TEASER: Last week, we began part 1 of our 2-part series with seven critical questions the founder(s) must answer prior to pitching to Angel Investors/VCs as well as preparing for their due diligence. This week in part 2, we complete the series with a review of an additional seven questions the founder(s) must answer prior to their pitch to the Angel Investors/VCs and subsequent due diligence.
For some it’s the daily ritual of pulling out the heavy well-worn breakfast pots, fetching water or hauling wood as needed to start the morning fire. While for others, it’s taking a quick shower followed by the brisk adorning of a suit as needed for the day’s anticipated executive session. Regardless of the ritual, getting ready for the day’s events is part of our global rhythm. So familiar are these routines that the definition for the word ready seldom, if ever, is reviewed. However, as the founder of your startup preparing for the Angels/VCs pitch and due diligence, the definition for this word ready is exceedingly relevant. For to get ready, it is understood to mean being fully prepared without omissions or deficiencies! While attaining this deliverable on a personal level is an ongoing expectation, the outcome is exponentially daunting for the startup founder entrusted with ensuring that the criteria for the pitch to Angels/VCs are not only met, but exceeded. It is for this reason that this week’s SIMBA Global Startups Success Essentials series continues with part 2 of our review specific to the critical questions that must be answered, and actions that must be taken by the founder(s) for a favorable review of their pitch to the Angels/VCs. Are You Ready? Let’s begin!
Question #1: Have you identified your startup’s funding needs and tracked expenditures in a credible, organized, and comprehensive review?
Founders who are effective in fully preparing their startup for scrutiny by Angels/VCs must have already assembled pertinent documents that specify detailed funding needs and uses of money being raised in a given round. It should be absolutely certain for the founder(s) to understand that questions relative to their integrity will immediately emerge from any presentation that is not informed by credible, organized, and trended documentation. Given that a favorable review by the Angels/VCs actually represents the intent of a mutual commitment by both parties to a relationship built on trust, establishing the inaugural integrity must be an obvious requirement for the founder(s).
Included in this comprehensive overview of the startup funding needs must be an honest accounting of any existing investments that have already been successfully procured by the founder(s) from previous rounds such as pre-seed, seed, and Series A. As a result, not only will clarity specific to future funding needs be ensured, but the Angels/VCs will be provided with the documentation needed to confirm that as the startup founder(s), you will steward their resources effectively to ensure maximum profitability and return on investment (ROI).
Question #2: What is the monthly “Burn Rate” for your startup?
Experientially, the term burn rate is used to describe the amount of money needed on a monthly basis for your company to stay alive. Consequently, the burn rate is calculated by determining the direct cost of sales including cost of goods sold (COGS), partnerships and affiliates fees; salaries and wages; rent, utilities, and insurance. From a theoretical perspective, burn rate is the rate at which a company is losing money on a monthly basis. For example, if your startup conducts $100 in monthly sales and your expenses are $250 per month, then your burn rate is effectively $150/month. Another expression to describe the burn rate is negative cash flow. With minimal reflection, it is glaringly obvious that with a high burn rate or negative cash flow, the startup will either have to immediately start making a profit, find supplemental funding, or unfortunately go out of business.
Historically, this term burn rate was coined during the dot-com (internet-technology) era as experienced in the United States at the turn of the 21st century. The term emerged as an expression that described the funding stages for a flood of startup companies prior to even establishing profitability and sustainability through positive cash flow.
Another often less thought of use for the term burn rate is in reference to the rate at which designated hours are spent on a specific business project. In this case, identifying and understanding burn rate within this context is of great value to the founder(s) specific to priority setting, product efficiencies and organizational synergy.
Question #3: Have you determined the market size for your startup?
