When and How to Raise Funds Video Lecture | Starting a Startup - Entrepreneurship

hi I'm Simon Reynolds and welcome to the
fortune Institute today we're going to
talk about a topic that is very dear to
a lot of entrepreneurs hearts and that
is how to raise money there are
thousands of entrepreneurs out there
that really don't know anything about
how to raise money for their business
and I have to be honest I was once one
of them I remember years ago I didn't
have a clue how to structure a
presentation to raise money or even who
to speak to but over the years I've
learned a lot about it I want to share
some of my best secrets for how to raise
money with you today in my first venture
capital deal I raised 1 million dollars
for a new business in my second which
was about 10 years ago
I raised 5 million dollars for a new
business and in my third about a year
ago I raised 12 million dollars for a
virtually new business so I really have
a lot of experience in the area of
raising money from the side of someone
looking for the money but I've also
invested in a lot of companies anything
from $10,000 to up to 1.5 million
dollars was the most I've ever invested
in a company so I really know both sides
of the fence and today I want to give
you some of the very best stuff I've
learned about how to raise money for
your business ok my first recommendation
when it comes to raising money for your
business is actually to put it off for
as long as possible now that may seem
crazy me introducing a lesson about
raising money and then coming up
straight off and saying don't do it now
but really there's a lot of sense in
what I say if you put off for as long as
possible when you need to raise money
when you actually go out there and ask
for it two things happen first of all I
believe that you perform much better
when you've got a lean business when
you've got a lot of cash around when
it's not desperate you tend not to work
as hard but I've always found in my
experience when I started businesses for
virtually nothing then I had to make it
a success there was no turning back and
I
so much harder with so much passion and
so much more commitment when I had no
money to fall back on by the same token
I remember investing 1.5 million dollars
into my business we were 1.5 million in
the red before we turned a profit now
part of the reason was is we were so
comfortable we were all on high salaries
we could buy whatever we wanted for the
business we weren't getting soft slowly
if we didn't have any money we wouldn't
have been a slack we would have really
pushed the the pedal to the metal we
would have really made sure that we made
the most of our opportunities so I know
it's counterintuitive but trust me
usually the less money you have the
better your business will go the other
great reason for putting off raising
money as long as possible is you get a
better price for your business if you
come in and you have no revenue and you
have no history of growth and you say
put money into my business the financier
is going to ask for a big chunk of that
business but if you can just put raising
money off for one year and show business
success show revenue growth show that
you're a really competent business
person well you can charge more for that
business it's not just a startup now
it's a semi successful business and it
gets a higher price or alternatively as
an adjunct to that you don't have to
give away as much of the company if you
can just build it a bit before you raise
money
now it may amaze you but some of the
most successful businesses in the entire
world have been started with very little
money at all
take the Inc 500 the Inc 500 is a list
of the fastest growing private companies
in America so some of the most
successful companies in America's
history are on that list now how much
money did it take to start an Inc 500
company well a while ago a survey was
done and get this around 14% of the Inc
500 were started with $1000
or less can you believe it $1,000 and
they built a multi-million and in some
cases multi hundred million dollar
business out of it the survey also
showed that around 27% of the Inc 500
was started for an amount that was
between one thousand and ten thousand
dollars so think about that put those
two figures together 41% of America's
fastest growing private companies in the
Inc 500 list were started for $10,000 or
less and incidentally around 10% of the
Inc 500 were started for between 10,000
and 20,000 dollars so 51% of the Inc 500
were started for less than $20,000 so
all the excuses that you might have that
you can't build a business because you
don't have any cash are simply not the
case now I'm not saying that money isn't
useful of course if you had money right
now you could probably expand at a
faster rate all I'm saying is it is not
the determining factor in your success
it is not an obstacle that you can't
surpass and in fact it may very well be
in your favor that you don't have much
money to start your business perhaps
you've been looking at starting an
internet business well there's really
good news there in the old days back in
say 2000 people were spending millions
and millions of dollars setting up their
internet businesses but now the
situation is different for two reasons
first of all the culture of Internet
start-ups is different no longer do
people seek millions of dollars or even
feel they need to raise millions of
dollars their thinking has changed and
the second reason which is aligned with
the first is it's so much cheaper to
start up an Internet company now why
largely because of open sourcing
outsourcing to other people both staff
and in particular software take website
development for instance it used to cost
tens of thousands hundreds of thousands
sometimes millions of dollars
to build a large website but now there
are companies like WordPress where you
can get a pretty good website built for
yourself by yourself in a few hours or
maybe a few days and what will it cost
you a few hundred dollars Eiko started a
company a year and a half ago that has
30,000 websites and almost all of them
are WordPress sites how much did it cost
us very little indeed that's the power
of the new Internet age it's so much
cheaper to start an online business my
second tip is to build relationships
with the people you're going to ask for
money before you have to ask them if you
just turn up and having created a
relationship and say hey I need $300,000
for my new business well it's going to
