By Patrick Driessen

“High achievers spot rich opportunities swiftly, make big decisions quickly and move into action immediately. Follow these principles and you can make your dreams come true!” - Robert H. Schuller

"Success isn't a result of spontaneous combustion. You must set yourself on fire!” - Andrew H. Glasow

On a regular basis I receive questions from fellow entrepreneurs if I can please help them with their startup, early-stage venture, or later-stage venture. Often their request for advice and support is based on their need for fund raising, to get through the startup phase or whether they should start their business or not.
To help many emerging entrepreneurs in these area's, I'll share many of my insights, lessons learned, tips and experience; allowing you to make the best startup and investment considerations!

Below you'll find an overview of insights, questions and actions allowing you to make the best considerations whether you should start or expand your new/existing venture or not and as a next step to allow somebody else to consider whether to invest in your venture or not. It's a mixture of qualifying questions and actions which I use myself as entrepreneur and angel investor, mixed with the investment considerations from fellow entrepreneur Tim Davis.

STEP 1: The Investment Considerations (TIC) for your New Venture

Getting Investor Ready

The questions below will help you to define the required actions, answers, stories, strategies and next steps, giving input to all the paperwork required to convince potential investors. Most of this information will be used for the creation and optimisation of the following documents:

1-page Investment Summary
Information Memorandum
2-10 page Business Plan
Draft Shareholder Agreement
Investment Term Sheet.

Go/No-Go Decision

The answers to the questions below will allow you to identify and define all the possible roadblocks and key challenges in getting your new business venture up and running. If you list these challenges and define strategies and actions on how to prevent and/or overcome them, you have the ideal input to make a GO or NO-GO decision. For example:

To successfully start and grow our new business venture, these are the key challenges:

Secure $50-150k in seed funding and potentially $500k in a Series-A round;
Find and hire an exceptional CFO and COO within the first 6-12 months;
Allocate sufficient working capital to bridge at least 9 months to get to break-even;
Sign an exclusivity agreement with X strategic partners;
Protect our brand name and other IP by xxxx before xx-xx-2011;
Create complete beta version of our new product/service within xx weeks;
Etc.

If you can positively overcome these challenges, including creating a Plan B(ackup) for any one of them (always expect the unexpected...), than you could decide to give it a GO, otherwise it’s back to your drawing board or give it a NO-GO and walk away from it.

TIC - Company Product or Service

What is the Clarity of Purpose: Summarize the company's business on the back of a business card.
What's new about what you're doing? What are people forced to do now because what you plan to make doesn't exist yet?
How did you come up with your business idea?
What is the Growth Opportunity?
What is your Competitive Advantage?
What can you offer that others cannot?
What are the Customer Benefits? (both performance and psychological benefits?)
Why would ‘you’ use your service? Why would others?
Why would ‘you’ pay for your service? Why would others?
What stage of development are you in?
How will you make money?
What is the social proof for your venture/business idea? E.g. are any "known" people from the industry involved in your company? If so, what is their role and what makes the person(s) impressive?
Is the new product or service ready? Demo? If not, what is the time-line for development and market launch?
Do you have any ideas/products/services you’d consider patentable?

TIC - Services and/or Product Strategy

What is the “value equation”? That is, Customer Value = Seriousness of Current State + Benefits of Proposed Future State -/- Cost of Solution.
What is the product or service ‘really and simply’; in one statement or word?
How will you improve your product or service?
How will these improvements allow your company to expand into other markets?
What is your “dream vision” of the product or service? That is, if I gave you a bottomless pit of money – what would you do? Why?
Is there any ‘uniqueness’ in terms of IP, etc?

TIC - Market

What is your target market?
What do you understand about your market that other companies in it just don't get?
What is the “bottom up” market view (i.e. entry level, segments, industry, country, global, etc.)
What is the “top down” market view? (i.e. above in reverse)
What is the current market state?
Who are the current market leaders (if any)?
What will differentiate you from the market leaders?
What is the market size and opportunity?
How much of the market are you wanting to penetrate?
How are you taking market share off existing players in this market?
How is your industry changing and what is the impact on the niche market(s) you focus on?
What are your “expansion axises”? I.e. what markets do you want to expand into?
What are the barriers to market entry? What are some mitigating factors?
How are you going to “increase” market share?
How many target audiences are there within your target market(s)?
What are your key target audience(s) per product/service, per country, region, etc.)?
What is/will be the average spending on a service/product in your target market(s)?
How can you increase the share of wallet?
Are there any organisations or competitors in the market you’d consider to acquire to accelerate your growth?

