Investors and VCs – How to Shape Up Your Business Pitch and Financial Models
by Caron_Beesley, Community Moderator
- Created: July 16, 2012, 6:47 am
Got a great business idea? Already tested your product or market? All you need now is an injection of cash to help you realize your business dream? Maybe now’s the time to approach an angel investor or venture capital (VC) firm.
But how can you get the attention of investors, prepare for your presentation and be sure you have all your financial models vetted and ready to share? Here is a cross-section of tips from a variety of experts who’ve sat on both sides of the table.
If you aren’t sure where to start, this blog offers insight and tips for finding the right investor for your startup: Five Tips for Finding and Securing Private Investors for Your Start-Up.
You might even want to consider starting with friends and family. In this article for OPEN Forum, Mark Henricks learns from several investors that if you can convince those close to you that your business is worth an investment, then you’ll probably be able to sell the idea to others down the road. Read my earlier blog – 6 Tips for Borrowing Startup Funds from Friends or Family.
Don’t forget the value of your network when it comes to getting an audience with a VC. Instead of the direct approach, look at a venture firm's portfolio, contact entrepreneurs in those companies and try to get one to arrange an introduction.
What to do to Prepare Yourself
- Know your business and industry inside out – Take time to understand and segment your market. Know the trends and use a SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats) to pinpoint and quickly assess the industry and your potential position in it. Research the size of your market both domestically and internationally.
- Know your competition cold – Don’t assume you’re the only player in this market; solidify your credibility by researching potential competitors before your chosen VC does. Chart your unique advantages versus key competitors.
- Make your value proposition clear – What makes your business special? How does your competitive position represent a barrier for your competition and a benefit for your customers?
- Explain your leadership strategy – Why are you the best candidate for CEO? Secure or tee up a strong leadership team. VCs look at the people you surround yourself with.
- Present a clear and executable sales plan – Redus recommends presenting a plan to exceed $30 million in annual sales within 5-7 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,” explains Redus.
Get Your Financials Ready
Your financial assumptions can make or break your credibility and your ability to secure investment. It’s good to have these assumptions reviewed by a good accountant or someone who’s done this before. In his article Get Your Financials Investor-Ready, Tim Periu, Principal with Proximo International, offers some insight into how to get a firm grip on your numbers and financial model before you present anything.
- Link your revenue projection to your sales model – Don’t just assume that your $X marketing budget will produce Y number of customers. Start with a projected estimate of the number of monthly customers, then detail the assumed cost for capturing each customer: marketing dollars, number of sales reps you hire, sales calls, and conversion rates. The process varies by industry and sales model – online versus telesales versus direct sales – so be sure you know your industry.
- Support all your key assumptions – Include your source information or link to it from within your spreadsheet-based financial model or the presentation you deliver.
- Make sure your financial model allows for sensitivity analysis – Periu makes an important observation about “realistic” projections in entrepreneurial financial models that are often found to be “wildly optimistic.” How can you counter this? Periu recommends running a sensitivity analysis – by changing combinations of assumptions you can see what impact these have in the overall financial picture. “Many models fall apart if I lower the price assumption by 3 percent. That’s a problem,” explains Periu. To be able to run a sensitivity analysis, Periu advises against hardcoding numbers. This allows changes to numbers in one part of the model to flow through to the rest.
When in doubt about your numbers, consult an experienced professional. An organization like SCORE, which pairs entrepreneurs with seasoned business mentors, is a useful free resource to help you through the process of financial modeling.
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