Since we all can’t win Shark Tank… Let’s start with a dose of reality. Very few — as in significantly less than 1% — of emerging U.S. businesses successfully secure Venture Capital (VC) funding. According to the National Venture Capital Association, less than 1,500 companies were the beneficiaries of first time VC backing in 2015. While angel funding is more available than VC investments, only about 2.5% of companies that apply successfully attain funding. If you think your company will be one of the lucky few, here are a few things you will need before pitching to VC or angel investors:
- Executive Summary and Pitch Deck
Your Executive Summary should provide an overview of your product or service and a concise, strategic plan for your business growth, while the Pitch Deck generally provides a brief visual presentation of the Executive Summary. If we use the ABC television series Shark Tank as our example, then this is the contestant’s business presentation.
- Fundraising Terms
Next, you will need to define your proposed fundraising amount and the equity, debt or other financial benefit granted in return. This is when you see our beloved “sharks” engage in both their negotiations with the contestants and their bantering with one another. Despite what you see on Shark Tank, it may be better to come to investors WITHOUT a proposed equity amount. Instead, let your potential investors know how much you are intending on raising, how it will be used and what you expect to accomplish with the investment. Then, let them make you an offer of the equity needed for them to be interested in the deal.
- Business Plan and Financials
Now here is what you do not see on Shark Tank — you do not see people give a detailed business plan, or most importantly present their financials. Consequently, that is why a number of the deals we see made on television do not make it through to fruition. Once the “sharks” have completed their due diligence and have seen the contestants’ financials and detailed business models, many of them are no longer seen as sound investments. Use this as VC and Angel Funding 101 — your business plan should include your market research and growth plan (i.e., your well-designed KPIs and financial projections). Follow these tips for preparing your business plan:
- Your gross margins, customer acquisition costs and other financial ratios should be in line with the industry — do not attempt to impress by providing unrealistic measures.
- Revenue projections should be tied directly to your sales model and the aforementioned business plan.
- In addition to the profit and loss statement, you should provide both a projected balance sheet and cash flow with assumptions for inventory needs, timing of receivable collections and other cash needs that are not apparent on a profit and loss statement alone.
- It is helpful to have commentary linked to each page to provide clear context.
- Your financial projections should normally be over a three- to five-year period. Beginning with monthly or quarterly projections in the early years, then moving to annual in later years is often sufficient, but keep in mind that your actual results will be compared to these projections down the road. Keep growth aggressive, but not unrealistic. Chances are that if you are reading this, you are not the next Facebook — so don’t pretend to be.
Being prepared with a detailed business plan and realistic financial projections will not only allow you a better opportunity to attract investors, but it will also provide you a deeper understanding of your business.
Keep in mind that your business might not be the right fit for VC and angel funding. Instead, you may consider friend and family investments, crowdfunding, government-backed loans or other sources of funding. No matter what approach to funding you choose, it is nothing but beneficial to have a solid business plan with financial projections in place, and that is something even the “sharks” might agree on.