Again, there was the pattern. People need a space where they can knock off the rough edges and focus their presentation.
What came out of this was a vision for a kind of ‘presentation boot camp’ – a space where founders could refine and focus their pitch without incurring the liability of having to learn under fire – and avoid establishing a negative branding in front of potential investors to boot.
44 Responses to “Red-Teaming: Improve Your Chances of Getting Funded”
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Dr. Earl R.
It has been a very long time that my institution, Lingnan, engaged in Business plan competition origanization for MBA students. They looked for real biz opportunities and tried to launch these projects. Will you have biz trip to China, especially to Guangzhou, then please come and visit us and give our MBA students a speech about how to attract investors and/or topics related to entrepreneurship.
BR,
LI
Posted by JILI Lingnan
In my experience, if you are requesting a modest investment it almost always must be used to grow the business directly. If the business is already profitable and self sustaining the rules change and it becomes about ROI…lwf
Posted by Lee Frederiksen
learntosucceed.bizMany good points above. Also having a well developed business plan, that helps small business aspirants focus their eergies, is also essential. Many individuals think they have it all in their head, or in some misconstructed presenation or plan. If you are serious about funding, you need a serious plan. http://www.learntosucceed.biz .
Posted by Richard Platoni
fia.org.au).Great question,
I find that the better you plan and the more you break your fundraising down into manageable and achievable stages the greater the liklihood of success.
There is a great resouce for fundraisers in Australi called ‘The Fundraising Institute of Australia’ that really helps to train staff, improve programs and generally increase the chances of success. (www.fia.org.au). Do you have a similar organisation in the US?
Posted by Julie Garland McLellan
What I have run into is that if your venture does not fit neatly into one of a half dozen buckets, then you can’t get funding. Unless you are working on IT, social media, Smart Grid of certain areas of healthcare there just aren’t any investors willing to look at you. My venture is related to food safety – what is called “field to fork” traceability. A portion of it has even been certified by the USDA. Those in agriculture ( and there are only a few) roll their eyes when they hear about databases, wireless comms and IT. Those in IT run screaming when you tell them cows don’t come from the grocery store. On top of it, to keep costs low and time to market fast, we use existing technologies so there isn’t much in the way of a patent portfolio.
All we have is a unique, affordable and well conceived solution to a nationwide problem that kills or sickens hundreds of thousands each year and also puts companies out of business. It just isn’t in one of those popular buckets so we remain unfunded.
Posted by Mitch Carr
Larry,
See.. the elevator pitch is more like the secret art of inducing migraines. If you’d like to take this further, let’s do so offline as this discussion thread is concerned with Dr Smith’s deep expertise. Finally been able to access the site and greatly enjoying the insight.
Posted by Paul Peters
Ok, i’m trying to use some contacts at SWIFT to set up an high-security infrastructure for “registered contract-circles of trust concerning quality certificates”.. These quality certificates can apply to everything.. messaging standards, currencies, the use of US English, metric system, HTTP, color coding for flower trade, geographical description, the visual experience of Monet, the clickbehaviour of my aunt.. everything. People, companies, organisations, computers, can register a “letter of intent” to agree on such a quality certificate. This makes a contract between at least one person, some other entity and the legal entity where these contracts are registered. This can be something of high importantance such as two companies agreeing to implement ISO 26000 standard for Corporate Social Responsibilty, or it can be a micro-credit IOweU for someone paying for public transport (which is more cost effective than micropayments). Or it can be door-to-door salesman dialing in on an 0800 number and registering an agreement making use of whichever means on can identify someone else, passport, social id, address, whatever.. (all these are qualities again).. The entities making up a contract form a so-called circle of trust, where everyone is responsible to uphold the integrity of the circle. Such circles can have different gradients in hardness (policy when not complying to the contract), but essentially this is the easiest way for agreements to form.
You can also use to create tunnels on the internet, and arcade of websites, which are tied together by e.g. the Gucci quality so people can do online secured shopping in a private segment of the online world of “friends of a friend” of Gucci.