TIC - Risks

What are the risks? Now, what are the real risks?
What are future and/or potential risks?
Operational Risks?
Human Capital and Retention Risks?
Financial Risks?
Legal Risks?
Political Risks?
Foreign Exchange Risks? Etc.
Which risks are Systematic (undiversfiable) and which are Unsystematic (diversifiable)?
What are your ‘personal risks’ in the business? Are you taking risks? If not, why should investors invest?
What are your teams ‘personal risks’?

TIC - Management

What is your level of experience?
If it’s limited, what are you doing about it to reduce investor risk?
What are your qualifications?
What is your previous business or operational experience?
Who is in the team? What are their levels of experience/qualifications/operational experience, etc.?
Is the team well diversified?
Does your team cover off a broad range of business disciplines? (i.e. financial, legal, marketing, sales, etc.)
What are your projected salaries? Why? Are they too high/low? Are they realistic?
Do you have any previous start-up experience? If so, what was this business? Did you sell it? Was the product/market/etc.?
Which key players have you lined up or identified to help your grow the business?

TIC - Sales & Marketing

What is your marketing strategy?
What is the forecasted marketing spend?
The ‘what, where, why, how, who’ of your branding and promotion?
What is your sales strategy?
Direct sales vs. channel sales?
What will be the cost of sales to acquire a new client?
How will pricing fluctuate and is it market sensitive? What factors make it so? How to mitigate?
What is your projected growth?

TIC - Financials

What are your financials (real and/or projected)? I.e. Burn Rates, Gross Margins, Earnings, Cash Flow, Debts, Break-even, etc.
What are your (forecasted) startup costs?

TIC - Investments

What is your investment? Financial, sweat equity, etc.
What is the realistic valuation of the business?
What is the Capital & Legal structure of the business?
Why do you need investment?
What will you use the investment for?
Why should investors choose ‘you’ over ‘another’?
What % equity are you offering?
What is your ‘forecasted’ ROI (return on investment)?
How long will you take to pay the investment back?
Is your Risk vs. Return fair?
How can the investors help without injecting money?

TIC - Random Questions

What is the problem you are solving? I know of other services in the same space. What’s the differentiator?
Competitor ABC is the market leader in this field by X% margin. How are you going to compete against them?
Is your market size really reasonable?
Where did you pull the data for your projected growth and revenue streams? Sales etc?
Are your direct sales vs. channel sales strategies sound? Why not focus on just direct or just channel?
I want to know more about how you are going to market? What are some of your other strategies?
Is there any defensible IP? What stage is this at?
How will people associate your product with the industry segment?
I want to know more about you and your team? Tell me.
I have had 2 other people pitch me a similar idea – why ‘you’ and not ‘them’?
Do you think the amount you are asking for is reasonable? Can you do more with less? Can you do less with more?
What are the largest obstacles you foresee in order to secure a greater market share?
You investment terms aren’t really reasonable? X% for %X million at % revenue – is this realistic?

STEP 2: Additional Actions & Next Steps to Become Investor Ready

Have / get signed official contracts and agreements in place for every possible partnership, alliance, employment, etc.
Create a compelling website with at least 5 pages (about, services, team, partners) to run a beta-test pilot case with.
Buy domain names for the company (e.g. com/net/org/tv/eu).
Get a signed Letter-of-Intent (LOI) in place with future business partners, clients, etc.
Design of new corporate structure & legal entity.
Get agreements with suppliers, manufacturers and service vendors.
Create a risk management matrix for all business areas.
Create biographies for all exec team members.
Create a work-flow overview for all business processes.
Create pictures to describe the commercial / production process.
Gather, analyse and consolidate all relevant market research.
Gather and select the best and most relevant quotes about the market by industry analysts (e.g. Forrester, Gartner, Frost & Sullivan).
Create a detailed financial plan for the startup phase 3-12 months and a high level / solid 3 - 5 year financial forecast.
Create a video demo & presentation à select best producer & editor or DIY and create a storyboard for video shoot.
Apply for a brand name and business name Trade Mark.
Select the best candidates for the Advisory Board.
Create a clear and compelling Unique Value Proposition.
Describe various use cases.
Create a demo in which a live use case will be demonstrated (i.e. how potential clients will buy, use and experience your product or service).

STEP 3: Get Ready for Due Diligence

Various categories with information which needs to be presented/handed over to a potential investor for their due diligence process:

Financial

Detailed P&L and balance sheet;
Ensuring the current accounts are in order;
There are no unaccounted liabilities;
Debtors and creditors are under control;
Systems are in place to deal with all management and compliance obligations;
Sound processes are or will be in place for authorising payments;
Corporate governance standards, etc.