be very difficult to get that money
because like most of life success
depends in business on the quality of
our relationships and they can't be
built overnight you've got to work on
them you've got to treat it like an
emotional bank account where you make
deposits consistently into the emotional
bank account between you and them and
then later on you ask for money so one
great system is to create a list of ten
or so contacts people that you think
could potentially give you money in a
year's time or a year and a half's time
or two years time and you go out and
make your relationship strong you tell
them about your business you show them
why it's going to be a great business
but you don't ask for any money you
literally say hey I just wanted to keep
you in touch really respect your opinion
love some advice but now I'm fine for
money now perhaps in the future when I
first started my group Foton group my
financial partner was very very good at
this for three years he went out and
kept in touch with a whole variety of
people who could potentially give him
money never asking for money and finally
the time came when the environment was
right economically and our business had
grown at a point that was strong and he
went out and he raised about 12 million
dollars in one week now he could not
have done that if he didn't already
establish credibility for our business
credibility for me and credibility for
him it made a huge difference to do that
investment upfront before he actually
requested any funds the next tip is to
get an introduction to whoever you want
to ask for money if you can't column
it's going to be difficult but because
of that concept of six degrees of
separation usually you will know someone
who knows someone who knows someone else
who knows that person dig around see if
you can find a connection and get a
friend of yours to call them someone
that they trust and who can give a
testimonial for you who can say hey it's
worth the time give this person half an
hour they've got a really good idea for
their business and they're a terrific
person as well now quite often that
potential financier won't want to meet
you
but they'll feel obliged to see you
because of the friend now once you're in
the meeting that's when you can turn
them around
but really it's a number of face to face
meetings you have with potential
finances that's really going to be the
determining factor along with your
business plan as to whether you get the
money so you need to maximize that don't
just think of who you know think of
friends who might know key people as
well number four use your contacts first
if you're looking for money if you go
out to venture capitalist or you go out
to people you don't know it's going to
be tough look at your friends are there
any friends that might like to put some
money into the business what about your
parents would they like to put some
money into the business
what about professors from university is
there a professor or a lecturer that
you've got on well with who may put in
money themselves or even better may know
prominent business people in your
particular field that could help you out
what about old bosses frequently if you
had a boss that respects you that really
admires what you did if you go out and
create a new business they may will
finance you what about entrepreneurs in
your community they don't have to be
multi-millionaires just people that have
made serious money maybe a million
dollars or $500,000 or just earn a lot
from their shop or their small business
a lot of those people have a lot of
spare cash and they'd be excited
sometimes to put money into a brand new
business also look at trade journalists
that is journalists from trade magazines
that cover your industry they know
everybody from the people who own the
companies in your industry to the people
who run the companies in your industry
if you get in well with them take them
out for lunch butter them up a bit and
then say hey do you know anybody who
could help me out with the finance
you'll be surprised how often they can
give you a really good reference the
other thing about going to friends
family and and entrepreneurs around town
is you'll probably get a better rate if
you go to the professional lenders
you're going to get a hard core low
valuation on your business and they're
going to try and get as much of your
business for as little as possible but
if you go to people who know you and
trust you and even love you you're going
to get a much better rate when you
borrow money number five the next people
you go to after your friends and family
in your contacts are angel investors
well what is an angel investor well the
term originated when in the theatre
industry in New York often people would
come in at the last moment and save a
theatrical production so they were
people who just loved the theater and
really just wanted to get the show off
the ground they were like angels to the
theater industry and that's how the term
started who are they well they're
normally rich individuals and they're
normally very experienced in business
they have successfully built a business
themselves and they know a lot about it
they're pretty damn smart and now
they're semi-retired and they think well
I'd like to assist some other people it
would be fun to do it now in the United
States there's well-established angel
groups and you can just google them in
Europe or in Australia there's a lot
less angel groups you can still find
them but it won't be as easy you may
have to look for individual angel
investors and you
to ask around and everyone will know
someone in town who has previously
invested in a business similar to yours
now the great thing about angels is they
are less demanding and you can sometimes
get a better price than if you go to
investors higher up like venture
capitalists now that doesn't mean
they're walkovers a lot of these people
are highly successful in fact a lot of
them are more successful than the
venture capitalist they've actually run
their own businesses successfully so
they're pretty smart but they have more
generosity sometimes in how they price
deals typically you could raise anything
from $10,000 to a million dollars
sometimes even more from an angel
investor but the usual amounts probably
going to be $50,000 maybe $100,000 not
that much
a typical angel investor might have a
total of a million dollars that they
want to invest in let's say ten
different businesses and they've got to
make sure that they diversify enough
