Presentations from the Investor’s Perspective
Posted by Dr. Earl R. Smith II in Venture Capital, tags: adviser, advisory board, angel investor, board of directors, CEO, chairman, coaching, consulting, director, earl r smith ii, earl smith, Executive Coaching, federal circle, federal contracting, funding, Governance, government contractor, investing, investment, investor, Leadership, leadership assessment, leadership coaching, leadership development, leadership styles, management assessment, managing partner, Personal Growth, the federal circle, turnaround, Turnaround Management, Venture CapitalDr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
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All investors are bombarded with requests for meetings. Entrepreneurs put a lot of effort into networking and building relationships that will allow them to make a presentation to a possible source of funding. They have honed their elevator speech and given it many times. Mostly the results of these contacts are non-committal or an outright expression of no interest. All investors say no or maybe much more frequently than they say yes. But, there are the times when you say yes and a meeting is scheduled. Here are a few thoughts on how to handle that meeting.
Request an Advance Package: It is a very good idea to require an advance package; something considerably more extensive than the executive summary. This will allow you to go through the preliminary materials, request any additional materials or clarifications and do some diligence yourself. One of the ways to make this initial meeting more productive is to get very familiar with the details of what is going to be presented. This will also give you a chance to research the competition and prepare a series of questions or talking points. Providing some, or all, of these questions well prior to the meeting can go a long way towards making it more productive.
Set Expectations: Make sure that you let the entrepreneurs know how you would like the meeting to go. If it is scheduled for an hour, set the expectations for how that hour should be used. Their initial presentation should take up no more than half the time. This will give both you and them a change to discuss any issues or questions that come up. Setting expectations will also help them focus on providing the level of information that is appropriate. One of the faults of many presentations is that it is too detailed for an initial meeting. I have seen stacks of twenty five to thirty slides. You need to let them know what information you want to see presented. It is a good idea to contextualize the meeting in a broader process. Let them know what your procedures are following the initial presentation.
Avoid Redundancies: You have probably already heard the elevator speech and seen an executive summary. If the meeting is going to be productive, it should focus on new information. Some of these new requirements may not be covered in the package that they have put together. For instance, if you are particularly interested in their success developing paying clients or their advantages over the competition, a prior request will help make the meeting more productive. Make sure that you communicate your needs early in the planning process. You want to avoid simply going over materials that have been presented in prior, less formal conversations.
Outline an Extended Process: Many entrepreneurs get very excited when an initial meeting is agreed to. They approach it as if one clean swtroke will result in their getting funded. Most investors I work with take between six and twelve months to make a final investment decision. The presenters should know that this is the first step on an extended journey. It is a good idea that, as a condition of taking the first meeting, your normal schedule is clearly understood. In some ways this will help the presenting team. Many entrepreneurs get very nervous that they will ‘blow their chance’. You should make it clear that the initial meeting is only a prelude to an extended process. The likely outcome will be a decision to go the next step.
Watch the Team in Action: The initial meeting will be your first chance to see their team in action. Are they well prepared? Have they anticipated important questions? How do they deal with hard or unexpected questions? Do they understand your perspective? You can begin to assess the strengths and weaknesses which will determine the probability of their success or failure.
The first meeting should be a team presentation. It is a very good idea to open a file on each team member and keep notes on their performance. You will also be able to see holes in the team. Many entrepreneurs put together teams from the ‘choir’. They avoid bringing skill sets onboard that are not directly focused on the technology. Often, when there are ‘outsiders’, they tend to be weak and unlikely able to meet their responsibilities. Three critical areas are business management, financial management and sales. Remember that you are assessing the team as well as their value proposition. One result of the meeting may be a set of recommendations for strengthening the team and an invitation to return once those recommendations are implemented.
Put them on the Spot: You need to know how the team and critical members will respond under pressure. They will certainly experience a lot during the period following funding. It is a very good idea to put them to the test very early in the game. Nobody comes to such meetings having all the answers to every question which will be raised. One of the things you should be looking for is the ability to say ‘I don’t know but will find out’. You need to weed out those who tend to try to bluff their way through such situations. Look for tensions within the team. Do they disagree without an apparent ability to resolve the disagreements? Teams that have figured out how to work productively together have a greater chance of succeeding. Remember, it is one thing if the team is well prepared for the presentation; it is another if they are prepared to build a business.
