JumpStart: IdeaExchange Blog

If you are an entrepreneur that is looking for investment capital to grow your startup, it is easy to get excited when a potential investor asks for your business plan. And why not? This angel investor or venture capitalist may be able to provide just what you need to make your dream a reality.

Before you get too excited, take a breath. Bear in mind that you are intending to enter into a business relationship with an investor and just as you would qualify any potential business partner it is also important to qualify your investor. There are several things to consider before you start handing over the requested documents like your business plan, financial statements, etc.

Were you referred? If they were recommended to you by someone you trust or are a known investor in your region, chances are they are a reputable investor. Even so, take precautions — read on.

Do the research. You need to do your own due diligence to be certain that you are dealing with a reputable investor. What are the steps you can take to do this?

1. Ask the investors to provide their information first. Ask about their business including their full contact information and physical address. Have them tell you about their investment interests, process, and expectations.
2. Verify the legitimacy of the financial organization. Try contacting the Better Business Bureau (www.bbb.org) or the Federal Trade Commission (www.ftc.gov) about their practice.
3. Request references of people they have invested in previously, and then call these references to discuss their experience.
4. Conduct business with a firm in your own country, especially if you have difficulty verifying the legitimacy of foreign investors. In many cases, though not all, investors want to invest in businesses that are located near them because this allows for better oversight of the investment and relationship.
5. Never provide personal information before receiving paperwork or pay upfront for a loan application review.
6. As you begin to form a relationship, engage an attorney that is capable of adequately representing your interests.

Know the odds. Did you know that for approximately every 100 business plans that an angel investor gets, they pursue maybe 10 for a further conversation, conduct their own due diligence on 3-4, and invest in 1-2? The odds are small that that investor is going to invest in your business.

Protect your secret sauce. Most investors will not sign a NDA initially since they typically will pull in subject matter experts to consult during due diligence. If you are going to provide them documentation on your business, you need to be prepared to share the essence of your idea without giving away the secret to what makes it so special. Down the road, when both parties are confident that things will move forward, a NDA can be revisited.

Get it in writing. Any reputable investor will be willing to put what they are offering in writing. Do not accept a verbal offer.

Though there are fraudulent investors, do your best to not get discouraged. There are many legitimate financial sources available for starting your business. Explore your options and take your time. Whatever you do, don’t allow any investor to pressure you into committing to an investment before you are certain of their legitimacy.

These tips are not intended to be comprehensive, but merely serve as a guideline. 

Other websites that can help you:

• The Federal Trade Commission — www.ftc.gov
• The Better Business Bureau — Search for any scam reports made — http://www.bbb.org/us/Find-Business-Reviews/
• RipOff Report — A website made “by consumers, for consumers” — www.ripoffreport.com
• Scam Busters — Helps you protect yourself from clever scams online and offline — www.scambusters.org
• Complaints Board — Online database of complaints for bad and fraudulent business –http://www.complaintsboard.com/
• Consumer Fraud Reporting — Search for companies to see if complaints have been posted by other consumers — http://www.consumerfraudreporting.org/search.php
• Save & Invest — Tips and tricks to avoid scams, lists of common scams, enter the criteria of your situation into a “scam” meter for evaluation — http://www.saveandinvest.org/55Plus/Fraud/index.htm
• ScamXposer — Search for recommended and not recommended business opportunities — http://www.scamxposer.com/bizopp-reviews.html

Tiffan is the Vice President of IdeaCrossing, a free online community created by JumpStart, which connects entrepreneurs with the national resources necessary to grow their businesses. Tiffan has worked at several venture-backed startup technology companies and strategic marketing agencies in both Boston and Cleveland. Through her work, she has facilitated the necessary growth of early-stage companies.

