top 5 mistakes entrepreneurs make in raising funding funding from angels and... · top 5 mistakes...

Top 5 Mistakes Entrepreneurs Make in Raising Funding

Hall T. Martin

Texas Entrepreneur Network, Director

txenetworks.com

My background

Angel investor for over 10 years

Started three formal angel networks

Run an open funding forum series monthly

Seen thousands of business plans

Coached hundreds of companies through the process

I’ll share my experience with you today

So what mistakes do people make in fund raising?

#1 Unrealistic expectations

Expectation: It should take a few weeks to a month

Reality: It takes a year to raise $1M

Preparation of business and documents takes 2 months

You have to pitch investors in person

Investors take 3 - 6 months to perform due diligence

Signing legal documents takes 1 to 2 months

Holidays and summer vacations will slow things

down

#2 Lack of a strategy

Just pitching investors won’t work—you need a

bigger plan – better, you need a strategy

You need to know where you can find investors

You need to prepare the investor for the pitch

You need to understand what investors are looking for

Your plan needs to include finding a lead investor

You need a closing process to finish the round

#3 Lack of follow up

Many entrepreneurs never follow up. They wait for

the investor to call

You should contact the investor and ask for a follow-

up meeting

You should be sending monthly updates

You need to educate the investor on your deal

You should build a relationship with the investor

#4 Lack of key documents

Most entrepreneurs start the process unprepared

You should develop the core documents first

Executive Summary—1 page

Pitch deck--12 to 15 slides

Financial Projections

Due Diligence documents

Legal entity, Intellectual Property (IP), credit

reports, historical financials, etc.

#5 Focusing on the product

Most entrepreneurs talk only about the product

Focus on the business itself – target market,

competitive position, marketing plans, sales

channels, etc.

You are selling the company – not the company’s

product

Identify all the values you have built into the company

and communicate those values

Summary

#1 Unrealistic expectations

#2 Lack of a strategy

#3 Lack of follow-up

#4 Lack of key documents

#5 Focusing on the product

What are Angel Investors

High net-worth individuals seeking to make a return

Meet the Accredited Investor requirement

Seeking to make a return on their investment

What are Angel Investors

Typically they are not professional investors

They often have substantial business experience

Each angel has his own criteria

Why do you want Angels?

Angels bring expertise

Angels bring their network of experienced people

Angels have a standing in the community

Angels can join your board of advisors

Angels typically know other angels

So where do you find angels?

Start with family

Look to friends

Check out your coworkers

Go through your rolodex to see who might be a

potential investor

Formal angel groups

You can check out the formal angel groups

Angel Capital Association—largest trade organization

www.angelcapitalassociation.org

Informal angel groups

There are informal pitch sessions and funding forums

run in the local community

Even if they offer only mentorship and practice, they

often as angel investors participating as judges

Business plan competitions

Mentors and coaches are often angel investors

Accelerator programs also have angel investors

Service providers

Your attorney and accountant often know angel

investors

Social networks

LinkedIn can help you identify angel investors in your

area

Facebook can also be helpful

Crowdfunding websites

There are numerous websites that connect angels to

entrepreneurs

Called Crowdfunding sites they match investors with

deals

What is Your Timeline?

Expectation

“I want to finish the fund raise by the end of the

month”

Reality

It will take one year for every $1M you are raising

So let’s say you are raising $1M. How will you spend

the coming twelve months

Month 1—Check Readiness

Assess your company

Communicate with your team and investors

Check with your attorney

Month 2 – Prepare the company

Build key documents

Executive Summary – one-page version

Slide Deck – 12 to 15 slides about your company

Financials – Both historical and projected

Due diligence docs – legal entity, IP, etc.

Fill out the team with a board of advisors

Month 3-5—Prepare the investors

Identify potential investors for your prospect list

Add ten new investors each month

Setup meetings with investors to introduce the deal

Ask permission to keep the investor on the list

Start sending monthly updates personalized to the

investor – do not send ‘broadcast’ emails

Demonstrate achievement of milestones

Month 6-9—Pitch the Investors

Follow-up to pitch each investor

Identify the lead investor

Close the lead investor using investor-friendly terms

Offer an incentive to the lead investor for the risk they take

Month 10-11—Close the remaining investors Invite other investors to join the round

Close the document signing process

Month 12 – Maintain the relationship

Keep sending quarterly updates to all investors on

prospect list

Prepare those investors for the next round

Questions

Assessing Your Readiness to Raise Funding

Hall T. Martin

Texas Entrepreneur Network, Director

txenetworks.com

Are you Ready?

