How to lure a start-up investor in 2011

With business lending still not an option for many banks and financiers, the demand for private capital from angel investors will be high in 2011.

This means business owners will have to be very smart in the way they go about raising money for early stage businesses.

What investors to target, how to prepare your deal and where to take it are all things you will need to get right in 2011.

Investor Landscape

Angel Investors  $0 – $1million

Angel investors are high net worth individuals who want to invest in early stage ventures because they have direct experience in the market you’re playing in and can see a good opportunity.

They will often be retired or in their advanced years of their career and will take enjoyment out of being involved in an early stage business.

Angel investors are fully aware that banks and other financial institutions aren’t lending at the moment and will therefore have an oversupply of deals to choose from.

This means they can afford to be more selective, and when they do decide to invest, they can easily negotiate high equity stakes in return for the money.

Currently operating in this space is Future Capital Development Fund, headed up by Domenic Carosa. Carosa has set up this fund to invest into internet upstarts that are looking for capital, expertise and networks.

Pollenizer, a Sydney incubator, has also just announced that they will be investing $500,000 into tech start-ups between now and June 2011. Pollenizer has developed a great reputation for bringing expertise to the table and delivering value beyond the money.

Venture Capitalists $1million+

Venture Capitals (VC’s) typically aren’t known for investing in start-ups, particularly before the model has been proven and is profitable.

The Australian Government is however launching The Innovation Investment Fund that is aimed at encouraging certain Australian VC firms to invest into start-up businesses.

This fund will see an extra $160 million invested in start-up ventures in the coming years.

Preparation

When it comes to raising money, particularly in this market, preparation is key.

Wholesale Investor, a media agency that link companies looking for capital, with the investors that have it, survey their database of 10,500 high net worth investors on a quarterly basis to find out what investors want, and what turns them off.

“Unrealistic expectation is what stops most deals from going ahead. The fact is, if it’s an early stage company the entrepreneur has to realise, the earlier it is in the life of the business, the more equity they have to prepared to part with.” Says Steve Torso, Managing Director.

He also says that if the company is seed stage and pre-revenue, their best bet is “the triple F fund – friends, family and fools. You really need to build respect and trust within your network and leverage off the people you already know.”

In order to get a business to a point where it’s investor ready, business owners often underestimate what’s required.

A period of ‘de-risking’ the investment opportunity needs to come before any capital raising. This period will include:

1. Ensure the concept is proven and is as advanced as it could possibly be without external funding.
2. Engaging mentors on an “Advisory Board” to demonstrate to investors there is experience on the management team.
3. Generate as much cashflow as possible so that the financials are healthy.
4. Have a valuation prepared by an advisor or accountant.
5. Identify a clear path to exit – how is the investor going to get a return and when do they get their money back?
6. Develop documentation required.
   1. Information Memorandum – This is a summary of a business plan and outlines why this investment opportunity is attractive to investors. Usually 8-10 pages.
   2. Executive Summary. This is a one page ‘teaser’ which acts as an overview. Listing the core business, the market, the team, any investment highlights and the exit strategy. This is the document you lead with when first meeting potential investors.

Dominic Dirupo, from Alphastation, a corporate communications consultancy that specialise in helping companies prepare for a capital raising, says that investors are put off by the lack of preparation done by the majority of businesses.

“Often a spell check will ensure you’re in the top 5% of deals,” he says.

The Pitch

It’s important that your pitch is accompanied by the documentation.

In the first meeting with a potential investor, you just want to gage their interest in a casual “shooting the breeze” kind of a way.

You might walk them through the executive summary if the interest is there.

From there, set up a time to make a formal presentation. This should be accompanied by a Powerpoint Presentation, should be 8-10 slides and should be no more than 20 minutes.

From there, you want to leave the investor with the information memorandum. This gives them the information required for them to assess in more detail whether the deal is of interest. If it is, they should come back to you requesting more information on the business, often they will specify what they want to see as part of their due diligence process.

Keep in mind, in a survey conducted by Wholesale Investor, in terms of importance “the pitch” came in at number 19 out of 20 – not very important.

Investors will often see through the pitch and look at the business model. If anything it is simply a demonstration of the entrepreneurs ability to communicate the business model in a compelling way.

The Do’s:

1. Prepare. Prepare. Prepare.
2. Be humble.
3. Be genuinely conservative. Whatever you do, do not say “this is conservative”.
4. Be totally honest, identify the risks in the business.
5. Clearly outline the path to exit for the investor.

The Do Not’s:

1. Do not, I repeat do not, compare your start-up to Google or Facebook.
2. Use the phrase, “if we just get 2% of the market…”
3. Have unrealistic expectations of the investor.
4. Present several businesses. Investors always like to see a focused strategy, particularly in the beginning.
5. Go into the pitch unrehearsed.

Where to Find Investors

The majority of early stage businesses that do raise finance do so through their existing networks. Business owners heading into capital raising mode are really heading into networking mode.

Have three coffees a day with friends, colleagues, contacts, potential investors. And when you’re sick of coffee, move to mineral water.

The more people you can chat with, the more likely you are to find that key introduction that will make the difference.

Industry associations, business functions and some of the resources listed above are all great places to start if you’re looking to build your existing network.

Raising capital is certainly not a get rich quick strategy, it takes time, preparation and patience.

Siimon Reynolds, one of Australia’s top advertising entrepreneurs who has raised significant amounts of capital throughout his career, once said to me, “It’s an absolutely crucial skill for entrepreneurs understand how to raise capital. The only better skill is knowing how to start a business that doesn’t require it.”

Jack Delosa heads up The Entourage, offering education and advisory to high-growth companies. Jack specialises in capital raising, acquisitions and exit strategies.