that they get a return averaged out so
they're not going to be putting 800 of
that in one business so they're good for
smaller chunks of money but they're
actually a terrific way to raise capital
so what are angel investors looking for
well firstly they're looking for a
clearly identifiable market you can't
just say to them we're going to go after
the female market you've got to say what
type of female it is economically from a
mindset position from an age position
you've got to know everything about that
market when they sense that you've got a
handle on exactly the market that you're
going to be going for then they'll relax
a little bit that's the first step
you've got to get over the next thing
they're after is that your business is
in a growing market now the truth is
business analysts like Jim Collins have
shown that plenty of people can create
extraordinarily successful businesses in
markets that aren't growing but the
reality is an angel investor will almost
certainly only invest in a market that
is clearly growing not declining or that
is just stable why
well as Warren Buffett said a rising
tide lifts all boats if you're in a fast
growing market you don't have to be that
good to make money the actual increase
in size and velocity of the market
actually helps you get a lot of your
growth it's a lot easier to be making
money in a fast growing market than it
is in a slow market so angel investors
are going to look for that they're also
going to look for a growth strategy what
exactly is your plan once you start the
business once you develop the business
to actually make money and he can't just
say oh we're going to get our products
and start advertising them you've got to
have a clear strategy you've also got to
get over one very important question in
an angel investors mind and that is what
are the barriers to entry they will
never invest in a business that can
easily be copied because otherwise
you'll start your great business and
then a big competitor will come in and
eat your lunch and take your whole
market share away from you they're
looking for protection now that could be
an intellectual property maybe you can
get a patent on some aspect of your
business maybe you've got an innovation
that it takes a long time for people to
copy maybe you have specialized
knowledge simply by being in the
industry for so long you know a few key
points that other people simply don't
know and it's going to take them a long
time to find out maybe you have an
advantage in distribution when people
look at a company like coca-cola they
assume it's a success because it's a
really tasty drink and of course it is
but the key to coca-cola success other
than marketing is its distribution it
has a far more sophisticated
distribution system than all of its
competitors you can find a Coke almost
everywhere and when a new soft drink
comes into town and tries to compete
with coke they offer the store owners
all kinds of incentives not to stock
that brand and because of their powerful
distribution it's incredibly difficult
for any other soft drink company to
actually compete with them another area
you
high initial costs so if it costs a
fortune to get into your industry but
you're already into it then you know
there's not going to be that much
competition coming if it's an absolute
nightmare to create the systems or build
the factory or get the machinery to be
in your business then that is a great
barrier to entry okay next up angel
investors are going to be looking for a
realistic valuation of the company so
you can't walk in there and say yes we
have no revenue but it's worth three
million dollars it just doesn't work and
it doesn't work particularly in this
economy people are getting very very
hard-nosed you've got to give a
realistic valuation to your business if
it doesn't earn much it's not worth that
much no matter what you think it will be
you've got to remember that when it
comes to angel investing they're seeing
good investment ideas almost every week
so if you come in with a reasonable idea
but it's charged at a fortune if it's at
a ridiculously high rate even if they
like the business they're not going to
invest ask for a realistic valuation not
too high but also not too low don't send
yourself down the river and you've got a
real chance of getting a deal I'll talk
a little about valuations later on in
this lesson angel investors are also
looking for systems and procedures a
good idea is not enough so many people
come to angel investors and they think
because they've got an interesting idea
for a business that somehow people are
going to open up the money floodgates
and all pour all over them and they'll
be rich the truth is a good idea is not
enough
what you need is systems you need
procedures you've got to have a system
for your budgeting a system for your
financial projections a system for your
logistics for your distribution there
are so many areas that need systems now
if you're a nascent business if you've
just started up then you at least need
to cover it with them that you
understand the basics of the systems
that are needed you don't have to flesh
it out into incredible degrees but you
do have to show a comprehension of the
need for systems
have some basic ones developed if you're
already in business though you really do
have to show that you're not just a
business idea
you're a series of business systems
inside your business idea they're going
to be looking for a good management team
as well it's probably the number one or
number two depending on the investor
reason that someone invests the truth is
most investors would much rather have a
mediocre business idea run by
outstanding people and then an
outstanding business idea run by average
people and it makes sense because there
that people day-to-day who'll make it
work and if they're in an ordinary
business or if they're in a great
business they're going to find a way to
get to profit and that's what an angel
investor talks about so what should team
like do you need to build your team up
do you have a history of success in this
industry do you have a history of
success in business do you show passion
do you look like a crack team you've got
to be very careful about that
finally angel investors need to know
that there's an exit point for their
investment you can't just say hey invest
with us and we'll eventually pay your
back or we'll give you a good return
really what you've got to show for an
angel investor is that they can get out