Most entrepreneurs ask, “Do I need funding?”

Many don’t ask the next question, “Am I ready to

raise funding?”

Legal Entity

Is your company formed under a legal entity?

Is it the right entity? – C-Corp

Product/Service

Do you have a product in the market?

If not, will you have one in the market in 3 months or

less?

Do you have customer interactions with your product?

Sales

Have you sold a few units?

Product validation -- shows the product works

Market validation -- shows customers will buy at the

price you asked

Business Model

Have you identified the business model?

Can you site metrics?

cost of customer acquisition

product development costs

profitability

Management Team

Do you have a complete management team?

Someone building it

Someone selling it

Financials

Do you have financial projections developed?

Income Statement

Cash flow Statement

Sales Forecast

Due Diligence documents

Do you have your Due Diligence docs

Articles of incorporation

Patent filings

Financial records

Attorney

Have you talked with your attorney?

Proper legal entity

Fund raise documents

Your Team & Your Investors

Have you talked with your team?

Have you talked with your current investors

Questions

How to Write an Executive Summary

Hall T. Martin

Texas Entrepreneur Network, Director

txenetworks.com

What is an Executive Summary?

One-page version of your business

Non-confidential information

Include your name and contact details

Let’s look at the key elements to include

Problem the company solves

It must be a large problem

It must be specific

Use numbers

Product/Service offered

Describe your core product/service

Avoid too many details on how it works

Highlight the economic benefits to the customer

Competitive Advantage

Use a matrix to list your company and competitors

Show four to five key advantages of your solution

Include indirect competition as well

Target Market

Show three market views

Total available market – Anyone who could use it

Serviceable market – Your target market

Beachhead market – Your initial customer target

Show size and growth rate of each

Business Model

Show how you generate revenue

Show how you spend money

Two key metrics

Cost of customer acquisition

Lifetime value of customer

If complex use a customer example

Sales Model

Describe your sales channel

Direct

Distributor

Web

Other

Intellectual Property

Discuss Patents, Trade Secrets, Trademarks,

Copyrights, etc.

Show what has been filed and when

Discuss any ‘office actions’

Management Team

Show top management team

List years of experience

List relevant work experience

Include board of advisors

Summary Financials

Show Revenue, Costs, and Profits for five years

If you have historical financials, include as well

Funds Sought and Use of Funds Show how much you are raising

Show what results to the business you expect

Exit

Show how you plan to exit the company and return

funds to the investor

Highlight example acquirers and show their history

of acquiring companies similar to yours

Questions

Building a Team

Hall T. Martin

Texas Entrepreneur Network, Director

txenetworks.com

Importance

Critical factor in raising funding as well as success in

business

Investors look for completeness

Investors look for critical skill factors

Investors are on guard for unnecessary headcount

Core Team

Core team consists of someone building it and

someone selling it

As the company grows this division of labor becomes

more sophisticated

Future hires

You should identify future hires to bring on when

revenues and funding justify it

A full management team slide doesn’t mean all are

working full time or even paid

People from large companies are not as helpful

Startup skills are different than big company skills

Board of Advisors

People who help out even though they are not

compensated

Not a Board of Directors

Make a list of areas you need help in

Recruit people to fill those areas

Meet once a week for coffee to discuss

Also use for potential C-level recruits and investors

Service providers

Recruit service providers who know your startup

space well

Seek those who can help beyond their core service

offering

Questions

Agenda

Crowdfunding– what it is and how it works

Five most common mistakes in crowdfunding

Example crowdfunding sites

Three critical elements to successful crowdfunding

Q&A

What is Crowdfunding?

Sourcing funds for a startup through a web portal

It creates another source of capital

The amount of funding comes in smaller increments

$25 to $500 typical donation

some websites focused on $1K to $10K

investments per donor/investor

How does it work?

1. Choose a crowdfunding site based on project

2. Submit your application (target funds & timeline)

3. Gain approval and publication

4. Promote your deal to your network

5. Respond to questions and feedback

6. Raise your funds

Two types of crowdfunding sites

Donations

Non-accredited investors

Examples: Kickstarter, Rockethub, IndieGoGo

Investments

Accredited Investors ($1M in net worth)

Examples: Microventures

What is the JOBS Act of 2012

Jumpstart Our Business Startups (JOBS)

Signed into law April, 2012

Investor crowdfunding will have a limit of

$1M/company and $10K/investor (Jan 2013 effect)

There are other parts to the JOBS act including:

506 status—general solicitation (July 4, 2012)

Regulation A filings--$5M limit moving to $50M

See more at Jobsactlinks.com

What does it mean to you?

