Raising venture capital? Make sure your company is ready before you pitch!

By: Peter Adams Monday December 15, 2014 0 comments


By Peter Adams

The main reason companies that have been screened and approved to pitch to angel groups do not raise capital quickly is not that the company isn't any good - it is more often because the company has not achieved sufficient readiness in the eyes of the investors.

These companies may go back to work for a year or more to refine their plan and gain traction before pitching again. Startup companies should be moving fast, but they have to have the basics down before most angel groups or VCs are willing to invest.

Some of the key points of readiness are as follows:

1) People: The team is considered the most important factor to most investors. The team should be strong with more than just one or two founders on-board. All areas of expertise will be addressed in a complete team with strength in technology, marketing, finance, leadership and operations all represented. Team leaders will have industry experience as well as the appropriate academic degrees.  An advisory team is also important. Startups should have industry experts, and resources to augment their full-time staff.

2) Plan: Startups need a strategic plan that charts their strategy for growth, market penetration, team development and more.  Strategic plans are needed to show investors that the team has considered many alternatives and have used their expertise in the industry to select the best strategy for the company. Companies with a strategic plan perform well in Q&A sessions where the founders are on the hot seat in front of investors, because they can show that they have seriously assessed all of the options vs. making up answers on the spot.

3) Proforma: A proforma is the company's projections of its financial results over a period of time. Proformas should typically show revenue and expenses for a company for five years or more in order to show investors how the strategic plan will be executed by using numbers. Investors look to see if the growth is realistic and if the founders have done detailed research into the costs of building their market and whether the outcomes will be able to provide investors with sufficient return on their capital.

4) Prototype and/or product: A company that is ready for capital needs to demonstrate traction. The more traction the company has, the lower the risk for investors. If the company has overcome its technology risk by developing a prototype or product, then they can demonstrate that the technology risk is minimized and investors will focus on market strategies and scaling up to rapid sales.

5) Promotional Strategy: Many early stage companies are comprised of technical founders who have been focusing on getting their technology working. Once the technology hurdles have been overcome, it's time to begin production and marketing. Many tech based companies aren't ready to raise capital yet because they need to recruit marketing staff and develop a sophisticated go to market strategy. Many companies don't receive investment at this stage because they cannot adequately articulate their strategies and resources needed to grow big in a competitive market.

6) Partnerships: Early-stage companies are typically small and need partnerships to grow fast. By leveraging partners in production or marketing/distribution, they can tap into existing networks that would be impossible to build from the ground up with a small and under-resourced team.

7) Pitch Deck: Companies need a high quality pitch deck (PowerPoint slides) that they use to present to investors. Companies that successfully raise money have put significant time and resources into creating a compelling message and a deck that communicates it effectively. Companies that are not ready have thrown together a few wordy slides that will fail to grab the investors' attention.

8) Term Sheet: Companies looking to raise capital from individual angel investors should prepare their own term sheet. A term sheet is a document that describes the terms of the deal including topics such as the price of the stock, board seats, class of stock being offered, dividend policy, control provisions and more. An individual investor is unlikely to spend the money on an attorney to write up a term sheet when that cost would be high relative to his or her overall investment.

9) Due Diligence Preparation: Some companies do great when presenting to investors, but fall apart during the due diligence process because they are not ready. Investors can ask for literally hundreds of documents during due diligence as they check out the company. Firms that are ready for due diligence will have collected and organized these documents in advance, often in a digital format, so that investors have rapid access to everything they need.

10) Community: Founders that are seeking investment need to start building relationships with angel and VC investors three to 12 months in advance. Investing is a relationship-based activity and successful fund-raisers get known in the community by networking, speaking, writing and more.

11)  Exit Strategy: Companies ready for funding have a well-developed exit strategy that outlines how they intend to return capital to investors. The exit strategy doesn't mean the founders have to leave the company, but that there is a plan to return capital to investors at some point. Unfundable companies are often led by people who are looking for investors to buy them a job and there's no way for investors to get out of the deal.

12)  Paying Customers: This one is a great validator for an early-stage company. Once a company can show that customers will part with their cash in return for whatever the company is selling, risk is reduced. One of the main causes for failure of early-stage companies is that customers just didn't value the product and didn't buy it. Companies that can show some customer adoption, however little, are at an advantage to those whose sales figures are little more than speculation.

Companies that do their homework first and get their strategy in order will be the first to get funded. Don't let this list cause you to give up on raising capital, and definitely don't become a perfectionist and spend five years getting everything just right. Most companies spend a year or more getting everything set before they're ready to pitch. Work hard, get your ducks in a row - and then pitch! It can take a while after a bad pitch before investors will take another look! Don't spoil your chances by building a reputation for being uninvestable.
Peter Adams

About the Author: Peter Adams

Peter Adams is co-author of Venture Capital for Dummies (John Wiley & Sons. 2013) and serves as the Executive Director of the Rockies Venture Club, America’s oldest angel investing group.  RVC is a non-profit organization furthering economic development in Colorado whose companies raised over $23 million in the past year.  RVC’s connects investors and entrepreneurs through conferences (Angel Capital Summit and Colorado Capital Conference), networking events, angel investing educational offerings and facilitation of Colorado’s largest angel investor groups.  Peter is the founder of the Biz Girls CEO Development Program for high school age girls and is an Adjunct Professor in the Colorado State University EMBA program. Peter holds a BA Degree from Colorado College, PhD/ABD from University of Colorado and an MBA from Regis University.