Highlight Your Needs and Expectations: Many teams will be used to presenting to the ‘choir’. Your needs and perspective may be somewhat new to them. It is normal for entrepreneurs to see their company in terms of its technology and advantages over competition. But you will be looking at it as an investment. This need goes well beyond what might be presented in spreadsheets. Every seasoned investor knows that these projections are never accurate. Key members of their team need to understand that you are in it for the return on your investment. It the team does not understand how you are approaching investment in their company, problems are certain to occur with deviations from expectations. It is important to have a very clear understanding of those metrics that guide your decision and expectations.
Ask the Hard Questions Early On: Your decision process is probably going to center around a relatively short list of key questions. Some of them will be answered by simply being asked. Others will depend on your impressions. But, if you are going to stay on solid ground, you need to gather reliable and thoroughgoing answers to them all. A very good idea is to share most of them at the beginning of the meeting. “This is what we need to learn as a result of this meeting?” Be particularly sensitive to attempts by the presenting team to reduce the importance of any of these questions. Take that as a lack of seriousness and involvement in the process. Remember this meeting is fundamentally about you and meeting your concerns.
Avoid Answering Questions about Results: Your normal process will involve an extend subsequent discussion of findings, impressions and how well the investment opportunity fits your objectives. You may want to express an interest in continuing the discussion, but any expectation that you will be making an investment decision as a result of a first meeting is unwarranted and demonstrates a lack of understanding of the complexity of your decision making process.
Focus on Implementation: A key indicator will be the team’s ability to implement. Look for relentlessness. They should be focused on monetizing the value propositions. One way to separate the ‘science projects’ from the nescient businesses is to look for clients or customers. Remember that old saying, ‘amateurs have markets, pros have customers’. Unless you are investing purely in the intellectual property or the technology, the only way you are going to realize a return on your investment is through the creation of value in excess of your investment. The principal way that value is created is through building a growing and bankable client base.
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An investment decision, particularly in early-stage companies, is a highly risky process. A structured and professional process will reduce lower the chances of negative outcomes.
© Dr. Earl R. Smith II
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Related Articles:
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Protecting Investor Interests: Quick Assessment, the Short List
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Mergers & Acquisitions: Thinking About Selling – Part I: Confronting the Reasons
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Mergers & Acquisitions: Thinking About Selling – Part II: Working Through the Emotions
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Helping Companies Adapt to Changing Times – Part One
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Moving the Ball
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Lack of Accountability – The Core of Failure
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Dr. Smith is a proven senior executive, Dr. Smith is Managing Partner of The Federal Circle. The Federal Circle partners with teams and existing companies. We help them up their game and win big in the Federal space. We also arrange funding for acquisitions and expansion by acquisition. Our model is based on the belief that, if you select the very best and work with them in a highly professional and focused manner, the results will be truly amazing. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration.
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This is a very pertinent observation. One of the key roles of an independent governing board is to help founders to make the transition and to provide the insights and guidance that are required as companies grow and external investment plays a larger role.
Any founder that is thinking of bringing in external investors should look first to create a strong governing team. That will give investors confidence, assist with maintaining strategic control if investors want board seats, and provide the guidance and supports that CEOs need as they progress.
Posted by Julie Garland McLellan
I appreciate that you do not say that the company should send their powerpoint deck in advance of the meeting. This is something that I would never agree to do as it takes away from the delivery of the presentation — basically steals my thunder. Great post from a different perspective, thanks!
