10 Ways to Show Investors Your Startup Has Good Management
JOHN SULLIVAN: Entrepreneurs must realize that when venture capitalists select new investments, the management team is the most important criterion.
Cass Business School research found that an effective management team was number one, followed by strong market drivers and a unique, disruptive product.
Stating that you have great management isn’t enough because you must also effectively “sell” the team’s management strengths to the investors. And that means providing insightful information beyond the standard: years of experience in the industry, previous firms, degrees and their primary technical skill sets.
To maximize investor confidence, also include information covering the following 10 powerful capabilities.
The culture the firm will operate under: Investors insist you have a plan for developing the type of culture that is required for continuous innovation and scaling up. As part of your plan, mention other effective company cultures that you’ll try to emulate because they mirror your situation.
Learning and adaptive capability: Google found that during rapid change, learning ability is the one factor across all positions that predicts on-the-job success. Build investor confidence by showing that your team has a systematic way to stay on the leading edge of knowledge and to adapt, learn from and bounce back after failures.
Show collaboration: Show that to maximize innovation, you have designed collaboration into every aspect of your team’s workflow.
Rapid conflict resolution: Conflict is common when passionate individuals with complementary skills collaborate. So show a process and a track record for rapidly resolving major conflicts.
Show the team is forward looking: Reveal your process for systematically spotting upcoming problems and opportunities, while there is still time to act, evolve and adapt.
Balance strategy and execution: Show your team understands the future strategic direction of your industry while at the same time it can effectively execute t10 Ways to Show Investors Your Startup Has Good Managementhe tactical aspects of your business plan.
Show you can convince others: Leaders must have passion but it may be just as important to have the capability of convincing others to also believe as fervently as they do. So reveal how management has been able to successfully convince top talent to join and remain with your firm. Also include your proposed process for incentivizing and continually motivating your team during the inevitable lean times.
Openness to accepting referred talent: Few VCs expect you to have a complete team when you ask for funding but many will want a voice in “filling in the gaps.” Be sure and acknowledge those leadership gaps and show enthusiasm for accepting new team members that are referred by the investors.
Reveal mutual acquaintances: It might seem like a small thing. But showing that team members and the investors share common long-term acquaintances helps to build trust and it provides them with a credible reference.
Team member summaries: Finally, don’t force investors to read a dozen resumes. Instead, provide a summary section covering each current and potential management team member. Include a one paragraph compelling story that effectively sells only the best aspects of each person.
John Sullivan has been a professor of management for over 26 years at San Francisco State University. His specialty is human resources strategy and designing human-resources systems and tools for Fortune 200 firms.
Why Small-Business Fundraising Should Involve the Whole Company
AMSALE ABERRA: As a fashion designer, I am not well versed in financial management, which is probably the case with many entrepreneurs. However, my philosophy has always been to build a capable team to help handle the areas that aren’t my specialty.
Some may think that financing a business is primarily about getting a bank loan or finding an investor. I’ve come to learn that managing the finances of a growing business is a regular activity involving a broad effort in which almost every department plays a role.
To begin with, it is important for a business owner to understand how much funding will be needed for the business, at what times, and what is causing the need for funding.
So I ask my financial staff to be very diligent in helping prepare financial projections, both long term as well as short term. I ask multiple departments to get involved so that information is flowing from those with firsthand knowledge, and who will be accountable for its accuracy: The sales team for revenue projections, the production team for cost projections, and any other team members involved in major expenditures.
It is important to be open with team members about the financial concerns of the company. They can better solve problems, such as identifying most supportive vendors, steering away from consistently delinquent clients, and negotiating the most helpful terms, if they know what’s important to the company. Financial stress will be obvious anyway, and less anxiety provoking if everyone feels involved in a team effort to resolve.
Before looking for outside funding, I recommend exploring all potential sources of financial help from existing business relationships.
Start with vendors. Persuading vendors to extend credit terms can be a powerful source of financing. However it is important for your buying and accounts payable teams to build trusting relationships by being open, honest and responsive, especially about timing of payments, including unavoidably late payments. Vendors also want their businesses to grow. Share information such as projections that demonstrate growth, a schedule of when customer payments will be made that will enable you to pay a vendor, or progress with a particularly promising customer that could lead to more joint business, and your vendors may be very supportive.