of their business and actually liquidate
their holding and get some cash now I
remember I had the opportunity of
investing in a in a very well-known
cosmetics company in Australia and it
was a terrific business and I was going
to put around three million dollars into
this business they were great people
they were absolutely superb products
they just expanded into America and were
going terrifically so why didn't I
invest purely for one reason there was
no exit strategy
there was no methodology for me actually
getting my money out the owner said
quite openly we're not sure we want to
buy back your investment state in a few
years so how could I invest I couldn't
get out of the company it was a terrific
company but it didn't have an exit
strategy for me so be careful when you
do your business presentation to an
angel investor that you've always got an
exit strategy now typically that's going
to be one or two things that's either
going to be a trade sale selling to
another company or it's going to be an
IPO an initial public offering that's
when you float your company to the
public now the truth is for the vast
majority of businesses it's going to be
a trade sale most businesses simply
aren't big enough
to end up on the stock exchange and
frankly it's an incredibly expensive
exercise to list your company on the
stock exchange don't you say yes we're
going to take the company public when
it's made a million dollars it's simply
to smaller company to take public you'll
be selling to the trade or getting out
privately not publicly next up remember
the angel magnets what do I mean by
angel magnets well the interesting thing
about an angel investor is they're not
just in it for the money what they want
to see is passionate people and they get
excited by passionate entrepreneurs who
want to change the world who really want
to create something great remember the
typical business angel is older and he's
looking back on his life and he's
looking for people who are like him or
her when they were young and you've got
to look like that you've got to be
enthusiastic and passionate and bright
eyed about the possibilities of your
business you've got to get them excited
about that because they're buying into
the fun of investing in your business as
much as the financial reward they're
also looking for nice people the second
angel magnet is just to be nice don't
forget an angel investor or in fact any
investor has a choice there's hundreds
of companies that they could invest in
or they could just put the money in the
bank but if you're not only a passionate
person but you're a nice person then
often that can get you the investment
they feel good about you they want to
help you out they'll slip you 50 grand
or a hundred grand for your company it
makes a big difference to be nice in
business generally but particularly when
you're asking for money they also want
to be included
including the angel in your business a
little bit is a great angel magnet they
want a bit of excitement in their life
and you can give it to them by including
them in a monthly board meeting or
ringing them every week for their advice
or going for lunch with them and just
just being inclusive that makes an angel
feel really good if you get all those
angel magnets right and you have a good
business idea with a good business plan
it's almost certain that you will be
able to raise the money
point seven after you've had a look for
friends and family who can raise the
money and after you've had a hunt around
for angel investors the next group to
look at our venture capitalist and
private equity companies so what are
they will that start with venture
capital first venture capital is the big
leagues of Finance they mostly invest in
tech companies I've got to say the vast
majority but not all of venture capital
money goes to technology-based companies
and they tend to invest larger amounts
now that could be anything from a few
hundred thousand dollars to ten million
dollars but it will frequently be around
the million or two million mark so it's
a bigger lick of money and typically the
company has already been established and
probably got close to cashflow positive
before they invest now that's not
exclusively the case there are some
companies that specialize in startups
but that is generally the case with the
venture capitalist and private equity
now venture capitalists can be tough
they may want a greater proportion of
the company they may want more control
on the board luckily they very rarely
want to own most of the company because
they want the the entrepreneurs to be
highly motivated but you've got to be
careful these are highly sophisticated
people financially for instance they may
give you what's known in the trade as a
clawback deal and they can be really
dangerous
the clawback deal is they give you the
money but if you don't reach your
targets they take more and more of your
business over now I remember investing
as an angel investor in a terrific
company which is now listed on the
Australian Stock Exchange
and back then the people who are running
that company thought that it would be
absolutely huge
within two years so in comes the venture
capitalists in fact I brought them in
and what happened they didn't meet their
targets
so the venture capitalist ended up
owning about 80% of the company now that
went on to be a successful company but
it just didn't grow as fast as they
thought in the early stages so be very
careful what you promise to venture
capitalist and how you structure your
deal because they can claw back a large
chunk of your shares now a bit like
angel investors venture capitalist will
be very very serious about your exit
strategy and they will typically want to
exit the investment between 3 and 7
years normally between 3 & 5 years then
there's private equity what's the
difference between private equity and
venture capital well these days there's
not that much difference their deals
tend to be structured a little
differently though and the style of
company they're after is a little
different they're normally after much
bigger companies and they'll seek for
example a management buyer now what's a
management buyout an MBO
well that's when the chief executive and
his senior staff will go to a private
equity firm and say hey we've been
running this company but we have an
opportunity now to buy the company will
you give us the money
now that's very attractive to a private
equity company because they go wow we've