Posted by Lisa Hjorten
Excellent article about the process. All entrepreneurs should read this before doing their plan as it outlines in broad strokes how to think about what they need to do and what investors look for. I am amazed most times I talk with entrepreneurs about how little they understand or know about the process, especially in today’s market. I actually had one ask me to read their plan and comment about the plan. I pointed out items that I felt would be necessary for an investor to even begin to consider investing and the entrepreneur’s response to me was your telling me this is a dead opportunity for me. I told him no, but you are going to need to research this and provide answers to these questions before an investor considers your project. He was missing basic items such as a complete team, cost projections only were for construction cost, etc. He felt all he needed to do was to present his idea to an investor and they would jump right on it. He was asking me to present it to some of the funding sources I have. This why he asked me to read his executive summary. I could not in good conscious present it to my funding sources as it would be a waste of time and hurt my credibility. I passed on something I felt if done right with the correct team was a solid investment oportunity.
First of all my expertise is as an architect. I have worked with and been involved with developers for many years and have a good idea of what is needed to approach an investor. I am by no means an expert so if I see some very obvious holes in the presentation I am not going to fray my relationship with my funding sources by asking them to review something I know will not be considered. I try not to waste anyone’s time yet many entrepreneurs get so caught up in what they consider a unique idea they want to jump ahead into producing it without going through the process of developing the idea in a logical manner and looking for all or as many scenarios that they can come up with that might cause the idea to fail. A good process for developing a presentation would be to list every item you need to accomplish to make your idea happen, list what it takes to make each of these items to happen and then develop a plan to make each item happen. When I say this I think the list should extend at least five years after opening the business not just include what it takes to open the business. As you say the projections are almost always a best guess. Entrepreneurs seem to think the best way to impress an investor is to have best case numbers laid out. Maybe that was true at some point, but today they want realistic numbers. If I can spot numbers that look wrong them more than likely the presentation is d.o.a. and you do not get a second chance in today’s market.
The one item I seem to never see in an executive summary is an exit strategy and yet this is one of the most important aspects for an investor. Today’s investors seem to want some basic information expressed clearly. A good idea, a solid, experienced management team, realistic numbers and an exit strategy. Missing any of these in the presentation is probably going to eliminate you from any consideration. Depending on what the deal is there will also need to be other items considered, but I think these are the minimum to start.
Once again excellent article.
Thank you.
Posted by John E. Burk
This is an excellent and fortunately very true set of observation.
I have had a number of interim roles leading transitions from founder managed to private equity. In every case, the founders have been so tightly coupled to their dream – that seeing it through the eyes of others has been difficult. Often there has been a spouse behind the scenes that made the challenge even more difficult.
Invariably in these founder led firms… I have battled a desire to “sell” what was done over the past twenty years and then extend that as “more of the same, but bigger”.
Depending on the fund raising stage (and personal network); angel partners can be a “more forgiving” starting place. I do think the understanding of external value and the presentation building process has been simplified when there were already angel partners in the picture who could help drive objectivity into the VC search.
Posted by Barry Cole
Earl, this is an interesting concept. I have devoted significant time to helping companies maximize their employee productivity and to further help companies succeed. Part of my strength comes from my work as a mediator and arbitrator in the field. The first rule is to look at things from all sides.
I think that yours is a great concept.
One challenge is that many who seek money have a great idea but lack the business experience to drive the project. They often lack the ability or willingness to invest in a team that can help see the project through. Further, they have no exit strategy.
Posted by David Gabor
I am impressed by your thoughts and would be happy to find some time to speak next week.
Regards,
David
Posted by David Gabor
Dr. Smith, I find your articles very helpful.
Posted by Martha Retallick
Dr. Smith, I will soon be seeking capital for launch of a business platform to provide (what I consider) timely services to banks. As a R.E. developer/investor used to debt financing, raising equity capital is new to me and I am intimidated. Thank you for the insight. –Marc McCormick
Vitaly, Thanks for the comment and links – very helpful. I agree that many CEOs have very spotty knowledge about IB and how they work. My group is organizing a seminar for this April and that is one of the focuses of it. Investment Bankers can be a great help is the client understands how they work and what their standards and objectives are. Lacking that, relationships with either inexperienced or unsophisticated clients can be very rocky indeed. I visited the article – if Hal would provide me with a Word file version, I would be glad to publish it on my website as a guest article. Dr. Smith
Vitaly Michka wrote:
Great article, Dr. Smith!