For vendors who are supportive, reciprocate when the time comes they need support, perhaps with advance payments. When the shoe is on the other foot, they will be more inclined to help your business. We had a very important and reliable contractor that at one point needed help with some substantial early payments. We were in position to help, and did so. Later this vendor was instrumental in helping us expand a new business line by tapping its credit sources to extend us generous credit to help us launch this new initiative. However be careful to balance your credit demands from suppliers, and be sensitive to their needs for healthy cash flow so they will remain motivated to support you.
If the need is for renovations to rented space, for which lenders can be reluctant to fund, the landlord may be willing to finance all or some of the cost, or give a substantial free rent to help your company finance the work. Such a negotiation is normally done at the beginning of the lease, but could be approached during the term if the improvement increases the value of the property or is in return for a rent adjustment.
Customers can also be a source of financing. Try to seek deposits or prepayments on large orders. A client that values your product or service may be more supportive than you think. If you operate on a set payment schedule for your product or service, consider ways to front-load the payments.
After exhausting “internal” sources of financing, consider financing each type of need separately as an alternative to a general business loan or investment. If the need is to purchase real estate, perhaps a separate mortgage, rather than a business loan, may be available, thereby leaving the rest of the business assets available to collateralize other financing. For equipment, consider leasing, either from the equipment supplier or a separate leasing company.
When seeking outside financing, I strongly recommend seeking specialized advice. Research CPA firms to engage an accountant that is known as an expert in the industry. He or she will open doors to the decision makers at the banks, nonbank lenders and many investing firms that finance similar businesses.
Such an expert can advise on when to consider nontraditional lenders. Banks are great for stable companies. But a growing company, especially one with some surges and dips, may need more flexible terms than a bank can offer. We have found success with an asset-backed lender. It is more expensive and requires more documentation than a traditional lender, but for us it matches the ups and downs of our needs well.
If the cash need is long term, and the conclusion is that an equity investor is needed, determine if your CPA or existing advisers are well versed in business valuation and negotiating with investors. If not, strongly consider engaging a specialist.
When seeking an investor, I recommend looking for more than just financing. Identify an investor that can truly help the business with a network of valuable contacts or with operating expertise in your industry.
Amsale Aberra (@AmsaleBridal) is a couture bridal designer and creative director of Amsale Group.
Three Reasons Why Entrepreneurs Need to Be Transparent With Potential Investors
CHRISTINA BECHHOLD: Early-stage startups are like peacocks–confident, assertive, strutting up and down Silicon Valley and Alley to show off their fabulous product, amazing people and dazzling prospects. Entrepreneurs sell the dream, and rightly so. Audacious vision is what I look for in every founder I fund. No one is looking to partner with the next middle-of-the-road anything.
Too often, though, startups assume determination is sufficient, and obfuscate truths that detract from the carefully orchestrated forward momentum. Such deception, intentional or not, usually backfires. Transparency, though, never fails, especially at the earliest stages of fundraising, and should be the priority of every founder. Here are three lessons on this theme:
Lesson 1: Investors talk to one another.
I met with a company founded by a well-respected entrepreneur whose software company was a first mover in what was gearing up to be a massive market.
He was well-spoken, experienced and persuasive. We moved through due diligence, and he seemed reasonably forthcoming with information.
When we got to actual investment discussions though, details became spare and odd—no disclosure of who was interested in participating, simply promises that the round was moving quickly, a term sheet from an alleged lead investor filled with blanks and typos.
Because the company had cast a fairly wide net when pitching, I emailed a few people I knew had also looked at the deal. All were getting different stories about the round, participation and terms.
Some were given names of different leads. When I raised this with the founder, he was taken off guard, surprised I knew other investors with whom he was speaking. He became markedly less self-assured, stumbling through an explanation.
We passed immediately.
Creating urgency is fine, but don’t try to play investors against one another.
Lesson 2: Share the facts before you’re asked.
Fundraising is a slog. I advise first-time founders to double the timeline they budget to raise, because it will always take longer than anticipated. Seasonality—summer vacations and year-end holidays—will undoubtedly slow down response times. Product and market are evolving simultaneously, so numbers and discussions change in real time.
If you shared projections for April and it is now May, proactively send the April actuals to the investors with whom you’re actively engaged. Share an update on the partnership discussions you hoped to conclude in March but which are pushing into late spring. Don’t sit on facts hoping no one asks. You’ll end up with investors who are ill-equipped to make an informed decision, leaving you with no or ignorant money.
Lesson 3: Value our time, and expect us to value yours.