Market size is consistently defined as the number of people who are potential buyers of your product or users of your service. Remember that there is an ideal customer for whom your startup makes such a significant difference that other options disappear. Make sure you have absolute clarity on the problem that you perfectly resolve on behalf of this ideal customer. Then declare your market and determine your market size. For example, if you are in the business of education, you might determine that you teach junior high girls strategies for success in high school math. Given that your startup exists to meet this unique buyer or user need, it is a non-negotiable fact that the founder(s) consistently determine, reassess, and redetermine the actual and projected market size to ascertain its accuracy. To calculate your market size, you’ll either be looking for data on the number of potential customers, or number of transactions each year. Given that market size is dynamic and ever-changing, we recommended that your projected market size be calculated for no more than a 3-year forward-looking window, and updated regularly in light of emerging competition.
For purposes of financial strength for your startup and for credibility during the pitch to the Angels/VCs, we strongly advise that you create conservative as well as best-case market size projections. In this way, you ensure not only that your pitch is credible, but also that the cash flow projections as needed for the scalability of your business is reliable.
Question #4: Do you know your competitive landscape?
As the founder(s) of your startup, you may ask why you need to know your competition. Shouldn’t I put all my energies into making my company its best? Isn’t it true that as in a race, if I spend all my time looking to the right, or to the left, or even behind me, that I will diminish my own speed and create a vulnerability for my startup’s success? Certainly, these are indeed valid questions. It is true as the founder, you don’t want to be obsessed with and consumed by the competition. However, insights specific to your competitors’ market shares and the type of product they are offering can inform your own product and/or service design and make it remain distinctive. You can be sure that understanding the value proposition for your company is an expectation that Angels/VCs will have during your pitch and during their due diligence.
Furthermore, understanding the competition will help ensure that you set your price at a competitive level that is market relevant and attractive to the consumer. In particular, your being mindful of the lurking competitors can inform your own product design such that you take advantage of your competitors’ weaknesses to improve the relevance of your service. Competition scanning is also an essential strategy by which as founder(s), you can ensure an ongoing assessment of any threats posed by new businesses that have just entered the business landscape. Through this knowledge, realistic projections for successful business growth can be both informed and realistic. Also, keep in mind that given the significance of on-line sales, it is essential that an analysis of the competition include the e-commerce platform as well.
Question #5: Are patents and intellectual property (IP), if any, accounted for and protected?
Amidst the excitement of launching your startup, it is easy to lose sight of the importance of designating time to formally protecting your product (patent) or service (IP). Failure to ensure these protections early can result in later financial losses that could devastate your startup. Your ability to protect your patent and IP will be of significant interest to the Angels/VCs as they consider your pitch and conduct their due diligence. Obviously, these investors want to ensure that their financial interests are protected and empowered for maximum returns on investment (ROI). Therefore, even when initial cash flow is strained, it is essential that funds be designated for proactive legal counsel specific to the need for any patentable products or the protection of any IP. Then, in collaboration with your attorney, you must conduct research to determine whether anyone else has registered exclusive rights to the brand names or products provided through your company.
Given the dominance of e-commerce, this research must also include social media and the internet. In addition, as you build your workforce, it is important that you ask each member of your team to sign an agreement in which it is acknowledged that they understand that all IP and patents belong solely and exclusively to your company. Be sure that any employees and independent contractors who will work with trade secrets sign strong non-disclosure and non-competition agreements, because there is no registration for trade secrets. Trade Secrets are protected only as long as they remain secret. Therefore, protect your business creativity, innovation, product, or services early and carefully for long term growth and scalability.
Question #6: Have you built a valuation model for your startup before the pitch?
During your pitch before the Angels/VCs and at some point during the due diligence, you can be sure that the question will be asked – How much is your company worth? The term that is used to describe this worth is valuation. In general, there are three general methods used to determine the valuation of your startup. The first valuation method we identify for you is called the Cost Approach (CA). Through the CA method, the business owner carefully determines the cost to build the product. The valuation from the CA method is relatively easy to calculate given that it is based on ongoing operations and therefore, is always current.
The second valuation method frequently used is called the Market Approach (MA). The MA method utilizes comparative analysis of precedent transactions to determine the point to which positive cash flow is projected and sustained. With the MA method, the business owner determines the valuation of their company within the context of the valuation of similar companies that have been either sold or acquired.