got a really experienced team they were
already done a good job and now they'll
be incentivized as being owners yep
we'll give you the money to buy that
business so an MBO a management buyout
is very typical of a private equity
situation private equity companies also
look for distressed companies so that's
a situation where the company's going
really badly and they can put in a new
team turn it around and then sell it a
few years later for a much higher amount
of money and a classic example in
Australia was Maya the huge department
store they came in and within three
years
vastly improved the company's position
and then put it on the stock exchange
and made hundreds of millions of dollars
out of it
but the truth is that typically the
private equity situation is only for
much larger companies in fact the larger
the better they'd like to apply a lot of
debt to their purchases so if they can
find some huge company and then ratchet
up the debt in the in the purchase to
sixty percent of the value of the
company or even ninety percent of the
value of the company then that's a good
deal
the bigger the company they can buy the
bigger the potential profits so for the
sake of our course most of the people
listening to this aren't going to be
after private equity incidentally
private equity companies often buy the
entire company just outright and install
their people to run it so if you want to
sell only say ten percent of your
company or twenty percent of your
company they're probably not the right
option for you however if you are an
expert in your industry with fifteen
twenty years experience and you've got a
great reputation and you know of a large
company that you could buy you really
can knock on private equity companies
doors put your proposition to them show
you how you can improve it and even
raise ten twenty thirty million dollars
or more and go and run it and they'll
give you a slice maybe 5% of the company
maybe 2% of the company to go off and do
that and that is a strategy that a lot
of executives have used to become mega
rich now it's all very well for me to
talk about these grand plans about how
to raise millions of dollars from
private equity groups and venture
capitalist but don't forget simple
advertising to raise money I know a lot
of people who raise their money by
putting a little ad in the financial
press or in the businesses for sale or
business opportunities section of a
newspaper how much did it cost them well
as little as ten dollars to in one case
around two thousand dollars it really
depends on the newspaper and the size of
the ad obviously could be a classified
ad or maybe you go to an online group
and
on site that has a business
opportunities section and if you can do
that and place an ad and in the headline
give a compelling reason why an investor
might want to invest in your company
you'll be surprised at the course you
get advertising works and it works for
this reason so many private investors
actually can't find good investments so
if they see an ad in the paper
they're often delighted to ring it up
and just see you have coffee with the
person and see if it's an investment
that's of interest to them take
advantage of that ok number 9 follow a
pitching format now what I want to give
you is a proven system that you can use
to actually raise money and it's two
parts first of all getting the meeting
now that's very simple you send a letter
out to 300 companies or potential
investors and you follow it up with
emails and phone calls you'd be nice but
you be persistent and you'll find that 5
percent of them will see you or they'll
at least ask for an executive summary
which we'll talk about soon now ideally
if you can get a meeting rather than
just sending a summary this is what you
do first of all you do not ask them to
sign a confidentiality agreement so many
company heads do that and venture
capitalist angel investors or private
investors usually will not sign it
why because 3 days earlier someone could
have come in with the same idea and now
they're legally in a tough situation
they can't invest in either company so
be very very careful about that there's
no need to ask for it
most people are trustworthy and if you
don't think the person is worthy of your
trust
you shouldn't go into the meeting in the
first place next up I want you to try
and limit your presentation to just 10
slides now a lot of people say that's
just too few slides to get all I've got
to say over with but I can tell you if
you keep it really simple you will do a
much clearer and better and more
persuasive presentation so what should
be on those 10 slides well here's a
system for you the first one I call the
grab and that is just a single sentence
or two that comes up first that sums up
what your busy
is about in a really compelling way so
they read that or you read it to them
they go wow now you got my attention so
it's got I have two things it's got to
be impactful and it's got to be a
succinct summary of your business
slide to the intro now that's where you
turn around and you introduce the other
people in your team to the investor you
can't just have them sitting there
without an introduction now that
introduction doesn't have to be long it
doesn't have to go into their whole
history of their life and their
experience in the business but rather
just give them a a one minute or a
thirty second chance for them to
introduce themselves and say something
relevant to this business that you're
about to ask for money for next slide I
call the problem so this is where you
address what is the problem in the
industry that we are going to solve with
our new company and the key word here is
pain what is the pain that customers are
experiencing that we can eradicate now
if you can't find any real pain if you
can't find a whole stack of customers
that aren't feeling financial pain or
emotional pain or logistical pain then
you just don't have a great business
your business has to solve a problem so
in this slide you really emphasize what
that problem is and how it's a real
problem not just a tiny problem that
it's meaningful that your company come
along and solve this problem logically
enough the next slide is the solution
how do you solve it now here you don't
go too deep you can leave that to your
business plan afterwards or in
subsequent meetings but you just give a
few points simple points about how you
can solve the problem that the market
has that the customer potentially has