We work a lot with Investment Banks, I am amazed how little potential clients know about IB and how they work. My colleague wrote a great article on this subject: http://bit.ly/9ReCnS
I believe that one must know what the IB want to finance and what they are looking for. There are no point in presenting them a project they have no appetite for. Here is my short article on this subject for your perusal: http://bit.ly/9BsXYQ
Interesting discussion, to be able to get more perspective where you come from Dr. Earl it would be useful to know what companies you are currently holding board positions or equal. It always helps to understand analysis when the background is well mapped out, I have learned. Before any negotiation or meeting of importance I first make a thourough background check of the person(s) I will meet, this gives me a very good picture of what I will be facing. Never underestimate what corporate culture can do to form peoples behaviour.
Philippe G. Mitterrand wrote:
This is network sharing at its very best. Thank you for such a great article.
Philippe
Randy Mayley wrote:
Good Article, thanks, I’m in the same boat. Randy
Thanks for the kind words David. I am glad that you found the article useful. Dr. Smith
Posted by David Weinstein wrote;
Thank you so much for giving me the investor’s perspective relative to what they are seeking relative to their return on investment. Very informative.
Peter, Thanks for the kind words and vote of confidence. My blog illustrates my commitment to providing guidance wherever I can. but you are right in observing that the real contributions that I or anybody else can provide only begins with such a blog. Most of my work is done directly with companies and individuals – and I do get paid well for that. Most of my new clients come from word of mouth – I regularly help clients outperform against expectations. One of the ‘soft returns’ of the work I do comes through watching a person or team realize a dream – manage something that they never expected to – achieve goals that were beyond their expectations. One of the reasons that I regularly achieve such results in my filtering process – how I decide who I want to work with. I only work with serious people intent on achieving serious results. That filter keeps me from dealing with the kind of people you mentioned in your third paragraph. People who are truly serious about what they are doing and dedicated to success know the value of what they are acquiring for the scarcest resources – cash and equity. They also tend to be very good at assessing value and making prudent decisions about who to involve in their efforts. thanks again for a great comment. Dr. Smith
Peter Ireland wrote:
Earl,
You give top notch advice to people and I really enjoy your blog. I did my first VC deal in 1987, but can still learn from you.
It can be painful reading some of the threads on Linkedin from people who with unrealistic expectations. They want years of funding to do coding or R&D for a project that may or may not ever pay off and are then shocked when no one shows the slightest interest.
Then after a few weeks or months of posting here, the paranoia creeps in and the accusations fly. Anyone who looks like they could help them get their house in order but who isn’t prepared to do it for free is accused of trying to take advantage of the poor entrepreneur. They expect people to give them millions but are outraged over being asked to pay for anything. (And no, I’m not talking about up-front fees to money finders. Never do that!) You find the same group complaining about everybody here, month after month.
I worked with startups from ’86 to the dotcom crash because it was a passion. Then the novelty started to wear off, and I productized my knowledge into a few financing manuals and moved onto other things. However, least once a month someone who has been knocking his head against the financing wall for 6 or more months will click through my Linkedin profile to my site and then return to Linkedin to accuse me of trying to take advantage of him. I got another one of these Linkedin PMs a few days ago. Hold on Buckaroo, let’s take a moment to consider this: you want me to take information that I have spent 1000+ hours into gathering since the mid-1980s through direct experimentation, reading, and interviews, and then writing it all down, and just give it to you for free? Have I got that straight? And if I pass on this wonderful opportunity, I’m the villain?
I see this Mexican Standoff everyday here. On one side you have permanently stalled entrepreneurial wannabes in desperate need of help; on the other side you have people who could help them but can’t or won’t work for free. Moreover, human nature being what it is, no one appreciates anything that they get for free.
On the plus side, 99% of the people here are realistic about life and you can engage with them without the paranoia creeping into the picture. Unfortunately, the handful who expect free money and expertise can leave a bad taste in one’s mouth. But that’s always the case when you’re dealing with the public.