The challenges of raising investment capital for your business and how to best prepare for an investor have been well documented by many industry experts. Yet having witnessed scores of presentations over the years I find that many entrepreneurs routinely miss a few key areas. And while there are certainly no guarantees or full-proof plans that will automatically result in successfully raising capital, the following suggestions should help you along the journey:

1. Present your business with energy, enthusiasm and confidence –- if you’re not excited about your business endeavor you’ll have a very difficult time getting an investor excited.
2. Know your business and industry cold – take the time to really understand and segment your chosen market. Know the trends, and consider doing a SWOT analysis on your chosen market (Strengths, Weaknesses, Opportunities and Threats).
3. Know your competition cold –- don’t make the mistake that so many have in assuming that “No one else is doing this”. If your investor discovers a recognized competitor that you should have discovered, you have instantly damaged your credibility.
4. Consider a comparison chart that demonstrates your unique advantages versus key competitors.
5. Clearly articulate your Value Proposition and what “makes your business so special’, and further explain how your unique competitive advantage represents both a significant barrier for your competition as well as a real benefit to your client.
6. Do your homework on the overall size of your market both domestically and internationally. That includes both consumer and commercial applications if applicable (overall market size or potential should approach $1 billion or better to really get the attention of investors).
7. Explain why you or a designated team member are the best candidate to serve as CEO.
8. Secure or “tee up” a deeply experienced management team. The people you surround yourself with are often the key deciding factor in securing investment capital.
9. Present a clear and “executable” plan to exceed $30 million in annual sales potential within 5 to 7 years. Remember that investors have options; they can choose to invest in any number of opportunities from traditional stocks and bonds to other high growth businesses. If you’re going to convince an investor to support your vision, you have to paint a large enough and clear enough picture that makes choosing your plan worth the risk.
10. Make sure the “assumptions” that drive and support your financial projections have been reviewed by experienced personnel so that such key items as unit sale prices and costs per unit have been thoroughly vetted.

As stated previously, in the journey of raising capital there are no magic bullets or guarantees. By incorporating these 10 tips however, you’ll be well on your way to dramatically improving your chances for success!

Darrin is Chief Economic Inclusion Officer of JumpStart and President of JumpStart Inclusion Advisors. He founded and ran his own strategic planning and management assistance firm and spent 16 years in the commercial banking and finance industry. Darrin has an MBA from Baldwin Wallace College and an undergraduate degree from Mount Union College. He has led a series of workshops and seminars on matters of economic development and diversity.

Position: CEO of a breakthrough idea/company

Hours: 60-90 hours per week

Reports to: Board of Directors: 3-5 people who are great and supportive but will also drive you nuts because the whole reason you quit your job to start a company was to not have a boss and now you have 3-5 bosses. Technically speaking, they also could possibly hire in your replacement. (Hey, they’re not your friends; nor are they even the shareholders’ friends; their legal obligation is to consider the best interests of the company as a whole). For the high growth route, a Board is totally worth it because the right Board of Directors extends your reach and knowledge immeasurably.

Company Description: Acme Startup is a totally new, breakthrough idea that will grow to $50 million or more in revenues and will fundamentally change the industry in question. It will be in its industry what Southwest was to airlines, Starbucks was to coffee, Facebook was to social networking, and Amgen is to therapeutics.

Position Description: Since this is mostly an idea trying to become a company, and no one has tried to commercialize this breakthrough idea, you will spend half your time evangelizing about the product and the need, the other half trying to raise money, and the other half (yes, three halves; our executive recruiter isn’t very good with math) dealing with hiring people, outsourcing for skills your company needs, and managing your board of directors and advisors. More specifically, the job entails:

• Developing the breakthrough product
• Evangelizing the need, product, market, and team that’s going to grow it to be great
• Finding cheap office space, and doing this several times over — each time you outgrow the office space you’re in
• Outsourcing for as much help as possible, as cheaply as possible, but without sacrificing quality**
• Creating lots of elevator pitches, executive summaries, and PowerPoint presentations of a gagillion different formats for 50-100 investor meetings, of which only 2-3 investors will end up investing;  Listening to “no” in 18 different ways and for reasons that make no sense, and using the “no’s” to make you stronger; Figuring out how to create “coopetition” with the yes’s in a way that is aggressive and maximizes value but isn’t straight-out slime ball city
• Hiring team members who are also entrepreneurial (and so also don’t deal well with the whole “boss” thing) and strive for excellence in all that they do, and working through with them the whole compensation thing too (see below)
• Holding monthly or bi-monthly board meetings plus regularly talking or meeting with board members individually
• Figuring out who is going to want to acquire this company, and when, and why, so that you and others can make money off of it; Meeting with those potential acquirers, and building something that they want
• Travel is 50% or greater, usually in coach class (unless you have upgrade miles), watching big-company executives sip cocktails in Business Class while trying to rearrange your seat tray in a way that you can see your computer screen so you can create yet another investor presentation.