then you follow it up with the market
slide now that talks about what's your
competition who are they what size
companies are your main competitors
what's the growth rate in that my
what are the parameters of that market
now the one thing you don't say in an
investment meeting is we have no
competition because a that's almost
certainly not the case and B that's what
everybody says but the truth is of
course you've got competition they may
not be directly competitive with you but
at the moment the consumer is buying
another product or service not yours so
that is your competition the next slide
is the model how exactly are you going
to make money what's your system for
making money what's your distribution
what are your gross margins or your
suggested margins for this business it's
really just a succinct summary remember
it's only one slide but it gives them
the sense that you've really thought
about the business model this isn't just
some crazy idea that you're running by
them next up is the marketing slide how
do you reach your customers now most
people have never even thought about
this they go in asking for money and
they have an answer like how we're going
to advertise on TV you want to know the
exact methodologies you're using in what
order and what the message is that
you're going to say in your ads now that
doesn't mean that you need a full
advertising campaign fully written out
to present to them but that your core
marketing strategy is absolutely clear
then there's the protection slide now
that's any patents you have or what your
barriers to entry are and that's a very
important slide the investor is going to
be looking at that how do you stop if
you've got a really good idea the
competition coming up and taking over
that whole section of the market next up
is the deal slide and that's really just
a simple summary of what percentage are
giving away what valuation you're giving
the company and finally the summary
slide there you just summarize the key
points of your presentation and any
particular ones that you really want to
emphasize that's where you give them the
final bit of impact so that is a formula
that you can use anywhere in any country
in the world in front of anyone to do a
presentation and it's succinct but it's
got everything you need to make the sale
now some tips
do not hand out a document before you do
your presentation because what happens
is they just go straight to the numbers
on that document and they're not
listening to you just save the document
for the end how long should your meeting
be well aim for about 20 minutes for
your presentation time because they're
going to ask questions during the
meeting and they're certainly going to
ask questions after they will have
allocated probably about an hour to
speak to you now you can't do your
presentation for an hour because some of
the most important stuff that occurs
happens in question time so you've got
to leave plenty of time for the
questions and also by keeping it really
short it forces you to get very very
clear about what the critical points are
of your presentation it stops your
waffling keep your slides short and
sharp not more than two or three
sentences maybe four at most on each
slide don't have whole paragraphs of
information the more they look at your
slides the less they look at you and you
want to be the piece of magic not your
slide deck if there's famous people or
experts involved in your company drop
names this is probably the only chance
you're going to get to make a big
impression so use everything drop as
many big names as you can be truthful
now I guess I really shouldn't have to
say that but some people they get in a
presentation and they just start
exaggerating shall we say you're going
to get caught out if not in the
presentation you're going to get caught
out eventually when they get closer to
investing in the company it just doesn't
make sense not to tell the truth use
case studies and examples in your
presentation typical parallels with
other industries or with competitors now
don't fill a whole presentation up with
it but it adds a bit of meat it makes it
look like you know what you're talking
about and follow the established norms
don't put weird type or strange colors
in your presentation keep it
professional have it so they don't
notice the slides themselves but they
notice what's on them point 10 your
executive summary is very important
now what is the executive summary well
it's I guess the document between the
slides and the business plan the
business plan has every piece of
information in it the slides have just
the basics and the executive summary has
a little more now it's very very
important because often an investor will
say just send me your executive summary
and as a result of that executive
summary if it's really good you get the
meeting so make it basically like your
slides but just add a few extra areas
for instance use of funds what are you
going to do when you get the money
critical milestones what your
projections are that type of thing just
add a little bit more meat it shouldn't
be more than 2 to 3 pages now it's a
small document but truth be known you
should spend the most time of all on
your executive summary because it's the
first thing they see and it's really the
document that they're going to judge you
on point 11 always have a detailed
business plan now this is a document
that you leave behind if the
presentation has gone well and it
answers all their questions that being
said don't waffle having a giant
document doesn't impress anyone
intelligent it's what's inside it
discipline yourself to make it only
about 20 pages if it's 80 pages you
might think there's some gems in there
but they probably won't even read it
brevity is power include references in
your business plan have some people that
they can call up so they get a bit of a
sense of your character or include some
letters of reference actually in the
plan at the back be sure to include
projections in your business plan
now with projections you've got to
balance optimism with realism you've got
to say that this business has enough
growth to get the investor excited but
at the same time every document you ever
see of this type has year three a hockey
stick the sales just going through the
roof they've seen it a million times
before so unless it really
absolutely true temperate make it more
realistic and you'll get more respect
from the venture capitalist angel
investors or the private equity groups
