Get advice from a VC on securing early stage financing

This is a great article with sound, hands on advice for folks looking to secure early stage venture capital. It has lists of key quesitons you must be able to answer and has a very practical approach to what needs to be in place. This isn't the end all be all of information, but its a succinct, clear place to start!

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A VC’s tips on securing seed and series A financing
February 12, 2010 Carl Showalter 6 Comments

(Editor’s note: Carl Showalter is a general partner with Opus Capital. He submitted this story to VentureBeat.)

While the economy is finally showing signs of life, securing capital for early-stage ventures hasn’t gotten any easier- so it seems timely to let start-up owners in on the criteria by which they will be judged.

Each year our firm typically reviews more than 2,500 companies seeking seed or Series A funding and invests in between six and twelve. Here’s how we judge a young company’s viability.
First of all, we evaluate deals on three axes: The team, the market and the technology or product.

• We want a team with domain expertise in the market space—individuals who can see the opportunities in that market before they are apparent to others and can use that vision to become early movers in the market.
• We want the company to be targeting a market that is nascent or even nonexistent. It needs to be a market the entrepreneurs believe will, at some point, grow rapidly, creating an opportunity for the company to move faster than any incumbents.
• The company needs to have a product with some level of defensibility – something that’s not easily replicable once the market becomes more obvious to others.

In addition to these primary criteria, there also has to be a scalable business model that can generate interesting valuation multiples over time. Having a good way to make money is not enough; a high-growth market to support it and a team and product that can take advantage of that market opportunity are essential.

The next step is to ask hard questions across these three axes. If you’re in the hunt for capital, here are some of the questions you’re likely to hear:

Team

1. Can the founding team succinctly and consistently articulate the company’s business opportunity?
2. Can they succeed in an unstructured environment? Are they comfortable with uncertainty? If the founders are from large companies, it’s helpful if they have some sort of track record in taking risks or starting something new.
3. Do they have a demonstrated ability to stay focused on the critical objectives?
   
4. Do they have the ability to challenge conventional wisdom and think differently? This is perhaps one of the most significant hallmarks of an outstanding entrepreneur.
   
5. Do they have a roadmap for the company culture? Surprisingly, many founders never consider this.
   
6. Do they understand the value of frugality and the need to ruthlessly prioritize spending?
   
7. Do they have realistic expectations of their positions in the organization and how that will evolve? In other words, are they comfortable with potentially not being a chief executive? This very issue can break up even the best of companies.
   
8. Is there a shared vision for the future of the company and its liquidity event? In this economic climate it’s more important than ever that company founders are focused on building a company for the long term.

Market

1. Is there a market that can grow exponentially to create an opportunity for a new entrant? “Exponentially” is key here. Solid growth may just not be fast enough to enable success.
   
2. Is there a scalable business model?
   
3. Is there a low-cost go-to-market plan relying on reasonable and realistic distribution channels? Lack of low-cost and scalable distribution is another small company killer. Are there large partners who could help reduce the cost of customer acquisition?
   
4. Are there three or less startup competitors vs. many?
   
5. Has there been some validation of the market opportunity, whether through a pilot or beta, or through research? Actual testing or feedback on a prototype by customers is always preferred, but for systems and semiconductor companies, research may have to suffice.
   
6. Do they have the ability to capture the imagination of investors as to why this could be a really large market opportunity? Are they convincing as to why they could be the market leader in the space? If they can’t capture the imagination of investors, it’s unlikely they can capture significant market share with customers.

Product

1. Is it simple to articulate and understand?
2. Is there a clear value proposition about the pain point or problem it’s solving and why this product or technology will uniquely address that need? There must be enough of a problem that customers are willing to risk buying from a startup.
3. Is there intellectual property or at least some “secret sauce” that makes it defensible? Patentable concepts are desired but not required.
4. Is the intellectual property free and clear from previous employers or others?
5. For a company selling a product, are the projected gross margins more than 50 percent?
6. Will the product be available within 12 to 18 months? Product should be in development, not just at research stage.

Despite what could still be considered a tough fundraising environment, early-stage venture capital investing is alive and well. If your start up meets the criteria outlined here, you should have no problem securing funding.

Got your cocktail/elevator pitch ready?

Some good solid advice on how to be ready for the well known cocktail (or elevator) pitch opportunity. It always surprises me how hard it is for entrepreneurs to explain their companies in a minute or less. If you can't do it, you certainly can't expect your advisors or exisiting investors to do it. Even bigger companies have a hard time with the short speech too.