With these ingredients, putting them in a central location and making it a lot easier, and lots of smart AI behind it this ought allow for a new forms of commerce to happen. This may not be what certain companies want who are heavily dependent on competing, but such can be molded in hardened circles concerning these qualities.. but it are agreed-upon standards which have enabled many a business to flourish, as well as trying to differentiate themselves by deviating from it.
Posted by Paul Peters
Paul,
Can you explain in more general terms? I’m not as advanced as you in the technical jargon.
Thanks,
Larry
Posted by Larry MacDonald
Thanks Larry.. well, i have one idea that actually creates four new markets.. i had some plans about collaborative marketplaces and service bazaars, but as i think most B2B platforms and VANs are a failure in the sense it addresses a small island of the whole, whereas adhoc web services, rest, ftp, vpn, etcetera have grown wild, i went a level deeper to allow for an infrastructure for “messy B2B”, as flexible as using a security certificate with your webbrowser. Essentially what it came on is a logical infrastructure for commerce, any kind of commerce…
I’m trying to work with a relatively neutral international organisation to get this going.
The only plans i had which were limited apply to IT operations and such, which i still assume 8 figures yearly revenue when it stabilizes but IT is now going through a forceful and wrong commodification and budgets are tight. There are some ideas i have which address both reducing costs and change the way operations work.
The thing is that most solutions i’ve come up with are infrastructural, new, moderately disruptive, relatively large marketshare, but not sexy..
Posted by Paul Peters
Dear Dr.Earl R.Smith II
Seasons Greetings
I have read your text above and am very happy to understand your concern.You are really very frank and unassuming.Let me do my small part to encourage your venture.
In these days it is very difficult to improve your chances of getting funded.The reason being not dearth of donors,funds but simply because the way of approach which is very important.
If one approaches this subject with lots of ifs and buts then you can never improve your chances of getting funded.
Start spreading a message that you want to impart free education to poor children and also employment to them after the training is completed.So the donors will get interested in the project and they get candidates who are really of good stuff.You can give them employment in the donor’s organisation at a later date.So your donor is kept happy and he starts donating.
Never take a donor for granted.Make him realise,aware that you are seriously considering proposals to help the donor at the end without fail.Once this trust is built the donor will rope in more donors.
Thanks.
Posted by RAMAKRISHNA KOPPAKA
1. Have the project or product finished and ready for market
2. Have Patents or other legal rights locked up firmly in each country
3. Have Executives under Contract who are considered superstars in the industry
Posted by Wallace Jackson
Hi Earl,
Internet start-ups provide a great roadmap:
Create BUZZ.
Many Internet start-ups create demand before they seek funding.
Once there is demand investors are “pounding on the doors” offering money.
JC Brandon
Larry, Your point is well based. I regularly see founders who are chasing a niche market. They are approaching investors who need a larger upside to meet their investment criteria. Those meetings can be very frustrating for both sides. The saddest part of it all is that many of the founders would have a far more interesting business plan if they took off the blinders and opened to the possibility of a larger market. Dr. Smith
A first and perhaps most important way to increase your chances of getting funded is to select a project to work on that has a large enough market and exhibits existing demand. Obvious, perhaps, but most of the unfunded select ideas or projects with too small a market and little to no existing demand.
Posted by Larry MacDonald
thanx
Posted by Khalid Alhamad
I feel like I have just hit the mother lode for useful information about getting funding. The Red Teaming article had so many real world, relevant examples and suggestions. Thanks for posting this link and for the info on your site. I can’t wait to get my business plan and presentation finished so I can contact you about utilizing your services to get me prepared for facing the VC.
Posted by Mindy Perry Jay
For 30 years I’ve consulted and open financial doors for thousands of entrepreneurs and small business owners achieve their funding objectives. There are numerous reasons why many do not obtain their funding. One of the most common is not have the proper SEC exemption in the form of a memorandum to provide the investor(s). If the individual or company is in violation of SEC Regulations and the investor knows it, obviously there is NOT going to be an investment made. The Reg D Series Private Placement Offerings is what I call “The Best Kept Secret In Business Funding”.
Having the proper PPM does not guarantee funding but it obviously indicates to degree of professionalism and credibility to the investor.
