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 firstname.lastname@example.org.