If I need the services of a coach or consultant again, Earl will be on my short list and I will be more than happy to compensate him for his time monetarily.
Morten Nicolaisen wrote:
Earl, for me is doing it once, a successful project. We have to keep repeating it to form a success.
However, it is not the first time I’ve been asked your question. I started the company with my own money, and have done some mistakes costing me a lot of time, money and lost focus.
Lessons learned the hard way
Anyway, in my opinion I’m not giving up anything to outside investors. We swap shares for money, and form a commitment for return of investment. A bank loan would be a good solution if I thought money alone will help me succeed. But, I don’t believe that.
The right investor for me will invest knowledge, time and access to a business network along with the money. Working together towards our common goal of high return on the investments made is mutual beneficial.
In my perspective, is it better to own a share of something with high value, rather than all of something with little or no value. Thus, if I can’t find anyone that are willing to invest, I should not be doing it myself either, and put the plan neatly back in the drawer and forget it
Thank you Peter for describing the stairs to climb. It seems clear to me that I should aim my focus on the business angels, as the first step along the way.
I appreciate your contributions, it have been helpful!
Best regards,
Morten
Mohan Dharmarajan wrote;
Dr Smith
I have seen your post and the web article. The investors that I am working with go exactly as you have said. Its not only the content, but even the order of preference and process is the same as is in the article. In addition, in our location and platform lot of work also goes on in the title chek – which is a large part of due diligence.
Regards
Steve Wightman wrote;
Dr. Smith, I read some of your articles and I honestly felt myself holding my breath a few times, like when reading about the “crazy eight” entrepreneurs not to invest in. We miss any direct pies in the face but I think it is plausible that we might look ‘crazy’ from 30,000 feet due to circumstances we are not clarifying well. Valuable insight for me to make adjustments from.
Yosef Lifshitz wrote;
thank you for this article, Earl – you are supporting all points I’ve been presenting to my clients as Equity broker. you added more value to preparations we go thru when initiating contact to private equity investors.
yosef L.
MS – Beyond
Rasim Huseynov wrote;
I greatly enjoyed reading articles. Thank you Dr.Smith!
Very useful and I will go trough it more than once.
If we will look at many aspects major is value creation and monetizing. As soon as entrepreneurs starting to realise their role as a guardian and prophet of value creation things should not go as bad as they can under different circumstances.
Best advise is try to start trying investors shoes and always keep him in mind first. It is not all that simple of course. Good chemistry, team spirit and luck also must be there.
Manoj Shah wrote;
Good insight, would definitely help. Thank you
Dr-Smith.comdr-smith.infoRaj, Thanks for the comment. My experience has been that the process generally runs in spurts. Investors who know the space are quick to identify companies what interest them. But, once that stage has been passed, the process slows down considerably. Investors want to know a lot about a series of issues. I have described them in my series of articles on ‘investment grade’. You will find the articles on the website http://www.Dr-Smith.com in the category ‘venture capital’. Here is a link to the first one – http://www.dr-smith.info/the-money-chase-what-does-investment-grade-mean-part-1/ . Dr. Smith
Peter Samuel Cugno wrote;
Your article was well done. I only wish I could run into a genuine potential equity partner that had the good sense to do at least ‘most’ of what you suggest — boy oh boy have I wasted a bunch of time on clueless ones!
One small bit of humor I would like to add … as I have carefully read the details of websites of some 500+ venture capitalists – private equity funds (worldwide) it’s surprising MOST of them have been in business only about has long as some of my neckties!
I wonder what that tells me about them?
Rajeev (Raj) Seshadri wrote;
The gulf between the power-point and the funding: However, the ‘dance’ is led, the question, “is there a business here?” and the ROI calcs need to to get answered quickly. The longer it takes, the less the likelihood of a positive conclusion….my 2c worth.
Ron Worman wrote;
Buyers and sellers may get invited to a dance. The question is: who leads?
Dr Smith – nice article and sound advice.