I write over 100 private placement offering annually and the success rate of funding far out weighs those who attempt to reach money with a business plan and prayer.
Posted by Ken Hollowell
Brian Javeline wrote:
The first thing an entrepreneur should do before an event, is to find a few people who know ABSOLUTELY NOTHING about the model, and present to them. At the end, ask them to repeat to you what it is that they think you do, what it is you need and when, and what do you think you will accomplish. While this will be a broad stroked reply, it will tell you if you are really hitting the nail on the head to present to an investor. Yes, an investor wants passion in an entrepreneur, but they clearly need to udnerstanding the market and opportunity for the product, as well as the opportunity for an investment and how they will make a profit. It sounds basic, but is not easy to do. I failed a lot on presenting for money even though I built multiple successful businesses (that did not have outside investors). I then learned how to package myself better and won a regional 2006 MIT Best Business Idea Presentation Award, then went on to find angel investors in CA, MN, NJ, FL, Canada and Britain. But I did not rest on my laurels and continue to refine my process as I search for a few more angel investors or now an early stage VC.
Brian Javeline
President & Co-founder
MyOnlineToolbox.com
2008 Dell Top 10 Innovator
2009 Forbes America’s Most Promising
Andrew Clapp wrote:
Best Technique: Treat the process of raising capital just as seriously and methodically as you do when you pursue new business for your company: research your prospects, target them with a customized approach, and present them with a concise and compelling story.
Best tool: Develop a longer executive summary, 8-12 pages in length because a 1-2 page executive summary leaves too many questions unanswered.
See the article on the link below, which offers lots more suggestions and caveats.
Links:
[ http://venturefund.wordpress.com/the-perfect-executive-summary-still-looking-for-it/|leo://plh/http%3A*3*3venturefund%2Ewordpress%2Ecom*3the-perfect-executive-summary-still-looking-for-it*3/ujbM ]
Andrei, You make a very good point. The force of ego play in any negotiation can have a defining impact on the outcome. If you are facilitating a transaction, you need to pay careful attention to that interplay. Often I find a referee helps – particularly if both sides give them the power to act effectively. Dr. Smith
Andrei Kolodovski wrote:
It’s a long topic… I also found similar things about the finance, HR and operations, and in addition I often see that many teams don’t get enough input from their target markets and customers. As a result, they “assume” a lot of things, rather than use facts in their decisions, which usually lead to disasters.
One key indicators I look for is how much team members ego get’s in a way of the decision-making. I observe how they handle disagreement and how they deal with critique. Good teams are good listeners. They take notes during the discussions, ask relevant questions, and follow up on issues and disagreements. Weak teams get defensive or just ignore everything that does not fit their views. Over time, intuition picks up similar clues and it’s usually pretty clear if the team is flexible and open-minded enough to accept other people’s input.
Andrei
Peter, Thanks for the comment. You hit the nail right on the head. Understanding the investor’s decision process, concerns and metrics is key to successfully getting funded. Dr. Smith
Peter Iannone wrote:
Too often teams think that if they can explain the technology or invention, they’ll get the funding. Not enough emphasis is spent on putting themselves in the investors shoes and explaining the value concept. How do they make their return? How is their bet hedged or protected?
Ian, Thanks for the comment. I agree that the pitch is important. I also agree that, in the current environment, getting a start-up funded is almost impossible. Investors are betting on proven teams with value propositions that they have already monetized. The point of the article is that many teams do not prepare their pitch adequately. They go in preaching to the choir as it were. Their presentations are more suited to a group of technicians than investors. As a result, they come away with less than they might. Red-teaming is one of ways which helps teams focus on presentations suited for investors. Dr. Smith
Ian Bush, PMP wrote:
Whenever I think about the “pitch” moment, I think about Guy Kawasaki’s presentation on the proper way to format your presentation. http://blog.guykawasaki.com/2005/12/the_102030_rule.html#axzz0mDDcR49Q
On the topic of finding funding, the reality is that generally no one will give you money unless you are matching it with your own, either through a diminished salary, or personal resources, unless your idea is un-freaking-believable. I have worked with multiple VC folks in the past, and I can tell you that the chances of getting funded to start up an idea is almost nil, and with each level until you are self-sustaining, the percentage of likelihood that you get money is probably about 1-3% (With between 3-5 levels before you go public or some similar type event).