While one might assume early stage-investors make decision based on a few Google searches and gut instinct, some angels and most fund investors do a significantly amount of diligence on any opportunity they consider seriously—market sizing, competitive analysis, expert references. While we accept the majority of our investments will fail, we certainly don’t write individual checks assuming so.
Investors mostly say no, and the best ones do it quickly. We must always recognize the tremendous value of an entrepreneur’s time, as should they ours.
There is no better way to sting an investor than encourage him to spend time and resources exploring an investment, advocating for it, and then cut him out at the end. While rounds can get competitive and tough decisions made, one can do it with more grace than a brisk email or call stating there is simply no room. Those are memorable interactions with founders on whom no future investment consideration will ever be spent. Be upfront about your expectations, timing and options.
Research suggests that transparency should be a priority for every company and can literally change the world. Acknowledging a mistake, let alone a failure, requires self- and situational awareness as well as a fair bit of humility. Fundraising founders who choose to make transparency a core value of their startup and their raise don’t trip over lies, forget details or ruin relationships. They get to the close.
Christina Bechhold is co-founder of Empire Angels, a member-led, New York-based angel group of young professionals investing in early stage technology ventures. They focus on supporting young entrepreneurs.
Here’s One Financing Source Entrepreneurs Too Often Overlook
SHARON HADARY: One of the most overlooked sources of capital for small and middle-market businesses is the so-called family office—private wealth-management firms that serve ultra-high-net-worth families.
Over the past decade, family offices have started to bypass indirect investment through private-equity funds and to invest directly in entrepreneurial ventures. It makes sense: A substantial proportion of the families with family offices earned their wealth through growing privately held businesses and, therefore, lean toward investing in entrepreneurial ventures. They may invest on their own, join with other family offices with similar investment goals, or participate in an investment club of family business.
Although family offices may start at $20 million, the vast majority have wealth in excess of $100 million.
As a result, it’s a great opportunity for growth-oriented entrepreneurs seeking capital.
For entrepreneurs, there are many benefits to getting capital from a family office. Family offices have much more flexibility than most other sources of private equity. They have no rules or restrictions about what they can do with their money. They have no investors whose goals they have to meet. So they can do whatever they wish with the money.
Because many families have experience with growing a privately held business, they understand the challenges the entrepreneur faces and recognize that it takes time to grow a business. They can tailor their investment to meet the needs of the business and may offer more flexible terms including longer time for realizing their return on the investment.
The relationship with the family office often is more personal than with other investors and, in many cases, members of the family become mentors and advisers for the entrepreneur. The value of having a family office as an investor is likely to go well beyond the value of the cash infusion.
The challenge is making contact with the family offices. There is no easily available list of family offices that invest in entrepreneurial ventures. Most introductions are made through personal connections and introductions.
Start with your own network and see if anyone—especially business lawyers, bankers, other entrepreneurs or a friend of the family office—can make an introduction.
Most likely you will have to turn to a business broker or a strategic growth adviser. These resources often have lists of family offices and the connections to make the introduction. They can also help identify opportunities for strategic growth and help you tailor your business plan presentation to align with the family office’s investment interests.
Sharon Hadary (@hadaryco) is the founding and former executive director of the Center for Women’s Business Research and an adjunct professor in the doctorate of management program at the University of Maryland University College.
Fundraising Is Really About Finding the Right Partner
DAVID KALT: When looking for investors, founders need to know that the value of a venture-capital firm or private-equity firm isn’t its ability to cut a check, it is its potential as a partner. And finding the right partner is much more important than the amount raised or your valuation. Indeed, the cost of capital isn’t limited to the dilution of your stake on the company. A bigger cost comes from an equity partner that fails to deliver value beyond his or her financial investment.
A great equity partner adds tremendous value beyond their invested capital, and a lousy equity partner destroys value beyond their contribution. Unfortunately, founders often go into the fundraising process with rose-colored glasses, assuming the former rather than the latter. Yet nine out of 10 times, an investor’s nonfinancial impact will be neutral at best, and will more likely be negative.
There are three key areas I advise founders to consider when seeking out the right equity partner.
First, approach the process just as you would when making your most important hire. Look at each investor’s track record, references, history and culture. Dig deep into your personal and professional compatibility and chemistry with them. How do you feel after meetings with them? Inspired? Degraded? How did the prospective partner deliver criticism? How did you receive it? Were they insightful?
Second, as in any relationship, equity partners have expectations. It is critical that you know what success looks like to them, in terms of time horizon and return expectations. Do they think in three-year, five-year or 10-year chunks? Are they looking to double or triple their money, or to make 10 times?
