Dr. Earl R. Smith II

Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com

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The objective of this series has been to describe the characteristics of a company that make it attractive to investors. The series began with the realization that many entrepreneurs sometimes do not have the ability to see their company through the eyes of the people they are hoping will fund it. The result of this disconnect is often tragic and seldom edifying. Companies that should be funded are not. Businesses that should have a chance to get off the ground and onto a path to profitability do not get that chance.

It is important to start with a single fact. Most start-up companies do not even approach being ‘investment grade’. Most entrepreneurs have never been investors in companies. They do not have the experience or knowledge that would allow them to understand the dynamics and risks of the process. Most are so fixed on getting funded that they do not take the time to assess their company from any perspective but that of its financial needs. This can lead entrepreneurs to a one-dimensional view of investors and the process of approaching them. Nowhere is this misunderstanding more evident than during the preparation for and presentation to potential investors.

Entrepreneurs tend to know little about the people they are presenting to; even though there is often much information available given a slight effort to collect it. They tend to see the process as one of ‘selling’ the investors on the opportunity to help build a company and lead with the technology and competitive advantage that they suppose they have. But, as you have read in the first five parts of this series, investors do not look at things that way. They find little value in a presentation that appears to be designed to recruit them as team members. In fact, they are frequently irritated by the pretension and misunderstanding of the situation that drives such a wild pitch.

The Presentation

Presentations give investors an early insight into the quality and professionalism of the entrepreneur and team. Remember, most of them see dozens of presentations within the space of a given year. Because they focus in particular spaces, they may end up seeing the same or similar slides, hand-out materials, analysis and statistics again and again. Whole sections of business plans may be repetitively inserted by local consultants who specialize in writing business plans. If the plan and presentation appear too slick and pre-packaged, investors will tune out quickly. If it is filled with special effects or broadly crafted ‘visionary’ statements, they will also turn away. Investors prefer to hear about companies and teams that are already in business, implementing, establishing and defending margins, building an expanding customer base, subjected to effective board oversight, with an effective financial control and reporting system and looking for funding to expand. Most of them prefer to fund expansion rather than R&D. The most effective presentations begin with a list of invoices sent and evidence of payments received. Here are a few guidelines:

• Concise and to the Point: It is a shame to have gone through all the trials of producing an investment grade company and then loose the opportunity to get funded as a result of an inadequate presentation. Yet some entrepreneurs do exactly that. There are a number of reasons why this occurs. The most common is that they focus their presentation on issues that seem important to them; rather than the ones which are important to the investor. This happens when the founders make the mistake of thinking that they are presenting to someone who is as involved as they are in the underlying value proposition and is interested in the ‘neat’ advances that the team has come up with. Although this may be of some interest to investors, they are principally focusing on the company as a potential investment. In other words, they are much more concerned with progress of implementing the business plan, in monetizing that value proposition, in the generation of strong and sustainable revenue streams, the control of expenses, the likelihood that the company will achieve strong acceptance with a growing customer base and, finally, the path to a successful exit.

  Another mistake that many entrepreneurs make is to misunderstand the appropriately limited agenda and goals of each meeting. They come to an initial meeting loaded for bear. Their slide stack might total twenty or more and be very complex with lots of dense graphics. They pass out printed materials that go into the details of their ‘competitive edge’. Then they drone on and on. The investors come to an initial meeting with a short list of questions. If the presenters are not smart enough to realize that, the reception they get will not be positive. It is important to understand what questions the investors will be focusing on and to deliver clear and convincing responses to them.

• In Their Space: It is important to remember that, if you are presenting to the right investors, they will have seen lots of presentations and many of them may be close variation on yours. By far the best way to get funded is to seek out investors who have made a commitment to your space. They will have spent time sitting through similar presentations. Many of these investors will have a broad understanding of the space, competition and challenges that the company will face in getting traction and customer acceptance. Entrepreneurs who present to such investors with the attitude that they are unsophisticated and inexperienced are likely to get a rude shock. The best first presentations involve less than ten slides and, along with collateral materials, focus on the issues that concern the investors during the initial meeting.
• In Your Own Words: Investors are very leery of pre-packaged presentations and business plans. They can generally recognize one that has been written by a consultant. Remember, they have sat through many such presentations. If they see close variations of the same slides that were presented to them last week, they are certain to assume that either the same consultant put together the materials or the team cribbed from another business plan. Investors want to receive a presentation in your own words as a demonstration of how well you understand your space, value proposition and challenges. They will assume that, lacking your willingness or ability to do just that, you are either lazy or amateurish. Neither one will give them confidence.
• Realistic: When investors are sitting through a presentation in their space, they being a wealth of historical experience to the table. That means that they have seen similar presentations from other teams. The value propositions and strategy for monetizing it have been discussed; sometimes many times and in great depth. Market assumptions have been challenged and tested. Discussions of differentiating advantages have been proposed and tested. Teams have been challenged with inconvenient facts and have had to respond. In short, you are presenting to some very well educated and knowledgeable people. Based on this experience, they have a pretty good idea of what is possible. They generally can recognize a poorly grounded fantasy very quickly. They may have ‘test questions’ that are designed to gauge the strength and depth of knowledge that the team. A single misstep can bring the presentation to an abrupt end. Many entrepreneurs make the mistake of overselling. Experienced investors know how difficult it is to build an expanding customer base at price points that yield good margins. They are also familiar with the sales cycle in your space. A presentation based on overly optimistic margins and shorter than normal sales cycles will be greeted with skepticism. Remember that your judgment and prudence is on trial; not just your entrepreneurial zeal.
• Performance Metrics: Investors are particularly attracted to presentations that involve sharply defined performance metrics; particularly ones that control the compensation and ownership of the team. The more thoroughgoing the metrics the better. It is not sufficient that they focus on meeting revenue projections. Metrics should extend to the performance of all aspects of operations; including overhead, equity ownership, compensation, board of directors structure and responsibilities, advisory board operation and performance, research and development and marketing. The last four are notoriously left out of most performance metrics schemes. Metrics should form the core of the funding agreement. They should be detailed enough to anticipate most probable outcomes and provide pre-defined resolutions to the most likely disagreements.

Most entrepreneurs see presentations to investors are seminal events. That is a mistake. Such presentations should be a review of the seminal events that have preceded them. By that I mean that a proper way to begin is to focus on past successes; particularly when they involve winning customers, collecting revenues and establishing margins. Investors know that the future, particularly for start-up companies, is hard to anticipate. The past, however, is known and knowable. Most are willing to consider the past as prologue; as an indicator of a likely future. A presenting team without such seminal events is at a major disadvantage. It is, after all, far easier to describe what you have already accomplished than to spin a credible tale about what you may accomplish in some uncertain future.

Next: The Money Chase: What Does Investment Grade Mean? Part 7 – Making the Grade

© Dr. Earl R. Smith II

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Related Articles:

• The Money Chase: What Does Investment Grade Mean? Part 1

• The Money Chase: What Does Investment Grade Mean? Part 2

• The Money Chase: What Does Investment Grade Mean? Part 3

• The Money Chase: What Does Investment Grade Mean? Part 4

• The Money Chase: What Does Investment Grade Mean? Part 5

• The Money Chase: Breaking the Truce

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Dr. Smith is Managing Partner of The Federal Circle. The Federal Circle partners with teams and existing companies. We help them up their game and win big in the Federal space. We also arrange funding for acquisitions and expansion by acquisition. Our model is based on the belief that, if you select the very best and work with them in a highly professional and focused manner, the results will be truly amazing. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration.

This entry was posted on Sunday, January 31st, 2010 at 11:14 AM and is filed under Venture Capital. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.