The short is, if you believe enough in your idea, you will have to self-fund it to get started, and then when you are able to start paying yourself is when people will get interested, and then, you have to decide whether you want to sell off big pieces to get it to the next level. Read more of Guy’s blog and you will get some real insight into the VC process.
Amit,
Thanks for the comment – you make some important points. The third one is particularly important. Investors react negatively to teams headed by founders who spent most of their time in the money chase. One investor told me that he always was more interested in opportunities where the CEO called to cancel a meeting because a customer needed attention. “I want to be second in line when it comes to customers of the companies that I invest in”, was how he put it.
Dr. Smith
Andrei,
Thanks for your comment. My experience is similar to yours and your observations are right on point. I also do a quick and early screen to see if the team is coachable. Most often I need to expand the team beyond the founders – most of whom are technology focused. There are three areas where I have found this to be necessary – finance, HR and operations. these core functions of any business are generally under served on technology focused teams. I have always found that entrepreneurs who discount the importance of these functions are the ones most likely to fail.
What kind of indicators do you look for? How do you approach deciding whether a team is worth working with?
Dr. Smith
Amit Grover wrote:
Dear All,
As the saying goes, to get new results, you need to do new things. Here are my views for improving your chances of getting funding:
1. Reach out to new VCs who understand your business, preferably go via references
2. Put some measurable objectives as a part of your business plan as immediate action point – that way you can go back to the investor when you achieve them and show proof of progress
3. Do not ignore the business – VCs like to see traction in business, but if you spend over 50% time looking for investments, without investing time in business, there is a sure chance you will fail.
4. Show some progress in business – it may be in product development, customer acquisition or brand building. Always have a new thing to tell you investors.
5. In every meeting with VCs, move towards a decision for investment – it maybe a no, but still its a decision.
Regards,
Amit Grover
Founder, Nurture Talent Academy
Wallace Jackson wrote:
1. Patent or Intellectual Property
2. Value Proposition
3. Executive Talent
4. Technology Advantage
5. Connections
Al Costa wrote:1 – Make sure you appear in as many media as possible, as investors may worry that as you are making too much noise someone may eventually fund you
2 – DON´T do business plans! Their only purpose is to REJECT newbies that think they are required. Real VCs invest in PEOPLE, and those do not carry BPs.
3 – Don´t pay to show your company to “VC´s” and don´t buy the crap “experts”, websites, books etc tell you. They are just there to make a buck out of poor souls and they never got funded themselves.
On 4/25/10 4:05 PM, Al Costa added the following clarification:
BONUS TRACK
4 – DON´T ALTER your business focus in order to get funding. VC´s are really bad at giving advice (they´ll never admit it though) and will ruin your business even if they fund it.
Also, if you tell them that you will stick to your plan no matter what they´ll see you are really commited. If they still think they know your business better than you know that you are in front of people who fund NO ONE.
Andrei Kolodovski wrote:
Good article, Earl.
This is a common problem, especially bad among the technology-driven teams. They are often very self-centered – spend most time talking about what they know and enjoy, instead of what’s important to the investors to make a sound investment decision.
In many cases, re-focusing their presentation on “money making” (business model, margins, sales, markets etc) helps a lot. Unfortunately, the technology teams often can’t discuss the money making side of business well. Good teams understand that they need a business expert on board (an experienced entrepreneur, executive, MBA, etc), but they are a minority – very often, founders have big and sensitive Egos preventing them from seeing their weaknesses. This is the first thing I usually check – if the team is open-minded and coachable. If not, I don’t waste my time – teams with immature Egos can’t be helped.
Alicia Castillo Holley wrote:
When I was raising money for Chile’s first seed capital fund, I spoke with thousands of people. the trick was not to repeat the same presentation but to learn for every single interaction. Every time I heard “I’m not interested” I would shift my focus completely to the person/team I was speaking to and asked two questions:
1. What would it take for you to say yes? and I would take notes and ask for clarification.
After that I would ask
2. Can you suggest two people that might be interested in this?
Sometimes they did, and even gave me their phone number, others they didn’t.