Third, look for an equity partner who is thorough and detail-oriented, common characteristics of the best private-equity and venture-capital investors I’ve met. Good ones take their job seriously; they listen to every word you say and keep incredibly detailed notes they refer to often. They do this as market research, of course, but also to hold you accountable. As such, even your earliest discussions should manage expectations.
You will speak with many investors who don’t invest in your current round, but who might in a later one. They will know if you kept to your promises.
David Kalt is the founder of Reverb.com, a marketplace for musical instruments and gear, and the owner of the Chicago Music Exchange, a vintage guitar store in Chicago. He also co-founded and was the former CEO of online broker optionsXpress.
Looking for Startup Funding? Sell Before You Build.
RITA GUNTHER MCGRATH: One of the most often overlooked entrepreneurial funding strategies I’ve come across is what I call the “sell before you build” approach.
All too often, would-be entrepreneurs think they actually need to have a product or offer a service to be able to sell it.
Let me give a specific example of an attendee who came to one of our Columbia entrepreneurship classes.
At the time, he was the purchasing manager for a shipyard in Brazil. One of his biggest frustrations was the uneven quality of materials that came from overseas suppliers, and the absence of any mechanism to intervene before having the goods expensively shipped to Brazil, only to have them rejected.
During the class, we started talking about how this gap in the market might represent an opportunity for a new business. But rather than quitting his job, putting up a shingle and hoping customers would turn up, he instead created a company name, got an email address, printed up a few business cards and a brochure.
Then he went to a major trade show and talked up his startup idea.
Much to his delight, he received a request for quotation on the spot.
His next step was to create a presentation, figure out pricing, and pay the potential client a visit. Based on our warning not to set his prices too low (another mistake entrepreneurs classically make), he created a price with a whopping profit margin.
As he reported later on, “I’ve got the purchase order and not even a comment about the price, or a discount request! After that fell into place, then it was time to really open the business officially!” He next talked one of the local business magazines into covering his startup story, other customers started to call, and things were well under way.
Once you have actual, paying customers, finding additional funds either from those customers (who will often help finance expansion plans) or investors looking for a demonstrated proof-of-concept becomes pretty easy.
As we like to say, “Use your imagination before you spend money!”
Rita Gunther McGrath (@rgmcgrath) is an associate professor at Columbia Business School and author of the recent book “The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business.”
How Stepping Down as Chairman Helped My Company Raise Money
JEFF JONAS: As founder of Systems Research and Development (SRD), like many entrepreneurs I was passionate about our technology and market opportunity as I pitched venture-capital groups. Fortunately, I had hired an experienced chief executive to run the company. One of his first moves involved bringing on a senior management team he knew and trusted. Another big move was to ask me to step down as chairman of the board to vice chair as he felt the company needed a more experienced board chairman, too. Despite being the largest single shareholder, I agreed.
This “adult supervision” turned out to be essential to fundraising.
Investor interest changed almost overnight. What I came to discover firsthand is that investors cared more about the management team than my fancy technology. The lesson: A “B-league” idea being managed by an “A team” is a better investment than an “A-league” idea being led by a “B team.”
The venture-capital firms looked to my management team to understand the vision, organizational structure, development and marketing road maps, growth plans, risk mitigation, etc., during their due diligence. During these conversations, the management team spoke about these matters in terms familiar to the investors. My management team was also able to describe critical structural changes needed to make the company successful.
One great example of this is our capitalization table. The table we initially had was atypical and thus presented unknowns, thus potential complexities—sure to create deal friction. Our experienced chief financial officer easily headed off this “structural problem” by clearly describing what the SRD capitalization table should look like and how we were going to get there. Conversations like this demonstrated to the investors we had deeply experienced management running the company. The resulting investor confidence led to a very nice A round financing with great terms. Just two years later, the venture-capital firms monetized on their investments at very decent rate of return when SRD was acquired by IBMin January of 2005.
There are an overwhelming number of great ideas being cooked up all over the place. Most of these ideas will never see the light of day, only because they aren’t being guided by a world-class management team.
As many founders and innovators are often not skilled and proven business leaders, it can be difficult to recognize this trap—and even if this is understood it is even harder to hand over so much control.
As a result, lots of great ideas will never get funded.
Jeff Jonas (@JeffJonas) is an IBM fellow and chief scientist of Context Computing.