Another opportunity when pitching to investors is demonstration of a keen understanding of the market decision process and “adoption rate”. While adoption rate is usually speculative, being prepared to describe normal adoption trends (including “the wall” that often occurs between early and mainstream adopters and plan to overcome “the wall”)…. can be the fine line between being perceived as “enthusiastic” and “unrealistic”. And if you are lucky enough to get funding, a plan that embraces market realism can also improve the level of management control/influence you are able to negotiate with your funding source(s).
Thanks William – I am glad that you found the article useful. Dr. Smith
William Melendez wrote;
Good advice to, not just investors, but guys like me looking for funding!
Mark L. Rosenberg wrote:
Excellent discussion. You are certainly correct that entrepreneurs do not understand how investors approach initial meetings and your article is illuminating.
Peter, Thanks for a very helpful comment. The core of your message is the central point of my article. Investors have standards – a definition of what they see as investment grade. Sure, that definition varies from one to another but the existence of standards is the issue. Either you understand and strive to meet or exceed those standards or you end up the proverbial ‘old man yelling at clouds’. The hard truth is that there is much more investment money than solid opportunities to invest it. Investors are starving for good, investment grade opportunities. What they get is half-baked, casually slapped together proposals from founders who try to value their pre-revenue company at ten million dollars in order to induce the investors into providing two million for twenty percent. If you could sit in on some of the sessions that I have and listen to the frustration, you would clearly see that the real gap is with the entrepreneurs. They just don’t know – or don’t want to accept – what makes a company a good investment. I am organizing a seminar later this year to focus on precisely that. Dr. Smith
Peter Ireland wrote:
Financing: how it really works
Let’s look at the typical stages in a successful company’s financings. We’ll start with the last and finish with the first. Although there are rare exceptions to this sequence, in most cases it looks like this:
-The IPO
This is the big pay-off at the end of years of hard work. It means liquid stock selling at, hopefully, a high P/E multiple. (The second best alternative is to be acquired by a large company such as a member of the Fortune 1000.)
-Venture Capital C-Round
The IPO is now in sight and the C-round is used to “fatten the pig” as much as possible in addition to preparing the company for it. Often this preparation includes replacing management with C-level officers who are known to and respected by Wall Street.
-Venture Capital B-Round
Wall Street is starting to take notice of the company. Therefore, the VCs want to maximize its forward momentum.
-Venture Capital A-Round
VCs step in when the business looks like it has potential for an IPO or acquisition a few years down the road.
-Angel Round
Angels come in with money when you have started selling. They jump aboard because you now have tangible proof of concept. You’re finally walking your talk. It’s no longer all just hot air coming from the founder. Be honest, talk is cheap.
-Seed Round
At this stage you have no more than an idea. You are going to build the next Facebook or Google or Apple…only it will take a year or two of work before there is something that can be sold. Or maybe it’s a dull little business which excites only you?
So, who comes in at this stage if you should be lucky enough to attract any money? The answer is the “3Fs”, otherwise known as Family, Friends, and Fools. Yes, this means your parents and rich frat buddies from your days at Harvard or Yale. What’s that? Your family is not wealthy and you didn’t attend an Ivy League college? In that case, you are going to have to finance your seed stage the most common way: with a day job.
Welcome to Planet Earth. That’s how 99% of startups get through the seed stage.
I am providing this information because so many people here post requests for funding to cover 2 to 3 years of coding or R&D. Then when they are ignored, they get angry.
If you are realistic about what types of scenarios attract investors, you won’t get angry. Instead you will work to create an opportunity that will be attractive to investors at every stage.
If you think that you are going to attract money to cover your living expenses and provide a bit of fun money while you code or do R&D for 2 or 3 years, you are in for nothing but frustration.
Morton, My first question is, given your success, why would you want to give up so much of what you have built to outside investors. “Paying and referable clients’” are generally bankable. A company that has them can often find the necessary financial resources through a combination of credit and customer financing. Dr. Smith
Guy, Great question – I spend a lot of time working with entrepreneurs – trying to get them to do just that. I am putting on a seminar this spring on how to see your company from the investor’s perspective. Your emphasis on being proactive is exactly right. Also, sensitivity to pace and process is critical. Knowing how investors work help there. Dr. Smith