Entrepreneur Funding Process by mbl16503

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									funding
the 2008




           guide
LETTER FROM:
 Preparing for the funding process
  “...the funding process is difficult, time consuming                                      TABLE OF
                                                                                                             Contents
            and filled with landmines and pitfalls. This
 supplment is designed to navigate the minefilelds.”




                                            SO YOU THINK YOU WANT TO                        16 Preparing for an
                                            RAISE MONEY?                                          Investor

                                            If so, Business District Magazine is here to
                                            help.
                                                                                            17 How to pitch an
                                                                                                  investor
                                                  In April we hosted the 2008 Central
                                            Texas Entrepreneur Funding Sympo-
                                            sium and it was a huge success with almost      18 Legal Considerations
                                            200 people participating.
                                                The positive response to the content was
                                            overwhelming, and it’s exciting to live in a    19 Valuing a startup
                                            city where entrepreneurialism is bred into
                                            its DNA.
                                                Every speaker provided a wealth of
                                                                                            20 Angel Investors: What
                                                                                                  they look for
                                            knowledge about the fund raising process—
                                            from preparting your company for an inves-
                                            tor to finding them—and when you do, how        21 Angel Investors: What
                                            to pitch them.                                        you should look for
                                                The funding process is difficult, time
                                            consuming, and filled with landmines and
                                            potential pitfalls.
                                                Our intent with this supplement is to
                                            provide a starter guide to navigating the       A special thanks to our sponsors
                                            funding process, so you can be as prepared      and contributors of the 2008 Cen-
                                            as possible before you make a presentation      tral Texas Entrepreneur Funding
                                            in front of an investor.
                                                All of the content was taken from speak-
                                                                                            Symposium:
                                            ers that were present at the Funding Sym-
                                            posium, and special thanks goes to Hall         CACH Capital Management LLC
                                            Martin, director or the Central Texas Angel     www.cachcapital.com
                                            Network (www.centexAngels.org) who
                                            provided the bulk of the content. (And the      Fish & Richardson P.C.
                                            information provided comes straight from        www.fr.com
                                            the investor’s mouth—so to speak).
                                                There are many opportunities to start       Small Business Development
                                            and build companies in Central Texas, and       Program
                                            if you’ve been thinking about going down        www.ci.austin.tx.us/sbdp/
  Jason Myers                               that road, there’s a wealth of resources
  Publisher                                 available to you—just take the first step.
  Business District Magazine
                                                                                            Central Texas Angel Network
                                                I hope you find the articles in this sup-   www.centexangels.org
                                            plement useful in the decisions you make
                                            towards planning and fund raising efforts.      Austin Technology Council
                                            They are designed to help with some of the      www.austintechnologycouncil.org
                                            key questions a business owner has to an-
                                            swer and prepare for before seeking invest-     Greater Austin Chamber
                                            ment.
                                                                                            of Commerce
                                                                                            www.austinchamber.com
                                                                                                         BUSINESS DISTRICT June 2008   15
Overview:

Preparing for an Investor
                                                                                                                                “The number one
                                                                                                                                mistake I see is
                                                                                                                                when a presenter’s
                                                                                                                                projections are not
To get your idea off the ground, find a mentor, research                                                                        credible, as in the
your market, and make a realistic pitch.                                                                                        notion that no com-
                                                                                                                                pany could grow so
                                                                                                                                large so quickly.”