Legal

Reviewing all current and relevant past contracts (commercial; employment);
Intellectual property protection (patents; trademarks);
Corporate structures (providing clarity and simplicity for incoming investors);
Shareholder agreements (terms and conditions that may impact incoming investors);
Supplier and customer agreements;
Trading terms and condition, etc.

Commercial

Unique Value Proposition;
Detailed Go-To-Market Strategy;
Business plan including future development roadmaps;
Overview with new business initiatives;
Marketing strategies, cost-of-sales per target client, sales/profit forecasts;
HR structures and resource requirements;
SWOT analyses;
Supplier/customer interviews to establish reputational bona fides and quality of the core value propositions;
Disaster recovery plans, etc.

Technical

Blueprint of the proposed technical architecture;
Infrastructure / technical architecture review & audits;
Technical details of all applications, websites, products and services, which will need to be created;
Specifications of all technical assets which will be required to enable the go-to-market strategy.

Management

Biographies of all the founders and/or management team members;
Resumes of the key team members;
References and endorsements of the key team members;
Employment agreements and shareholder agreements of founders and/or management team.

As the quality of the management will be your most important key to success AND will be the most important selection criteria an investor uses, you might want to include additional content along the following lines:

Why and in what way(s) you and your founders are exceptional and what kind of exceptional things you are capable of?
What is the experience of each founder in starting up a new business and/or leading a business?
How long have the founders known one another and how did you meet?
How would you describe the relationship between each of the founders (e.g. close friends, best friends, former colleagues, etc.)?
For each of the founders: please describe at what age did they start earning money.
If the founders have worked together in the past; please explain about one or two challenging cases in which your co-operation led to joined success and/or victory.
Share the management and leadership experience of each of the founders and include the number of direct reports and indirect reports they have had (if any).
What has your team (including the founders) accomplished in the past that would make investors and/or potential clients think you will be successful?
Write 2-4 paragraphs on why you want to be a (leading) entrepreneur.

Note: The above points are all insightful suggestions and it might not be necessary to adopt all of them to succeed in your fund raising case.

Tip: As most investors get bombarded by many investment opportunities, it’s their challenge to select the most exceptional and most potential ones. So.... dare to stand out and dare to be different, but don’t overdo it or take too much risk!

STEP 4: Accelerate!

If you’ve read all of the above and thought “Yes, I can do all of this”, than it’s time to accelerate the process!

In the olden days it used to be costly and time consuming to create a beta version of your new venture, but thanks to social media, crowd sourcing, offshore development and advanced technology; it’s not only simple and fast to create the basics for your new venture(s), it’s also very affordable... as long as you know where to go and how to get what you need in the best possible way. A few tips:

Get your new logo, website design and/or mobile app design via crowd-source platforms such as: www.99designs.com, www.DesignCrowd.com or www.CrowdSpring.com. If you just start with mock-ups of your new website/application than you can create a compelling story-board to cover the visual side of the story you’ll tell them.
Get your website, mobile app and other tech stuff developed using a market place with quality control process; allowing you to manage the outsourced development for the lowest possible cost. You can use platforms such as: www.Freelancer.com, www.eLance.com, www.Odesk.com, www.RentaCoder.com or www.Guru.com.
There are various apps on the market, which will allow you to create, cut and edit your own video, without the need of hiring a professional video recording expert. Especially if you have an iPhone4 you can DIY the video editing. Alternatively it often pays off to spend a few extra bucks on an expert. E.g. I was happy to spent $500 on a full day of recording + editing because the 2 minute video the expert had created had a massive impact on anyone who saw it!
Get lessons learned from fellow entrepreneurs via the various startup- and business websites and communities such as: www.VentureBeat.com, www.StartupLessonsLearned.com, www.Kauffman.org, www.Inc.com, www.StartupNation.com, www.BusinessInsider.com or via www.YouTube.com.
Use proven funding platforms to source and select the best potential investors such as: www.AngelSoft.net, www.AngelList.com, or www.TheFunded.com.

I hope these insights will enable you to start and fund your business venture faster and more successfully, thus allowing you to accelerate your business growth, while mitigating operational & financial risks.

"Entrepreneurship is living a few years of your life like most people won't, so that you can spend the rest of your life like most people can't." - Anonymous

Warm regards & success,

Patrick Driessen

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Saturday, July 2, 2011

Startup & Investment Considerations