Wednesday, October 26, 2011

Pitching to Angel Investors: Your Business Model and Financials

The business model describes how much revenue you make from each customer, along 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.

The financials reflect in numbers what the previous sections described in words. They must be consistent. If you are showing a revenue growth rate of 100% per year and your business model indicates you need a sales person per $1M of revenue, then these numbers should come up in the income statement.'

For companies already in operation, it’s useful to show the past year and the coming four years. In other words a five year window is used. In addition to the income statement, there also needs to be a cash flow statement and a sales forecast that breaks out ASP (Average Selling Price) and unit growth. Investors want to see gross margins and net income to understand the profitability of the business.

Funds Sought and Use of Funds
It’s important to state how much funding you are seeking in this round. If you’ve received a previous round of funding it’s helpful to show what you accomplished with that funding. Achieving milestones demonstrates your ability to execute which is one of the key questions the investor will be asking. Also, for the funds sought in this round show how those funds will be used.

Finally, discuss the exit strategy. How will the investor get their money back? Will it be a merger and acquisition (the most common form today), an IPO, or some other method. This is how the investor can calculate an expected rate of return.

Investors often look for market validation. List the customers you have closed to demonstrate that customers will buy your product/service. If you don’t have any customers, it’s advisable to get a few of them signed up before you go out for fund raising. It’s also important to list customers in the pipeline with forecasted sales expected from each. Showing your customer’s results from using your product/service in the form of an ROI or even hours or dollars saved goes a long way to proving the value of your product/service.

Best regards,
Hall T.

Monday, October 24, 2011

Pitching to Angel Investors: Competition & Competitive Advantage

If you want an investor to stop listening to your pitch presentation or to stop
reading business plan, state how you don’t have any competition. You might be
surprised at how many entrepreneurs make this rookie mistake in their pitch
presentations--we hear it constantly, and it’s almost certain that you’ll lose
credibility instantly with investors.

I believe that entrepreneurs that say they have no competition are trying to convey a broad opportunity to exploit a market--the problem is that it has the opposite effect. The main reason is that the customer is solving the problem somehow now,even if indirectly in comparison to your solution. There’s always another company competing for the same dollar, and even worse, If the investor finds out about a competitor from someone other than the entrepreneur then it makes them look even more unprepared.

When researched thoroughly, the competitive analysis in your business plan
demonstrates to potential investors that you understand the strengths and weaknesses of your business. It also gives them a better picture into the market opportunity.

When doing research on the competition for you plan or pitch presentation, you should focus on answering the following questions:

1. Who is out there competing for the same dollars that you’re going after?
2. Are they directly or indirectly selling products, services, or substitutes that
3. What are their strengths and weaknesses in the market?
4. How are they currently positioned in the market.
5. What segments of the market do they operating in?
6. What is their go-to-market strategy and how does that differ from yours?
7. What threats do they pose that may impact your business?

In other words, perform a SWOT Analysis (Strengths, Weaknesses, Opportunities,
Threats) on each one of your competitors and compare them to your company.

When you go to present your findings in the business plan make sure you:

1. List the key competitors with their strengths/weaknesses in comparison with your
2, Show specific competitive advantages of your solution.
3. Use numbers to make the comparison. The more numbers, the more solid your company
looks. Use numbers to show market share, your economic benefit, etc.