                                                                                                      tions are not attractive, investors will pass on
                                                                                                      the opportunity.”
                                                                                                          Cadenhead warns entrepreneurs not to be
                                                                                                      too conservative and never say you are. He
                                                                                                      also adds that it is crucial to have an explicit
                                                                                                      exit strategy.
                                                                                                          “If you plan to be acquired, focus on your
                                                                                                      target buyers from inception,” he said. “If
                                                                                                      you plan an IPO, when is the ideal time and
                                                                                                      what are milestones to get there? Lay it all
                                                                                                      on the line.”
                                                                                                          Cadenhead said the presenter should be
                                                                                                      specific about their funding needs when
                                                                                                      they get in front of an investor, should ask
                                                                                                      for the specific amount of money they need,
                                                                                                      should tell the investors how much they have
                                                                            By Steve Habel            already spent and should break down their
                                                                                                      short- and long-term goals.
                                                                                                          It is important to tell potential investors
   Many entrepreneurs have great ideas                                                                the benefits of your technology, but not to
and plans, but they will never go anywhere.                                                           get too specific about the technology itself.
Many won’t take the initiative to pick up the                                                         “Spend your time talking about the benefits,”
phone, or they are afraid that someone will                                                           Cadenhead opined.
steal their idea, so they won’t disclose any                                                              “The technology will excite investors. Do
information to people that could potentially                                                          not allocate much time to discussing how the
help them. Others have difficulty formulat-                                                           it works. When they are interested, they’ll
ing a business plan, and even then, they don’t                                                        ask. But do explain how your technology is
know where to begin to find investors.                                                                protected. Remember your team is the ‘main
   Michael Hundley, president and chief                                                               act,’ not the idea or technology and not your
executive officer of CACH Capital Manage-                                                             slides. Tell the potential investor why you
ment, said that the first step is to find a mentor.                                                   are the perfect team for this venture and
“You want to talk to people that have been in         nology Commercialization (MSSTC) degree technology.”
the industry or that have gone through fund-          program at the University of Texas at Austin,       The presentation of your plan is also para-
raising activities. Most entrepreneurs are re-        spoke to the attendees of the Funding Sym- mount, as it directly reflects on you and your
ally generous with their time—they will talk          posium on “What Investors Want.”                professionalism. “Make your plan look good
to you and mentor you,” said Hundley.                    “Investors seek a lucrative return,” and easy to read,” Cadenhead said. “If your
   “If you’re trying to raise less than $1M,          Cadenhead explained. “They understand the presentation is sloppy, your plan probably is
your most viable options are to try and find          idea of high risk leads to high return.”        as well.”
an angel, or what we call the three Fs (found-           Knowing that, Cadenhead said it is im-           When it comes to money, there are level
ers, family, friends),” he said.                      portant that entrepreneurs’ present projec- limits and it is important the presenter under-
   Once you’ve determined that finding an             tions that support a high return and that the stand those limits. “Friends and family top
investor is the right option, you have to build       projections must be attractive and credible. out at $500,000, and angel investors will go
a plan with a realistic value proposition for         “The number one mistake I see is when a up to $1.5 million,” Cadenhead said. “Ven-
the investor.                                         presenter’s projections are not credible, as in ture capitalists could invest from $4 million
   Dr. Gary M. Cadenhead, the director of             the notion that no company could grow so to $20 million in the early rounds. There is no
the Master of Science in Science and Tech-            large so quickly,” he added. “If the projec- shortage of funds for attractive ventures.”

16         BUSINESS DISTRICT June 2008
                                                                                                 Michael Hundley, President &
                                                                                                 CEO of CACH Capital Manage-
                                                                                                 ment explains how many entre-
                                                                                                 preneurs come in with a great
                                                                                                 idea and a plan, but it quickly
                                                                                                 becomes unrealistic.

                                                                                                 Incorporate these three ideas
                                                                                                 to dramatically increase your
                                                                                                 chances of getting an investor
                                                                                                 interested in your company.


