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How Software Entrepreneurs can be Successful Presenters to Investors (Part 3 of 3)
[An open letter to the software entrepreneurs presenting to investors]
Ed Harley’s open letter to software entrepreneurs began in the Keiretsu April 2004 Newsletter. In that first article, Ed suggests a format for the first 5 minutes of a presentation where the entrepreneur describes the customer’s situation, the seriousness of that situation, the solution, and the value to the customer. In the second article, which was published in the Keiretsu July 2004 Newsletter, Ed continues with minutes 5 to 8, covering the model and growth of a business. In this third and final article, Ed covers presenting the financials and the needed resources of money, management and introductions.
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In the first 5 minutes, it was essential that I really ‘got it’. In minutes 5 to 8, you were just ‘skimming’ over the highlights -- not trying to tell all. In minutes 8-10, your approach should be different again. Now you are a “closer”.
Min 8:00 Min 9:00 Financials Current & Projections (1 slide)
I understand that all financial projections are subject to long discussions. You have just 60 seconds to describe those projections, a fraction of the time you spent formulating them and calculating the different simulations. Indeed, I am interested in that work and will go over it in some detail at a later time. For now, I am only interested in either a 3-year or 5-year projection of revenues, gross margins, earnings, and cash flow. Yearly granularity is just fine. You should point out the projected milestones of positive cash flow and positive earnings. Your objective should be to present your financial information in a manner that conveys to me that your business model makes sense. The superior presentation contains one slide with a table or a graph that tells the story.
Over 80% of you present your financial projections successfully. Most mistakes are in form rather than about content presenting the financial spreadsheet in a font size that I cannot read. If you are concerned about not including enough detail of your financial projections, then prepare a second slide in case it comes up during Q"e;A.
Min 9:00 Min 9:30 Investment Required, Capital Structure, Deal, and Exit Strategy (1 slide)
As an angel investor, my first concern is about any follow-on investments that could affect the value of my initial investment. If the business growth is on or above plan, that follow-on investment will be higher than today’s valuation. If the business growth is stalled or slower that expected, then that follow-on investment may ‘cram down’ my initial investment.
Thus, I strongly recommend that you start this 30 seconds by telling me how much money you think you will need to raise IN TOTAL to reach a positive cash flow. Next, tell me how much money you desire to raise today and how much money you need to raise in the future. Finally, complete the picture by explaining the existing capital structure, who owns what, and if there are any unique terms.
Assuming you are offering an ‘equity deal’, then you will be asking me to make a $X investment at specified terms for a Y% ownership in your company. To make that calculation, we have to agree on the value of your company. Fairly valuing an early stage company is highly contentious. Even reasonable angel investors disagree. Your objective in this session is to present yourself as a ‘reasonable seller’ by insuring that your valuation of the company is ‘in-the-neighborhood’. We will negotiate the exact valuation and terms over the next few weeks as part of the due diligence process.
I see two methodologies that generally result in ‘in-the-neighborhood’ valuations and leave me believing that you are a ‘reasonable seller’. The common methodology is to use some ‘rule-of-thumb’ ratios— some multiple of last year’s revenue or profits, some multiple of next year’s revenue or profits, or some other ratio—as your justification. The more unusual methodology is to use comparable transactions as your justification but usually there are no direct comparables. With either methodology, you should explain why you have chosen a slightly higher multiple because you think you have the best ‘house in the neighborhood’, or why you have chosen a slightly lower multiple because you have a ‘fixer-upper’. Close this section by describing your exit strategy and the estimated time before a monetizing event will return my investment.
Perhaps 50% of you will present your capital structure successfully. It appears to me that many mistakes are made because you do not want to cover this topic. You are unsure of what to say, so you present no valuation. With no valuation, it is impossible for me to judge the likelihood of our reaching an agreement on investment terms. I am an angel investor and invest in those opportunities where I receive a fair valuation and where that venture grows in size to enable a liquidity event where I convert my investment back to cash. On-the-other- hand, if you go ahead and present a valuation that is ‘out-of-the-neighborhood”, you are presenting yourself as an unrealistic seller. I am generally not interested in dealing with unrealistic sellers. You may feel obliged to set that valuation because of an earlier valuation for a ‘friends and family’ investment that you are trying to ‘maintain’. It is unlikely my motivations for investing are the same as your ‘friends and family’ investors.