Work on it, and practice - it helps!

http://blogs.wsj.com/venturecapital/2009/06/11/winding-up-for-the-cocktail-pitch/

June 11, 2009, 9:44 AM ET
Winding Up For The “Cocktail Pitch”

By Scott Austin
Say you’re an entrepreneur at a cocktail party snacking on some trail mix when you strike up an innocent conversation with the guy next to you who turns out to be a venture capitalist. He’s interested in hearing more about your company - are you prepared to make the pitch?
Mark Suster, a general partner at Los Angeles-based venture capital firm GRP Partners, appeared on the Fox Business Network yesterday to help new entrepreneurs develop what he calls the “cocktail pitch.” As he stated in the Fox interview:

“You know that you’re going to be faced with this cocktail party pitch scenario a lot of times in your career. It’s not just pitching a VC - you bump into a potential customer, you bump into a business partner, you bump into a journalist who wants to cover your story…what are you going to say? You need to practice that so it rolls off your tongue with energy and excitement. If it’s the first time you’re saying it, or you haven’t practiced it, it’s not going to sound very good.”

I’ve embedded the Fox Business clip at the bottom of this posting for your viewing pleasure. Suster also recently blogged about this topic, and with his permission, I’ve reprinted some of his tips below. If you’re a new entrepreneur, Suster’s advice is very helpful. For more on this topic, please check out Suster’s blog or the original post in which he also advises what topics the pitch should cover.

1) Show energy & enthusiasm – Passion sells. Show energy and excitement. Get your game face on. Make an impression. This is your shot and you have my attention. Don’t waste it on low energy, mumbling, limp handshakes or lack of assuredness. I’m not saying go “over the top” in your excitement, but enthusiasm for your idea is contagious. If you’re shy or introverted I don’t expect you to be something you’re not – it will come across as insincere. But at least practice your pitch enough so that you can say it with gusto.

2) Be human (no jargon, give me examples) – Most people who pitch me use jargon. I have a simple philosophy. If you can’t explain to me what you do in simple terms I assume that you don’t know what you’re talking about and you’re hiding behind terminology to sound more intelligent. The most difficult of topics can be explained in human terms. I like people to use real world examples. When I talk about my recent investment in RingRevenue I like to talk about the problem that affiliate networks have selling high value products. I call it the “treadmill problem”. If I want to buy a treadmill I won’t click and order over the Internet when a treadmill costs $3,000 or more. I want to speak with a sales rep to understand the 8 different models and which I should buy. With RingRvenue affiliate networks can track calls like Internet sites track clicks. Explaining this in “treadmill” terms I believe puts a human face on the issue.

3) Use numbers - Numbers speak. And they help convince people that you know what you’re talking about. In the RingRevenue example the pitch goes something like this: ”The highest that a product costs in an affiliate network is $200 because above that price people prefer to call a sales rep rather than buy online. Affiliate marketing is a large market already: $10 billion of goods sold through this channel of which the networks make fees of $2 billion. We think we can increase goods sold through this channel by 10x making it a $100 billion channel.”

4) Tell me what you want from me – In marketing or sales terminology we call this a “call to action” and I’m surprised at how few people incorporate this into their pitch. What is your goal in telling me about the virtual reality game you built that targets teens? Do you want me to meet you at some point in the near future? Do you want to approach me in 6 months but just want to be on my radar screen? Do you want to follow up with me via email to find out who invests in $250k deals in Southern California? Close by telling me what the next steps are or how I can help. Please don’t always make it a meeting for next week if you aren’t immediately fund raising. It can be as simple as, “I just want to say hello and tell you what we do so that I can speak with you next year when we’re raising money. Do you mind if I drop you a quick email with my contact details?”

5) Be prepared for the deep dive discussion if I engage – If you’re pitching me the Cocktail Party Pitch you had better be prepared for a deep dive. I might have just been thinking about investing in a self-service retail kiosk company so the fact that you have a product like this is great. I can cover the “Deep Dive” another time, but one bit of advice now … don’t do all the talking. I remember a friend from Australia had a saying that always stuck in my mind. He said, “that chap is a crocodile. All mouth an no ears.” Selling is about listening, asking questions and peppering in commentary. The Elevator Pitch is as much about selling as it is about pitching. So if you get beyond first base (the first 1-2 minutes) get ready for two-way dialog.

Great deck for startups on how to present at investor events

This is a great deck on how to present in a very time condensed format and win. The idea is not to focus on your technology or how great it is (we know its great!) but to focus on who will pay for it, why they will pay for it, and why they won't spend money with another company to solve this problem.

I've seen so many startups over the years try to cram everything into a short 5-10 minute presenation at every event imaginable. You don't need to say everything at this first shout out to investors. This is a sales pitch for you - just get them interested enough to ask for a meeting. That's really all you can ask for!

http://www.webyantra.net/2009/05/22/excellent-resource-how-to-make-pitches-at-startup-showcase-events/