Small firms can now raise up to $1M without having

to register with the SEC

Non-accredited investors can invest without having

to meeting accreditation requirements

There will be some limits based on annual income.

“Funding Portals” will act as broker/dealers to ensure

compliance

Proposed Requirements for investments What are the reporting requirements:

< $100K CEO certifies the financials are correct

$100K to $500K -- a public accounting firm

certifies the financial statements

>$500K -- audited financial statements are

required

How does crowdfunding compare?

40+% of posted projects to CF sites get funded

15% for angel deals

1% for VC deals

Kickstarter’s track record 2011

Launched Projects: 27,086

Successful Projects: 11,836

Dollars Pledged: $99,344,382

Total Visitors: 30,590,342

Project Success Rate: 46%

Launched Projects: Up 143.4%

Successful Projects: Up 202.7%

Dollars Pledged: Up 259.4%

Total Visitors: Up 268.8%

Project Success Rate: Up 7.0%

Who should use it?

Startups seeking to raise startup or growth capital

How much can I raise?

For donation sites most raise less than $20K

For investment sites most raise less than $500K

What does it cost?

Currently most sites charge a listing fee of 0% to 5%

and an additional 4% to 10% of funds raised.

Do I have to raise all of it?

You specify a target fund raise amount and

timeframe

On some sites you keep what you raise and in other

sites you have to raise the entire amount to get the

funding.

Most deals raise their funding within 60 days

We’ll show you examples later in this presentation.

Handling donors & investors

Donors— get cool perks (music downloads, sample

product, naming a cupcake after you).

Investors –get an equity stake in your business

Five most common mistakes

1. Not making the pitch compelling enough

You need a great team doing something great

Mediocre projects don’t attract much attention

Five most common mistakes

2. Not promoting the pitch outside of the site through

blogs, emails, newsletters, and social media

Engage your network to start

Leverage your social network to expand

Develop and run a broader PR campaign

Five most common mistakes

3. Not demonstrating a detailed plan

You need to show how the funds will be used

The plan needs to look realistic and achievable

Vague or fuzzy plans do not get funded

Five most common mistakes

4. Not asking for realistic amounts of funding

You need to raise enough funding to accomplish

the project

Asking for too much or too little will kill the raise

Five most common mistakes

5. Not responding to questions nor asking for

feedback

Respond to questions quickly and with competence

Start a dialog and then build a relationship with the

investor

Example Crowdfunding Sites

Kickstarter

Rockethub

IndieGoGo

Microventures

Angelist

Kickstarter

Focus: Design and Crafts

Success Rate: 43% to 46%

Cost: 5% Success fee (if you reach your goal)

0% Success fee (if you don‘t reach your goal)

Funding model: All-or-nothing

Investor: Non-accredited

Website: http://www.kickstarter.com/

Rockethub

Focus: Creative projects

Success Rate: 85% for those using their consulting

Cost: 4% Listing Fee

4% Success Fee (if you reach your goal)

8% Success Fee (if you don‘t reach your goal)

Funding model: Keep what you raise

Investor: Non-accredited

Website: http://www.rockethub.com/

IndieGogo

Focus: Creative projects

Success Rate: Not published

Cost: 4% Success fee

9% Success fee (if you don‘t reach your goal)

0% if funds are refunded

Funding model: Keep what you raise

Investor: Non-accredited

Website: http://www.indiegogo.com/

Microventures

Focus: Tech, social, mobile, gaming

Success Rate: 100%

Cost: 10% Success fee

$100 to signup & $250 for due diligence

Funding model: Keep what you raise

Investor: Accredited

Website: http://www.microventures.com/

Angelist

Focus: Angel deals

Success Rate: Not published

Cost: Free

Funding model: Matchmaking site

Investor: Accredited

Website: http://angel.co/

Three critical elements

1. Make a pitch video

- Keep it short and cover the basics

- Use good audio

Three critical elements

2. Demonstrate credibility and success

- Show use of the funds with financial statements

- Polish your online image including your social networks

Three critical elements

3. Create a community with a cause

- Investors want to engage and contribute to a community

- Donors often fund based on interest in having the product

- Examples: The iPhone watch team raised $8.4M

Questions

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