The third method to calculate valuation is referred to as the Discounted Cash Flow (DCF) method. The DCF method is based on a form of intrinsic valuation. This method is often viewed to be the most detailed and comprehensive approach to valuation modeling. Through the use of a resource such as an Excel spreadsheet, a DCF analysis is conducted where the founder(s) is able to forecast the company valuation through differing financial rule-based scenarios.
Question #7: Are your fundraising targeted goals clearly identified and in order?
While your primary fundraising strategy is to build a great product or offer a great service through which you will establish market share while generating ever-increasing sales and revenue, it is also typical to include in your fundraising model partnerships with potential Angels/VCs. It is for this reason that we have dedicated these recent postings to insights and proactive actions that as founder(s), you will now implement to strengthen the likelihood that your pitch to the Angels/VCs will result in a favorable outcome.
Therefore, as a first step, we strongly recommend that you create a comprehensive list of 15-25 Angels/VCs whose interests you believe align well with the personality and purpose of your startup. Furthermore, we suggest that you to create informal networking opportunities with these individuals through which you explore mutual interests. Gaining understanding through these meetings will also provide valuable insights for creating your pitch.
This brings us to a very significant point where each pitch must uniquely be tailored to the interests of the Angels/VCs. Not only will it be insulting and disrespectful to the potential funding partner(s), but your pitch will be doomed to receive a negative review if it is presented in a generic “cookie-cutter fashion”. It is also important that you develop a resilient but flexible mindset that accepts the reality that you may need to make more than one pitch to various Angels/VCs prior to receiving a favorable outcome. Without becoming defensive, you must develop a receptive and welcoming mindset that can handle what often will be brutal feedback, and then use the lessons learned to gain new valuable insights. By way of review, you should note that angel investors can be a single individual or group of individuals who invest their own money into a company, whereas venture capitalists (VCs) are employees of venture capital firms who invest other people’s money such as insurance companies’ funds, university endowment funds, or corporations’ pension funds.
- Create a spreadsheet that identifies the funding needs for your startup. Include in this overview a correlation of anticipated funding needs with actual expenditures. Be sure to create parallel files of documentation for these projections.
- Calculate the monthly burn rate for your startup. For maximum financial effectiveness, evaluate this cash outflow against your actual and projected revenue. Identify strategies to eliminate negative cash flow with associated timelines for achieving these goals.
- Identify the ideal customer for which you are the only answer. Formulate a feedback system by which you ensure that you continue to meet and exceed the expectations of this ideal customer.
- Develop a checklist that you will utilize to determine your top seven competitors. Remember to include on-line vendors in this determination. Utilize this checklist on a quarterly basis to ensure that you maintain your startup’s competitive edge.
- Identify an attorney for your startup. Ideally, this will be someone who will provide an initial free consultation in exchange for a long term relationship through which your company’s IP and/or patents will be protected.
- Build a valuation model of your startup before the pitch using one of the three valuation methods discussed earlier. You can be sure that as founder(s), the Angels/VCs will question you intensely on your startup’s valuation method. Therefore, be ever ready on the question of your startup’s valuation.
- Begin now to create a list of Angels/VCs for your potential pitch and due diligence. If possible, establish a networking opportunity during which you can confirm their potential interest in your startup.
NOTE: As a reminder, SIMBA Global Startups offers mentorship assistance for the design and implementation of the above Call-To-Action formulation to qualified founding entrepreneurs. We therefore invite you to review our funding qualification criteria and subscribe to our free newsletter at our website: https://simbaglobalstartups.com/entrepreneurs/
MENTORING MOMENT: York Zucchi, Swiss-born global entrepreneur
“… As we jumped through various stages in funding rounds, still self-funded, I ask myself if an investor was going to buy in now, what would they want to see us doing or what would they want our next priority to be…. And then we did that next …” – York Zucchi.
NOW Just IMAGINE!