emphasized in your projections the path
to cash flow positive that's what
they're looking for
how long does it take till this company
sustains itself that it actually makes
money month to month so how should you
do your projections well I think give
them five years of projections and make
the projections quarterly quarter by
quarter for the first two years and then
year three four and five
just your estimate of the annual figures
now the truth is obviously the further
you go out the less accurate your
projections are going to be and believe
me the venture capitalist is going to
take that into consideration
so get very tight in the first two years
and then go wider for the additional
three if you're an already existing
business seeking capital be sure to
include a profit and loss statement and
a balance sheet remember that what
they'll be looking at is not just your
figures but include a set of assumptions
behind those figures what are the key
drivers that make you conclude you can
do this
have some justification to the figures
how long should this section of your
presentation be I think the financial
projections should only be about two to
three pages keep them sharp any decent
investor will be able to look at those
figures and see if they're realistic or
not you don't need ten pages to create
your financials also remember this
nobody actually believes your financials
they've seen a million of these
presentations they've invested in quite
a lot of companies and frankly no one
ever lives up to their presentations in
some way they're always different in
reality for the investor these documents
are just to see whether you're smart
whether you make sense whether you've
got a realistic appraisal of your
businesses chances they're not going to
live and die on you hitting those
particular targets they'll accept them
as being a very very rough outline they
won't actually
believe them number 13 decide a
realistic valuation I talked to you
earlier about this now let's get into a
few details first of all how do you
establish a valuation for your company
well the number one method is to look
for industry norms literally look around
and find out ask friends ask owners of
companies ask business brokers what does
a company get sold for in this industry
because you can bet your last dollar the
investor will be doing that and you need
to stick to industry norms when it comes
to your valuation now usually the key
component of the valuation is what's
known as the multiple so what does that
mean
well it will be a multiple of what
you're earning that establishes the
business's valuation so there are two
ways you can look at that you could look
at your current earnings and be paid a
multiple of that or you could be paid
next year's earnings or even your
projections for the next three years
earnings and be paid a multiple on that
that's known as a future based multiple
so what if you don't have any profits
well if you don't have any profits there
are two ways evaluation can be handled
there's plenty of them but two main ways
first of all you do an estimate of your
future earnings and base your valuation
on that a multiple of that for instance
you might say okay over the next three
years we intend from scratch to get to
this point and therefore we want to be
paid X multiple on that amount now
normally that would be a pretty low
multiple because it's all about the
future but it can be done so the next
method is a price to revenue ratio so
you might be turning over a lot but not
actually making much profit so you don't
want to be paid a multiple of your
profits obviously you want to be paid
somewhat on how much revenue you've
actually reached rather than your low
profit so how do you do that well you
look for a price to revenue ratio so
typically that shouldn't be lower than
one two three
now that might mean that let's say they
will give you $1 because you're doing
three dollars worth of revenue
and you should seek above that and
certainly not any lower than that so in
order to really sell compellingly to a
venture capitalist you've really got to
know what are their expectations for
themselves you may not know this but a
venture capitalist is really a fund
manager other people or typically
institutions have invested in his or her
fund and they want to return now what
are their expectations well they're
expecting about a 20 to 25 percent
return so if you're an investor in a
venture capital fund you're expecting
about 20 to 25 percent return now here's
the problem that venture capital fund
may invest in 10 businesses but half of
them will get written off half of them
will totally fail so they have to be
looking at a return that's much greater
than 20 to 25 percent for your business
so what are they looking for
well usually an angel investor or a
venture capitalist is looking to get 5
to 10 times their investment back in a
period of 3 to 5 years and that is one
of the key criteria that you should take
notice of when you're talking about your
valuation to them that's what they're
looking for that's what you're going to
have to give them point 14 consider
convertible notes so what is a
convertible note well it's when you take
out a loan for your company that can be
converted to stock in your company later
so the advantage is to you that you
don't have to give away a slice of the
company necessarily you might do a
convertible note and they get an
interest rate and actually just get paid
back it's like a loan but later on they
may take a stake or you may elect to
give them a stake in the company and
what's the advantage for the convertible
note holder well they get paid back with
interest so it's actually a good use of
their money and if the company really
goes through the roof they can convert
that to a stake in the company so it
allows you as a venture capitalist or an
angel investor to have the best of both
worlds
you get the return on your money but if
it's a great success then you write it
with the owners of the company all the
way to the top
number 15 in the methods of raising
money negotiate intelligently now I'll
give you an entire lesson on negotiation
later on in the fortune Institute's
curriculum but for now I want you to
keep in mind these important points when
it comes to valuing your business when
it comes to asking for an actual amount
of money start high but be realistic
it's very hard to increase the offer
once you've started low so start high
and let them pull you down there's a lot
of research on this that shows that if