Background and Skills:

• Adaptive Excellence – Whatever you do, you do it well and this clearly shows in your resume. Doesn’t mean you take the straight and narrow “achievement path” but does mean that, like cream, you rise to the top of whatever you do: video gaming, sports, hobbies are all definitely fair game, so long as you are someone who rises to the top of whatever you do. REQUIRED
• A Predator –- Love capital markets and figuring out how to win in the equity capital markets. The equity market is a brutal, Darwinian place — Everest comes to mind — and it is not getting much better. REQUIRED
• Strong communicator — Communicating consistently and well is pretty critical to retaining that top spot. STRONGLY PREFERRED
• Industry knowledge – The ideal candidate will know her product and her industry, because that’s usually what it takes to have great insights. But, industry knowledge has to come with the above factors. PREFERRED
• Prior successful entrepreneurship –- Has led a startup company to great success — raising capital and growing revenues — ultimately achieving a wealth creating exit. IDEAL***
• For other desirable traits, see also this.

Compensation: Competitive, but bizarre. You will make a ton o’ dough, let’s just say $5-$10 million if the company does well.**** You’ll make out pretty poorly if the company craters, which statistically is more likely than not. More specifically, you should be able to make ~$90K-$300K in salary*****, which is great, and the salary is that amount because if we want someone to successfully grow this biz, we know we better pay that amount. But keep in mind that you’ll have no severance plan, likely no employment agreement (although it’s a possibility), potential months-long gaps in pay (we try to avoid it, but it happens), and few benefits (basic medical; no 401K match). Your equity ownership will be 10-100% of the company, but this will decline to about 7% over time as you build value over about seven years. Which you might think makes NO sense, but it actually does. As you build value, you bring on investors who dilute your ownership percentage. So, you own less of a larger pie, which means your economic stake is worth more $$, but your control stake declines. That’s if it works out well. If it doesn’t, then you have less ownership of a lesser-valued thing and no control either, which most assuredly sucks (sorry - hard to find another word). But that’s what risk is. So, if this story sounds too horrible for you — and it is, like climbing Everest, a very narrow and specific route with change-the-world type glory but many embittering pitfalls — then you should not apply for this position. 99% of management positions are at companies that aim to grow a little slower, at a more sustainable rate, so that the company can avoid all the hassles (no argument from us on that word –- they are hassles) of equity capital.

(Our apologies that our executive recruiter got so carried away on this compensation piece, but we thought that rather than just writing “Competitive Compensation and Benefits”, you oughta know the basics).

To Apply: Do not send resumes. Instead, please come up with a breakthrough idea, and if you believe you can execute it really well, then raise some seed or friends & family capital, quit your day job, and let’s have some fun.

NOTES:
* This is a sample job description. It is not an actual job description.

** Do not sacrifice quality. Instead, if you can’t afford them with cash $$, issue equity in some form to the highest value advisors.

*** It is rare to find these serially successful entrepreneurs — people who have successfully run and grown a company and had a wealth creating exit and who, rather than retiring to Naples, actually want to do it all over again with OPM (Other Peoples Money) and all the hassles therein. But, if that type of person applied for this position, we wouldn’t sneeze at that.

**** The average founder-CEO of a venture backed company owns 5-10% of the company at exit and the average acquisition for an equity backed company is about $100-$150 million, so let’s just say ~$10 million is your take, but less after built-in/contractual preferences of investors are fulfilled, so make it $5-$10 million. The range of possibility is, of course, anywhere from $0 to the low billions.

***** The salary grows within this range as you hit value creating milestones, advance through stages, grow revenues, and add investors.

Becca Braun is President of JumpStart Ventures. She founded and led a number of early-stage companies and organizations, as well as worked as a private equity investor and management consultant. She received her MBA from Harvard Business School and her BA in Linguistics from Harvard University. She is keenly interested in the intersection of wealth creation and broad-based regional economic growth.

In late 2004, Lynn-Ann and I sat with our computers one night at a cafe at Cedar-Lee and put together a five year projection of how much additional capital the companies JumpStart would invest in might be able to raise. The first year showed $3 million. The second showed $6 million. We had benchmarked against Innovation Works in Pittsburgh, a phenomenally successful venture development organization; we would try to use their success ratios for our projections; no sandbagging. The third year showed $15 million. Year four showed $20 million. And year five showed $30 million. These numbers (totaling $74 million*) seemed huge at the time, especially since we projected that 25-50% of the companies we invested in would likely fail; it’s inherent to Imagining, Incubating and, to a lesser extent, Demonstrating stage investing. As we sat at our computers that night, JumpStart had only invested ~$300 thousand in two companies, Stanton Advanced Ceramics and PreEmptive Solutions. 

