Obtaining money from investors is usually key to the success of any startup. However, many fail to get funding even though their idea may be brilliant or their product innovative.
Oftentimes entrepreneurs don”™t know how to make a compelling pitch to the right investors, or haven”™t figured out the management piece or how the business will bring in the needed return on investment, according to three private-equity experts who spoke at a recent forum.
Regardless of whether the amount is $20,000 or $20 million, “the inevitable truth is that not all investments are successful,” said Jonathan Keattch, an adviser to private investors and management teams in the U.S. and U.K.
From an investor”™s point of view, he said, “the amount doesn”™t matter so much as what you”™re going to use it for and when I”™ll get it back.”
In approaching a potential investor, entrepreneurs need to pitch their business plan ”“ what they”™re planning to do, why and why they, in particular, will be successful in carrying it out ”“ in 15 minutes or less. “The most important thing is simplicity,” said Keattch, who formerly held posts as chief operating officer at World Telecom and as head of operations at Alcatel in the U.K.
The forum was held Sept. 26 at the Hudson Valley Center for Innovation in Ulster, N.Y. Also speaking was Stuart Aarons, chief financial officer at VentureLink Inc., which raises capital and provides corporate finance and M&A advisory services on behalf of fund managers.
“Write down very clearly what you intend to do and why you”™ll make money,” he said. “What”™s the purpose? How much money does the business need to get to a certain place, with either a cushion for the next level or to take it to the point of exit?”
Aarons has 26 years of experience in finance and business development. He started his career at Chemical Bank in London and New York, and then worked at Bankers Trust.
The third speaker was Thomas Fitzgerald, a managing director and president at Accrete Partners, a Chicago-based consulting and financial advisory firm that merged with Goodrich Capital L.L.C. in 2006.
“Concentrate on the pitch. Make it compelling. You”™re trying to get your foot in the door,” Fitzgerald said, and added that once you”™ve captured a potential investor”™s attention, there will be ample time in follow-up meetings to get into the details, such as your sales and marketing strategy and R&D needs.
Fitzgerald began his career at The Dun & Bradstreet Corp., was vice president of finance at ACNielsen International, and was director of corporate audit for the Engelhard Corp.
All three men have been involved in investing at three levels: as angels, from $10,000 to $100,000; as sources of private equity, ranging from $1 million to $5 million, a level that often entailed raising money from friends and family; and as sources of public funds, for amounts ranging from $5 million to $20 million.
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What they want
Investors are keen on getting information about the startup”™s team. “Who are the collective group of people to move the business forward? What are the combined set of experience and skills?” said Aarons.
He and his colleagues also emphasize a common-sense approach that takes an honest look at the numbers. While the proposal “should bring forward a market opportunity and represent the potential to bring value to the investor, don”™t say it”™s unique. It isn”™t.”
In fact, the management team is just as important to the success of the business from an investor”™s point of view as the product or service, Fitzgerald said. “A good manager could take an inferior product and move it forward. Management is the lifeblood of delivering on the ultimate promise your pitch made.”
Asked how involved investors should be in a startup they invest in, Aarons said that while entrepreneurs would like investors to “keep a circumspect distance, it never works. You get deeply involved.”
Keattch said the amount of involvement decreases with the amount of the investment. “With a small company, you need a particular type of investor. Someone who”™s investing $50,000 will spend a lot of time helping the company. If you put in $20 million, there”™s a degree of maturity (in the company) and more capability of reporting, which enables an investor to track what”™s going on remotely. You get more involved than you thought, or not at all.”
Once they have a good business plan and the necessary staff in place to implement it, entrepreneurs should get out there as much as possible. “Early stage companies should take advantage of every opportunity,” said Fitzgerald.
“You can never know enough people,” added Aarons. Networking “is not just about marketing, it also presents a business with the operational opportunity and a chance for a sounding board and to think critically about what it”™s doing.”
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