How to pitch to an Investor                                                                     • Be flexible
                                                                                                                       If your management team
by Hall T. Martin                                                                                                      and people that you’re
I see entrepreneurs pitching their companies to prospective investors on a near daily basis.                           surrounding yourself with
The biggest mistake I see is that the entrepreneur treats the fundraising process as a sprint                          are significantly more
                                                                                                                       than what you need, or
when it’s closer to a marathon race. In fact, I’ve seen entrepreneurs try to close on the in-                          their skill sets don’t speak
vestment check in the first meeting. The investor rarely signs a check in the first meeting                            directly to the initiative,
and I’ve never actually seen or heard of it happening. There’s a process for pitching to the                           then get ready to shave it
                                                                                                down to people that will help you succeed. “We
investor and it takes multiple stages.                                                          find that many founders and CEOs are not flexi-
     Stage 1—Introduction: The first stage is when the entrepreneur meets the investor          ble in this regard,” said Hundley, “And we want
for the first time. Little is known about each other, and the entrepreneur should be able to    to help them be successful, but if they are not
provide basic information about the deal and provide a one-page executive summary.              listening and taking our advice, their chance of
                                                                                                funding is very low.”
     Often times, an entrepreneur will ask an investor to sign an NDA (Non-Disclosure
Agreement). This is a problem for many investors because without knowing anything
about the deal, it’s difficult to know what the NDA covers. The entrepreneur needs to be
                                                                                                • Demonstrate market potential
able to provide some non-confidential information to create some level of informed inter-                             Your plan should demon-
est on the part of the investor.                                                                                      strate the potential market
                                                                                                                      and the real market. In-
    Stage 2—Informative: If the investor shows interest, then we go to the next phase in                              stead of saying “this is a
which the entrepreneur goes through a set of slides giving more details about the business                            multi-billion industry, and
opportunity, problem to solve, solution, business model, forecasts, product description,                              I’m going to take 10 per-
                                                                                                                      cent of it,” which may not
management team, etc. There should be no more than 20 slides and should take only 10                                  be realistic for a startup,
minutes or so to walk through.                                                                  say “the industry is this big, and there’s plenty
    Stage 3—Interest-building: If the investor expresses interest then the next step is to      of room to participate. Our plan starts with a
supply a business plan so the investor can read the detailed version of what the entrepre-      rollout in Texas, and then moves out to the con-
                                                                                                tiguous states.” The plan should also demon-
neur presented.                                                                                 strate how you plan to achieve those goals with
    Stage 4 – Deal Structure: If the investor wants to move to the next stage, he’ll ask for    people, the results you expect from them, and
the Terms Sheet – listing the contractual arrangement of the deal. If the entrepreneur has      how much capital you’re going to need.
already raised some of the funds, then there’s typically a terms sheet available. If there’s
no previous money invested, then negotiations may begin on the terms of the deal.
    Stage 5—Identifying risks: After terms are agreed upon (subject to due diligence) the
                                                                                                • Show Return on Investment
next step is for the investor(s) to perform due diligence. This may entail a detailed review                           It’s commonly referred to
                                                                                                                       as an exit strategy or li-
of financial statements, patents, project plans and more. Also, the investors may contact                              quidity event, and it means
customers and partners to verify their position.                                                                       that once an investor has
     Upon completion of these steps, the investor signs the documents and transfers the                                looked at the company,
                                                                                                                       the plan, the product, the
funds. This process takes anywhere from several weeks to over a year. If the investor                                  management team, and
knows the entrepreneur it can speed up the process greatly. First time entrepreneurs should                            how they want to get it to
budget a year for a full raise and this could vary based on the complexity of the deal and      market—assuming that they provide the capital
amount of funding sought.                                                                       how do they get that capital back and what is
                                                                                                going to be the return on investment for that
    The goal for the entrepreneur is to take the discussion to the next step in the process.    capital investment? Also, what is is the amount
Trying to skip steps will only frustrate the investor and slow down the process.                of time it’s going to take?

                                                                                                             BUSINESS DISTRICT June 2008          17
INTERVIEW: Kin Gill & Edward Cavazos

Legal Considerations
                                                                                                                               “Most entrepre-
                                                                                                                               neurs could benefit
                                                                                                                               from thinking about
                                                                                                                               intellectual property
Two Fish & Richardson attorneys discuss legal                                                                                  proection from the
                                                                                                                               outset.”
issues you need to know about before                                                                                           Edward Cavazos
approching an investor, and how to protect
your intellectual property By Steve Habel