you start high you end up with a better
figure than if you started low and built
it up make small concessions not large
ones as soon as you can when it comes to
the deal try and give in on points that
don't matter
rack up a few Wings in their favor and
then when it comes to the large
concessions that's when you hold firm a
lot of people do the opposite they fight
over every little point so by the time
it comes up to a big issue the venture
capitalist or the investor is a little
irritated they're not feeling as much
goodwill towards you and they want to
win that's the last thing you want give
in to the little things fast and finally
remember and this is a very important
point that no matter what people may say
there really is no true valuation of a
private company there are so many
variables there are so many arguments
for why it should be less or why it
should be more that no one really knows
what the actual valuation should be
we're all guessing so take advantage of
that flexibility in your negotiations
finally stay in touch with investors so
few people do they do a presentation and
the investor might like it but decides
to pass and they don't stay in touch so
they take it as a note but in fact it
was a no stroke maybe if only they'd
stayed in touch then maybe six months
later or nine months later or a year
later they'd have got some money out of
that investor
don't forget times change the investors
particular situation may change
they may have more money in nine months
they may have changed their point of
view about the industry in a few months
they may have actually had a life change
where they have a different point of
view about the style of stuff they
should invest in you don't know so come
back to them build your relationships
you know a classic example of this is
Zappos the world's biggest online shoe
store
the truth is Zappos was running out of
cash fast they were desperate to get
some money into the company and they
went to see a guy by the name of Michael
Moritz a very famous billionaire venture
capitalist and head of or one of the
heads of the Sequoia venture capital
fund they thought okay we're a fast
growing business we may be small but
we've dealt with Michael before he's
shorter invest in this and they were
really surprised when he said no they
came back a few months later he said no
again they came back a few months later
after that he said no again and they
came back again a few months later after
that having continued to build their
business and they got capital so be sure
that when it comes to your business you
don't just turn up once to venture
capitalist you keep in contact okay
what's our summary of all these points
you've had an absolute mountain of
information here but let's see if we can
summarize it number one put off raising
capital as long as possible you'll get a
better price later and it'll also make
you meaner and keener to build the
business build relationships with
potential investors before you need them
get an introduction to a potential
investor dangers cold call them if you
can possibly avoid it use your own
personal contacts first your friends
your family your relatives they're going
to give you a better price and they care
for you more and they're probably if you
lose the money not going to send in the
liquidators and the receivers on you to
friends first next go to the angel
investors and remember the angel magnets
people want to see passion
interesting nice fun people they're the
type of people they want to give their
money to if their angel investors
they're in it for the lifestyle for the
enjoyment as much as the investment
return next up go to the venture
capitalist and use my strategies for
talking with either venture capitalist
or private equity companies don't forget
advertising it can be one of the
cheapest ways of raising capital put an
out in your local paper asking for
investors you'll be surprised what you
can get follow my pitching format or at
least follow a pitching format from an
expert don't just do it yourself and go
off in all directions shorter is always
better
don't forget your executive summary is
incredibly important really spend the
time on it always have a detailed
business plan don't give it to them
straight off give it to them later but
make sure it's comprehensive include
projections and the justifications for
those projections decide a realistic
valuation be real not pie in the sky
consider convertible notes they're an
excellent instrument for both the
company that receives the note and the
investor negotiate intelligently and
then stay in touch after the initial
meeting even after the initial rejection
so that you create a relationship who
knows what's going to happen in the
future okay
your weekly work it's very very simple
number one contact three investors
whether you need them now or not
literally ring up people who could
potentially give you money even if you
only want it in two years or in six
months or a year and say to them hey
let's have a chat I want to tell you
what's happening in my business don't
want to ask you for anything maybe you
give me a little bit of advice but I
really respect you and I'd really love
to come around and just show you what
I'm up to
and then number two create a pitch to
get money whether you need it or not
it's fantastic to do that early because
number one it clarifies exactly what
your
business proposition is for an investor
and number two you never know when
you're going to be at a dinner party and
someone's going to say send me some
stuff about your company and you could
get an investor at the very next day
have your investment proposal ready you
never know when you're going to use it
so there you have it a whole heap of
ways that you can raise money for your
business quickly efficiently and at a
good price now don't be too hard on
yourself if it was all a bit of an
information hit a bit of a bomb of data
for you it does take a while to digest
all this information that certainly took
me some time
so just play this video again read your
notes again and again every week or so
and you'll get very used to it and it
will become second nature to you every
business skill is learn about and
raising money for a business is exactly
the same next week I'll be talking about
the biggest mistakes I've ever made in
business now I've made a few and I
really want to save you from making them
until then work hard think big and I'll
see you next week at the fortune
Institute