Suffice it to say, $100 million seemed light years away.

About three weeks ago, the companies in JumpStart Ventures’ portfolio officially surpassed the $100 million in capital raised mark (almost $103 million to be precise, or nearly 7 times the $15.7 million we have invested in 45 companies). By the numbers, 32 of the portfolio companies have raised follow-on capital over 127 fundraising rounds, with the average total amount raised by those 32 companies being $3.2 million and ranging from $50 thousand to $20 million, and the median timeline from our investment to next investment being 15 months (and trending downwards). Twenty-three companies raised over $1 million dollars. Cleantech companies have slightly edged out Healthcare companies, with the former totaling $41 million in follow-on funding raised, and the latter at $39 million. Phycal and Echogen (fka rexorce) have led the charge in Cleantech, and in Healthcare, Juventas, CardioInsight, and Synapse Biomedical have also raised significant capital. By type of investor, venture capital investors have carried the day, with angel investors close behind; grant funders (especially from the federal government) rose as a percent in 2010, but we expect that to even back out in 2011. Also, $100 million represents about 10% of the total amount raised in the Northeast Ohio region over the past five years of $1.1 billion.**

That’s the numbers, but as we all know, this is not about “companies” raising “capital”: too cut and dry sounding in so many ways. It is human beings, namely Northeast Ohio entrepreneurs, telling a story about innovation and how that innovation will somehow make the world a better place. And these entrepreneurs being resourceful enough to find people with money who happen to love their particular story – whether these people are former entrepreneurs turned angel investors, associates at investment funds, or even sometimes government officials who provide grants. Sure, while it’s not really “companies” and “capital” and various takes on the numbers, it is also no love story. Anyone who’s raised money knows that it is due diligence, term sheets, a whole lotta elbow grease, and, eventually, return on investment. It’s about taking something that is a science project and turning it into a product that customers want, which, if the revenues at our portfolio companies are any indication, is happening consistently, with ever more customers buying what these portfolio companies are offering.

$100 million is more than a number. That’s the point. So, regardless of which number or ratio holds meaning to you, here’s to the entrepreneurs who lead the companies in the portfolio and to whom “capital efficiency” is way more than a buzz word: Andrew, Arnon, Bill, Bob (3 of them actually), Brad, Brian, Chad, Chris, Craig, Dan, Dana, Dave, David, Dean, Elliot, Ethan, Fred, Gabe, Jay, Jeff, Jeeva, Jim (2), Jodi, Jon, Karl-Heinz, Ken, Kevin, Krzysztof, Lance, Laura, Len, Mark, Mike, Nick, Phil, Rahul, Scott, Steve (2), Sue, Tony (3), and Wendell. And here’s to the hundreds of investors who have put their hard-earned money behind these growth stories, from Arboretum to Charter Life Sciences, from Draper Triangle to Early Stage Partners, from North Coast Angel Fund to Ohio TechAngels, and from the Ohio Department of Development to the U.S. Department of Defense.   

Now before year’s end, the JumpStart Ventures team will sit and project out the path to $1 billion for JumpStart Ventures portfolio companies. It’ll feel like as much of a SWAG as $100 million did five years ago. But at least now that path has faces, names, relationships and the other things that make a spreadsheet more than a spreadsheet: they make it an ecosystem.***

Notes:

* These numbers then increased by about 25% because we increased our investing budget from $3 million per year to $3.75 million per year, hence giving us the $100 million number.

** This is a slight apples to oranges comparison since our follow-on funding numbers include some grant funding and the overall region’s numbers include angel and venture capital only.

*** Thanks to Kerri Breen who took the spreadsheet I referenced at the beginning of the post and who has not only successfully supported many entrepreneurs on their fundraising efforts but also runs the numbers like it’s nobody’s business.

Becca Braun is President of JumpStart Ventures. She founded and led a number of early-stage companies and organizations, as well as worked as a private equity investor and management consultant. She received her MBA from Harvard Business School and her BA in Linguistics from Harvard University. She is keenly interested in the intersection of wealth creation and broad-based regional economic growth.