    Kin Gill, principal of the Austin office of     preferred stock as types of security most in-     photos and, importantly for some start-ups,
Fish & Richardson P.C. has particular experi-       vestors are looking for. The valuation of an      software. Patents, on the other hand, protect
ence in advising startup and emerging growth        entrepreneur’s idea and – hopefully – their       novel, non-obvious inventions. Trade secret
companies in the technology industry. There         business is art, not a science.                   protection is afforded to closely guarded,
are several things that Gill will discuss with        “There is no magic formula,” Gill said. “In     confidential competitive information. Trade-
the client that will have an impact on various      the end, value is a function of what inves-       mark law protects brands, logos and other
legal steps that will need to be taken in con-      tors believe the potential long-term value of     unique identifies for goods and services used
nection with the company’s plans. The initial       a company is, discounted to its present value     by the company so that competitors cannot
question Gill asks his clients is “what is the      and with considerations of necessary returns      confuse the market about the source or origin
end-game?” Are they looking at a typical li-        factored in.”                                     of the products or services being offered.
quidity event, such as an acquisition or pub-                                                               For each type of intellectual property
lic offering or is this going to be a “lifestyle”                                                     right, there are specific rules and regulations
business?                                                                                             governing how to acquire the protection (if it
    “It is important to answer these questions                                                        doesn’t automatically attach) and what types
up front because it affects the choice of en-                                                         of assets are appropriate to protect.
tity and structure of the company,” Gill ex-                                                               The key decision for many start-up com-
plained. “We need to determine the long-term                                                          panies involves when they should be consid-
plans (however far away they may seem) for                                                            ering intellectual property.
the company, as this will impact the structure                              “In the end, value is          “Most entrepreneurs could benefit from
of the entity, the company’s ability to attract                             a function of what        thinking about intellectual property protec-
outside funding and the types of investors                                  investors believe the     tion from the outset,” said Ed Cavazos, an at-
that will be interested in the company.”                                    potential long-term       torney with Fish & Richardson P.C. in Aus-
   Gill then will delve into who is involved in                             value of a company        tin. “I advise my clients to come up with an
the proposed capital structure of the compa-                                is, discounted to its     IP strategy very early. That doesn’t necessar-
ny – is it the founders (and are they vested?),                             present value and         ily mean applying for patents or registering
                                                                            with considerations
is it friends and family and will the firm’s                                                          copyrights right away in all cases.”
                                                                            of necessary returns
employees have ownership?                                                   factored in.”
                                                                                                           Cavazos adds that what is important is
     Next, particularly in the case of a tech-                              Kin Gill                  to know when formal steps are necessary to
nology company, Gill needs to understand if                                                           avoid losing important rights. “The rules can
there is anything that this company will do,        Patents and intellectual property                 be tricky, so check with a lawyer who can
or access that is unique, and if the company        Entrepreneurs looking to get funding should       help you avoid costly missteps,” he said.
has the rights to do it, and if the company         carefully consider the role intellectual prop-       For some companies, having an IP portfo-
needs to protect its rights in such things.         erty protection will play in their business.      lio in progress can assist in the funding pro-
     Finally, it is time to turn to the need for    For some companies, especially those that         cess. For others, where waiting is an option,
outside funding, the options that are avail-        rely heavily on proprietary technology as a       the first funding might help to take the formal
able based on answers to some of the earlier        competitive advantage, taking the appropri-       steps towards a patent or trademark. Though
questions, how the process will work and the        ate steps to protect their assets through pat-    that is only the first step in the process, it can
legal aspects of that process.                      ent, trade secret or copyright law is critical.   sometimes be an effective way of staking out
    “Once we get past the first few steps, the      Trademark protection is important for sig-        intellectual property protection in areas that
question becomes, really do you need mon-           nificant company brands.                          are important to the company.
ey?” Gill said. “To determine that, we need              Unfortunately, navigating the various            Savvy investors understand this and will
to examine the plans for the company, the           types of intellectual property rights (patent,    almost always be impressed to know the
capital requirements, the analysis of options       trademark, copyright and trade secret) is         company they are looking at has thought the
and the range of pros and cons.”                    not a simple task for the uninitiated. Copy-      issues through and has a plan.
      Gill identified the convertible note and      rights protect original expressions like text,

