The Way I See It… by Michael C. Volker
Here’s what it takes to get a VC’s attention
The next time
you meet a Venture Capitalist, ask her what percentage of business plans get
funded from all those which she receives. She’ll likely tell you that only five
out of a hundred plans she gets stand any chance of getting funded.
Business plans
have two basic purposes: First and foremost, a business plan allows an
entrepreneur to envisage his ultimate destination and provides him with a
roadmap to get there. Secondly, it serves as a vehicle for attracting
co-travelers on the business journey, be they investors, mentors, employees or
partners. It is for this second purpose that a business plan must be written to
sell without resorting to hyperbole.
Defining the
trip and planning the route may be all that the startup entrepreneur needs to
get started, but getting others interested in coming on board may not be that
easy. Prospective participants will want to know what thrills await them, what
perils they may encounter on the way, and, of course, what it will cost them to
get involved.
Keep in mind
that no matter how exciting this excursion may be for the company’s founders,
it may be next to impossible to entice others to join in. They may perceive the
voyage as being too risky, too boring, or it simply may not fit with their idea
of a worthwhile pursuit. If you aspire to climb Mt. Everest, it’ll take a lot
of convincing to recruit others if you’ve never climbed before.
It isn’t easy
finding an investor. They are busy people and getting their time and attention
takes effort. The so-called “elevator pitch”, i.e. a verbal condensation of the
plan’s executive summary, must be very clear and articulate. It should be
market and opportunity oriented, not product-centric. The technology is only a
means to an end. A good story with a strong team behind it is a good start.
If the
elevator pitch arouses curiosity, investors will then want to know more. This
is accomplished with the Executive Summary. This document, which makes up the
first and most important section of the business plan, contains the specific
highlights thereof. It must identify who the team players are, what their
aspirations are (e.g. is this a lifestyle company or will it hit $100 million
in 5 years?) and why they should be able to tackle the opportunity which
they’ve identified. It should state the potential of the business, e.g. annual
revenues over the first five years, and demonstrate an understanding of the market
and the competitive environment. The capital needs and the ultimate payback
potential must be included as well. Think of the executive summary as the
travel brochure. Everything an investor needs to know is found there. Avoid
motherhood statements and unnecessary rhetoric.
Investing is a
defensive game. Good investors must think of reasons why not to invest. A well conceived plan will have
contemplated such reasons and will focus on why to invest. For most venture capitalists, there are three essential
criteria: the people (i.e. management), the technology (i.e. competitive
advantage), and the market opportunity (i.e. potential sales and profit).
VCs and
investors in general have different hot buttons. Some target specific industry
sectors and technology areas within those sectors. Some like early stage deals
and others prefer the larger, syndicated types of opportunities. Entrepreneurs
can waste a lot of time if they don’t understand an investor’s motives and
preferences. Raising capital is a dating game. It’s no different than courting
a partner for life. It takes an intimate understanding of each other’s visions,
aspirations and limitations.
The way I see
it, investors invest in people. They know that most successful technology firms
today are not doing that which they originally set out to do. That’s why the
founders' talents, skills, domain knowledge and commitment to the venture are
so important. This, coupled with a great opportunity and a competitive
advantage, is what it takes to attract capital.
Michael Volker is a high technology entrepreneur and director of Simon Fraser U's University/Industry Liaison Office. He oversees Vancouver’s Angel Technology Network and is a director of the BC Advanced Systems Institute and the Vancouver Enterprise Forum. He may be reached at mike@risktaker.com.