At the end it was not about proving that I was smart and had all the answers, but that I was willing to accept their opinions and consider making changes.
In several months, I had a magnificent proposition, based on what people wanted and needed at that particular moment.
I also learned to say retrospectively “just because I ask for your opinion, it doesn’t mean I don’t have one”.
There is money out there, for good projects and for good people.
Carmen C Booker wrote:
I’m very interested in this because of my desire to open a prestigious small business. Currently with not much capital, but definitely interested in investors.
John Maturo
I just want to say that I enjoyed your information from that last discussion It seems you have much experience and wisdom.
I would like to learn more about these areas of finance.
Thank you
John
Dr. Archana Raheja wrote:
In my view focus on 3Vs (V Cube) is important:
Vision; Value (Offering sustainable and real value to customers); Value (Offering realistic and reasonable value to investors).
Michael Waitzer
Dr. Smith,
The ‘Red Teaming’ idea is a fantastic idea. Teams looking for funds can generally find a good level of expertise to bounce proposal off of and get real feedback for little more than the cost of a coffee.
In my experience consulting with groups who are trying to raise funds for a project, the most common mistake is forecasting to aggressively to make a compelling presentation. Investors are generally smart people and would rather see over than under delivery of results. The fine line between enticing and being unbelievable is a tricky but necessary path.
Joy, The article should give you a general idea of the process. Anything more would come from the specifics of each situation. Some red-teams can focus on relatively few issues while others, mostly because of the complexity of a value proposition, strength of the competition and questions about the management team, require a more thoroughgoing approach. Each red-team is custom designed. Generally the cost is very modest when compared with the funds being sought. In my experience, the process significantly improves the chances of success. Dr. Smith
tizersecure.com.Joy Valentine wrote:
Dear Dr. Earl,
We have developed and marketed the first version of our internet security products available for download from http://www.tizersecure.com. Currently we are adding a firewall, parental controls, behavioral scan and other features and also adding Data Loss Prevention and Information Rights Management to target Small and Medium Businesses in the US and India. We need funding for product development and marketing and have a business plan ready. How does Red Teaming work and what are the costs? Thanks, Joy Valentine
Koen, I have found two rules highly reliable. 1) successful people hire coaches while unsuccessful people question the cost of coaching and 2) successful founders employ red-teaming almost to an excess while unsuccessful ones are penny wise and pound foolish. Dr. Smith
Koen Batsleer wrote:
Hi Earl,
it is clear that ‘training’ makes better players, also in the field of entrepreneurship and financing.
The main issue is how you can make this ‘training’ profitable, since most entrepreneurs do not have/want to pay for this training/advice.
Therefore, my question to Amid is : how can you finance this ‘training institute’ for entrepreneurs ?
greetings from Belgium,
Koen
Steven Catt wrote:
Very much enjoyed your post and could not agree more with the idea of the Red- Teaming. I have found in the past that such dry runs with inpartial panals are invaluable and plan to use this strategy again in the very near future with a new venture that I will soon be seeking Angel VC Funding for. You really need to be prepared for having your dreams turned upside down and your ego to take major broad side. The upside is being prepared so you can respond when you get hit by real investors, with real money, that can make or break your company’s future.
Phil Lauro wrote:
In science verification is accomplished through repetition and multiple sourcing. That’s how we discover things. Missing the point is exactly the point. Maybe that’s why the financial industry finds itself in a mess.
This would be common sense.
mumbaiangels.com)nurturetalent.com)Amit Grover wrote:
Hi Earl,
I have met and evaluated over 1000 entrepreneurs and their business plans at Mumbai Angels (www.mumbaiangels.com) and the experience was so encouraging that I started Nurture Talent Academy (www.nurturetalent.com) to help entrepreneurs do well. Let me know if I can be of help.
Regards,
Amit
Thanks for your request for a consultation. Please send me a description of what you would like to focus on during our chat. We can arrange a time to talk early next week if that schedule works for you. Chief