18      BUSINESS DISTRICT June 2008
                                                                                                “My personal favorite method
                                                                                                of valuation is the rule of five.
                                                                                                For each of the following items
                                                                                                the company receives a $1M
                                                                                                towards the valuation. If the
                                                                                                company has all five solidly in
                                                                                                place, then it’s worth $5M. This
                                                                                                makes for a simple valuation.
                                                                                                Ultimately, your business is
                                                                                                worth what investors and en-
                                                                                                trepreneurs agree to.”
                                                                                                •   Customers
                                                                                                                  If you don’t have any customers,
                                                                                                                  it is advisable to get someone
                                                                                                                  signed up as soon as possible
                                                                                                                  to demonstrate market valida-
                                                                                                                  tion. Often times, discounts are
                                                                                                                  offered to the first customers in


Valuing a startup
                                                                                                return for their efforts in testing the software and
                                                                                                acting as reference accounts. Some companies
                                                                                                hold off on selling the product until it’s nearly per-
                                                                                                fect, but this may be misperceived as customer
by Hall T Martin                                                                                disinterest.
                                                                                                • Revenue
 One of the key questions in raising funding is how to set a valuation for the business.                         CSIdentry Founder William Mor-
 This is especially difficult when the business is in seed-stage and even early startup stage                    row’s presentation at the 2008
                                                                                                                 Funding Sympoisum ended with
 since there’s not much on which to base the evaluation.                                                         the most appropriate slide: “Rev-
    For the first-time entrepreneur there are several things you need to know and a few                          enue solves a lot of problems.”
 methods you can use to establish a value for your company.
    First, there’s terminology such as “premoney” and “postmoney” and it’s important to
 know what these terms mean.                                                                    • Management
   “Premoney” refers to the value before investment and “Postmoney” refers to the value                         One of the first criteria most in-
 of the business including the investment proposed. So, if a company is presumed worth                          vestors look for in a deal is an
 $1M and the investment is $2M. Then premoney is $1M, and postmoney is $3M.                                     experienced management team.
                                                                                                                Even if the company is filled with
    Second, both investors and the entrepreneur must agree to the valuation. Often times,                       first-timers, the CEO needs to
 entrepreneurs come up with a valuation based on how much they believe their equity is                          have experience and it behooves
 worth. Angel investors on the other hand look at the number of risks taken off the table                       the entrepreneur to recruit some-
 (market validation, product completeness, business model viability, etc). Angels weigh         one with experience and contacts especially in the
                                                                                                industry.
 the potential returns against the risks.
    In an established company one can use asset-based or discounted cash flow methods
 to set a valuation for the business. If the company is in an asset intensive industry (say
                         semiconductors) then the value of the assets factors into the valu-
                                                                                                • Defensible IP
                         ation. If the company has a revenue stream that throws off excess                       For some companies, having an
                                                                                                                 IP portfolio in progress can as-
                         cash this too could be used to calculate the value of the company.                      sist in the funding process. For
                         Since most seedstage and early stage companies don’t have much                          others, where waiting is an op-
                         of either then these methods are not often used. There are other                        tion, the first funding might help
                         methods to consider.                                                                    to take the formal steps towards
                                                                                                a patent or trademark.
                            One method is the “comparables” technique in which the en-
                         trepreneur looks for companies in the same space which have re-
                         cently been bought out by another company. Some high profile
                         acquisitions are reported in the paper and there are websites that     • Product
                         also list businesses for sale. Check out www.bizbuysell.com or                        The solution to the problem
                         www.bizquest.com to find a company that matches yours. This is                        given is the product/service your
                                                                                                               company offers. It’s important
 one way to establish a “market” price for your company.
                                                                                                               to give enough detail so the
   Other factors that can move the valuation including competition, size of target market,                     investor understands what you
 growth of market, and IP position. The less competition, the greater the size of the mar-                     are doing without going into too
 ket, and the faster it’s growing could boost the valuation. Also, a strong, defensible set     many details on the application.
 of patents, trademarks, copyrights, etc, could bolster the valuation.
                                                                                                                     BUSINESS DISTRICT June 2008         19
     Angel Investors:                                                                                               “Entrepreneurs who want
                                                                                                                    to protect their intellectual
                                                                                                                    property don’t have to de-
     What they look for                                                                                             scribe the “secret sauce”
                                                                                                                    behind their product but
                                                                                                                    can focus on the benefits
     By Hall T. Martin                                                                                              the product/service offers.
                                                                                                                    Only in later stages will the
     Angels look for completeness in the business plan both in the topics covered                                   investor need to learn more
     and how well each topic is covered. In this article we’ll look at each element of                              about the IP.”
     the business plan and highlight key issues for the entrepreneur to consider.