Min 9:30 Min 10:00 Recap
It is extremely important that you summarize your presentation. It is most effective if that summary considers my perspective first and foremost. Start your final 30 seconds, with words such as “ The objective of my coming here is to share information with you about this investment opportunity”. Now without slides, but deep in your gut tell my why this is a good investment for me. I want to hear conviction in your words when you say why you believe you have a credible growth story and that the investment risk and opportunity equation is fair and reasonable.
My guess is that only 5% of you will present a persuasive summary successfully. For 1/3 of you, your summary has little persuasiveness because your words are simply a restatement of what you said earlier. For 1/3 of you, your summary is not credible because of your shortcomings in earlier sections. For other 1/3 of you, you do not give any summary at all because of poor time management (or maybe at your choice) a real opportunity lost.
Min 10:00 Min 20:00 Q"e;A (5-10 slides ready)
Lots of literature is written about successfully answering questions in front of an audience. That literature always suggests two strategies:
- Anticipate what questions will be asked and prepare your answer to that question. (Have slides ‘in holding’ for complex answers where a visual representation will augment your words -- this is very effective.)
- Repeat the question after it is asked.
During the 10 minutes when you are answering questions, besides listening closely to your answers, I am watching your body language for any clues about your strengths and any serious weaknesses. Hopefully, during the first 10 minutes, you shined in your prepared remarks. Now, hopefully you will continue to shine when you are ‘thinking on your feet’.
Specifically, here is my suggestion on the style you should use in answering the different types of questions:
- For the clarifying questions, you should have alternative ways to explain the same topic. You have just given me considerable information, and I may not understand it all.
- For the easy questions, you should give short, crisp answers.
- For the complex questions, you should have prepared additional slides in advance that give visual support to your answer.
- For the ‘poking questions’ that pry away at your baseline strategy, market, projections, etc. you should not be defensive but don’t be a wimp either. I don’t expect your venture to be perfect. Contrarily, I don’t expect that all of my ‘poking questions’ will be valid and reflect a weak spot in your venture.
My guess is that 50% of you will shine when answering questions. Your mistakes are not really classifiable, it is just a ‘gut feeling’ that my colleagues and I have based upon what you said and how you said it.
Closing Comments
I hope this open letter walked that fine line between being encouraging and being tough. My desire is that this letter helps you be a more effective, confident presenter.
Starting a new company is difficult. Completing a product is difficult. Selling a first customer is difficult. Building a management team is difficult. Raising money from outside investors in difficult. Those obstacles and more, face every entrepreneur.
Presenting your business to investors requires you successfully to tell 7 stories.
‘The fundamental business logic story’
‘The total available market (TAM) story’
‘This is a $50m to $100m business story’
‘The product can be differentiated story’
‘The product/service can be sold story’
‘This management team can do it’ story’
‘This is a good investment for the investor story’
If you can passionately tell me those 7 stories while building a rapport with me where I eventually become an investor, we can jump over obstacles together. In addition to being a source of funds, I am a member of a terrific network of successful colleagues who are willing to assist you in your entrepreneurial effort. Our knowledge is both deep and wide, crossing industries, technologies, markets, and distribution channels. Thus, I encourage you to make the upfront effort to tell me your story. We can be successful together.
Copyright 2004 Edward P. Harley All Rights Reserved
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I thank the Keiretsu Forum membership-at-large, of which I am a member. I have gleaned many of the letter’s thoughts from our one-on-one conversations and group discussions. I specifically thank members John King, Phil Chernin, and Ken Taylor, for their insightful editorial comments and wordsmithing.
Ed welcomes any comments or suggestions on this open letter. His email is epharley@pacbell.net.
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