     Customer Problem
     The first element in any business plan or even   financial, operational, manufacturing, sci-      that would most likely be a strong candidate
     the pitch is the customer problem. What          entific, technical, or other. Again, industry-   to purchase the company’s product/service.
     problem are you solving? It’s important to       specific expertise needs to be highlighted.      This number is usually in the millions of dol-
     be specific about the problem your custom-       Startups without a full management team          lars. Finally, there’s the Beachhead market
     er faces. The problem must be large and          could create an “Advisory Board” staffed         which is the first set of customers the com-
     compelling enough such that people not only      with non-paid volunteers who provide ad-         pany will pursue. The company should list
     want a solution, but need one and are will-      vice. Typically, they have substantial indus-    beachhead customers that are in the pipeline
     ing to pay for it. Using numbers to describe     try experience and can augment the manage-       which shows market validation.
     the problem makes the problem more com-          ment team.
     pelling. For example, how many people suf-                                                        Sales/Marketing Strategy
     fer from a disease or condition? How much        Target Market                                    There are several models for marketing and
     money is wasted on inefficient solutions or      The target market must be sizeable to attract    selling the product/service. It’s important to
     methods? Often times, telling a story can        investor interest. I break the “target mar-      describe the sales and marketing strategy. In
     make the problem more understandable.            ket” category into three pieces: Available,      particular, what is your channel to the cus-
                                                      Serviceable and Beachhead. Typically, the        tomer --direct, indirect, OEM, franchise, li-
     Product/Services                                 Available Market is anyone who could poten-      censing, other? Also, explain why you chose
     The solution to the problem given is the prod-   tially purchase the company’s product/ser-       that model over others. Show how you will
     uct/service your company offers. It’s impor-     vice. This is usually a billion dollar number.   generate leads and then progress those leads
     tant to give enough detail so the investor un-   The Serviceable Market is the subsegment         into buying customers.
     derstands what you are doing without going
     into too many details on the application. In                                                      Competition & Competitive Advantage
     some cases, it is helpful to express the com-                                                     Business plans which indicate there is no
     pany’s product/service in a few words such                                                        competition receive little credibility from the
     as “We make radiation-hardened memories.”                                                         investor. The customer is solving the prob-
     This helps the investor in on understand the                                                      lem somehow now. List the key competi-
     company’s offering. While ancillary services                                                      tors with their strengths and weaknesses in
     and spinoff products may be a part of the                                                         comparison with your own. If the investor
     plan, it’s better to focus on the core prod-                                                      finds out about a competitor from someone
     uct/service. In startups and even early stage                                                     other than the entrepreneur then it makes the
     companies, investors look for focus and clar-                                                     entrepreneur look unprepared. Show specif-
     ity of purpose. Cluttering the business plan                                                      ic competitive advantages of your solution.
     with numerous potential options makes the                                                         The more numbers you can place into the
     company appear diffuse and fragmented.                                                            comparison the more solid your company
     Entrepreneurs who want to protect their in-         “List the key competi-                        looks. Use numbers to show market share,
     tellectual property don’t have to describe                                                        your economic benefit, etc.
     the “secret sauce” behind their product but       tors with their strengths
     can focus on the benefits the product/service         and weaknesses in                           Customers
     offers. Only in later stages will the investor                                                    Investors often look for market validation.
     need to learn more about the IP.                     comparison to your                           List the customers you have closed to dem-
                                                           own. If the investor                        onstrate that customers will buy your prod-
     Management Team                                                                                   uct/service. If you don’t have any customers,
     The key to the management team is experi-           finds out about them                          it’s advisable to get a few of them signed up
     ence in the area of the new business. First                                                       before you go out for fund raising. It’s also
     time CEOs need to have substantial operat-         from another source, it                        important to list customers in the pipeline
     ing experience. In addition to the CEO most       makes the entrepreneur                          with forecasted sales expected from each.
     startups have two other executives on board.                                                      Showing your customer’s results from using
     Depending on the business, they could be              look unprepared.”                           your product/service in the form of an ROI

20       BUSINESS DISTRICT June 2008
or even hours or dollars saved goes a long way
to proving the value of your product/service.      Angel Investors:                                                        “Choosing the right
                                                                                                                           angel can comple-
Business Model
The business model describes how much rev-
                                                   What you should look for                                                ment your startup.
                                                                                                                           It’s a fair question to
                                                                                                                           ask how additionally
enue you make from each customer, along            By Hall T. Martin                                                       they can help you.”
with how much it cost to acquire, sell, and
support that customer and the profit left over.
The investor wants to see the business model
to understand the level of profitability and the
scalability of the business.
                                                   An entrepreneur seeking funding for a startup business must be aware that
Financials
                                                   angel investors come in many forms. Finding an angel investor that matches
The financials reflect in numbers what the pre-
vious sections described in words. They must       your business needs and the personality of your company is a key element to
be consistent. If you are showing a revenue        success. Of course, an entrepreneur will almost always take funds offered
growth rate of 100% per year and your busi-        (assuming there are no untenable strings attached), but it behooves the en-
ness model indicates you need a sales per-         trepreneur to find investors who can provide not only funds but also expertise
son per $1M of revenue, then these numbers
                                                   and contacts.
should come up in the income statement.
For companies already in operation, it’s use-
ful to show the past year and the coming four      If your company doesn’t already have an       Marriage Partner
years. In other words a five year window is        Advisory Board, the right angel inves-        This angel is in it for the long haul. They’ll be
used. In addition to the income statement,         tor could be recruited to sit on such as a    there through thick and thin.
there also needs to be a cash flow statement       board to provide guidance and advice on
and a sales forecast that breaks out ASP (Aver-    an as needed basis. If the angel has sub-     Networker
age Selling Price) and unit growth. Investors      stantial expertise you may want to invite     This angel knows everyone and can help you
want to see gross margins and net income to        the angel to sit on the Board of Directors.   find customers, partners, suppliers, and more
understand the profitability of the business.      In this case, you’re asking the angel to      within an industry.
                                                   work one-to-two days a month so com-
Funds Sought and Use of Funds                      pensation at some level may be in order.      Executive Recruiter
It’s important to state how much funding you           Not all angel investors are the same.     If you need to fill out the management team,
are seeking in this round. If you’ve received a    Angels have differing levels of expertise     then this is the angel for you. This angel knows
previous round of funding it’s helpful to show     and skills. Here’s a list of the main types   experienced people with CEO, finance, manu-
what you accomplished with that funding.           you’ll see in your fund raising efforts.      facturing, technology backgrounds and more.
Achieving milestones demonstrates your abil-
ity to execute which is one of the key ques-                                                     Strategic Partner
tions the investor will be asking. Also, for the                                                 If you have a specific challenge you’re trying
funds sought in this round show how those                                                        to overcome, then this angel is the one who
funds will be used.                                                                              has expertise to help. Examples include FDA
                                                                                                 validation, complex manufacturing, industry-
Exit Strategy                                                                                    specific knowledge, and the like.
Finally, discuss the exit strategy. How will
the investor get their money back? Will it be                                                    General Utility Player – this angel is an extra
a merger and acquisition (the most common                                                        pair of hands who can be called on to help out
form today), an IPO, or some other method.                                                       wherever needed.
This is how the investor can calculate an ex-
pected rate of return.                                                                           Fund Raiser
     In summary, most investors read the one-                                                    This angel knows other angels and can help
page executive summary and decide to con-                                                        raise additional funding.
tinue or not based on what they read so it’s       “Not all angel investors
important to spend time making sure the sum-                                                     Each startup is unique with its own set of
mary accurately reflects your business. Each
                                                   are the same, and they                        strengths and needs. Choosing the right angel
                                                                                                 investors can complement your startup. It’s a
category must be described in a short, concise     have differing levels of                      fair question to ask potential investors “Aside
manner.
                                                    expertise and skills.”                       from funding, how else could you help us?”

                                                                                                              BUSINESS DISTRICT June 2008      21

								
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