entrepreneurship 101: what do investors look for?
DESCRIPTION
Part of the MaRS Entrepreneurship 101 series. Every entrepreneur wants to know the secrets for successfully pitching a VC or an angel. This lecture features an unusual theatrical format that seeks to unlock those secrets. Speaker: Peter Tolnai, founder and President of Orchard Capital Group Inc., an angel venture capital fund. Download the audio presentation and post questions on the MaRS Blog: http://blog.marsdd.com/2007/02/28/entrepreneurship-101-pitching-a-vc/TRANSCRIPT
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“I’m afraid I can’t remember how thismeeting was set up and I don’t have any
documents. Can you please remind me whoreferred you to me?”
The Question?
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The QuestionSetting up the MeetingA Review
! Some homework on investors
! Resourceful
! Results-oriented
! Inappropriate use of Craig Lauder (who doesn’t know about this meeting)
! Over-aggressive
! Demonstrates that the team is not well-connected
! Defensive about the deal – won’t send advance materials
Positives
Negatives
The Bottom Line
! Get the best quality introduction you can get
! Send some materials in advance so VC can prepare and use time more efficiently
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“Please give me your personalbackgrounds and tell me the story of how
you know each other.”
The Question?
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The QuestionThe Management TeamA Review
! Two people have worked together before
! Each team member should speak and provide their own backgrounds
! All have large company experience; no entrepreneurial experience evident
! Bob and Mark are brothers: Nepotism often a problem
Positives
Negatives
The Bottom Line
! Experience in BOTH a large sophisticated company to acquire skills AND asmall, resource-constrained company to learn entrepreneurial skills providesbest background and complete skill set.
! Teams who have worked together before reduces risk of creating a newmanagement team.
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“Mark do you think you have the rightexperience to be the CEO of this deal?.”
The Question?
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The QuestionMark as the CEOA Review
! Some very limited entrepreneurial experience
! Knows the online gambling industry
! Knows the online gambling industry
! No entrepreneurial experience; questionable abilities to set priorities; identify HRrequirements; recruit a management team; manage a business “by the numbers”;etc.
! Overconfident “sales-guy” without recognition of challenges of starting a business
Positives
Negatives
The Bottom Line
! Entrepreneur may or may not be the CCEO at different stages of companydevelopment.
! Listen to the VC and assess if he/she has practical insights on this point.
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“Please tell me about the technology andthe market you’re going after.”
The Question?
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The QuestionThe Market OpportunityA Review
! None - Sorry
! “Gray” area legally; needs to be offshore and many investors in the fund would notbe supportive”.
! Completely unrealistic revenue and EBITDA forecasts. Defining revenues byassuming market share is an illusion; all start-ups start with zero market share.
! Greedy and arrogant
! Focused on making money personally – not building a business.
Positives
Negatives
The Bottom Line
! Build a business that solves a real business or consumer need, and the financialrewards will take care of themselves.
! Building a business is very hard; demonstrate confidence with an awareness ofthe risks.
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“What segment of the market are youtargeting and what is the competition
doing in that market segment?”
The Question?
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The QuestionMarket SegmentationA Review
! The online gambling market in Asia is large and potentially underserviced; these arenot games that most mos North American companies would typically “do first”.
! It isn’t clear that Mark has played Mah Jong or any of the other games he wants totarget, as his knowledge of the competition appears to be thin.
! Even if this were a relatively open market opportunity, Mark and the team appearto lack the cultural sensitivity which would almost certainly be required to succeed.
Positives
Negatives
The Bottom Line
! You have to know more than just what you’re doing! Try to know EBERYTHINGabout the market: segmentation & characteristics of each segment; competitorsand their strategies; key success factors; who has failed and why;movement ofkey managerial talent; etc.
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“Can you describe the technologyarchitecture and whether any of your
technology could be considered proprietary?Have you looked at the intellectual property
estate around your technology?”
The Question?
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The QuestionTechnology ReviewA Review
! None - Sorry
! No IP work at all
Positives
Negatives
The Bottom Line
! Understanding of IP estate is essential, both “positive” (“Do we haveanything patentable?”) and “negative” (“Does our invention infringe on anyexisting patents?”)
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“How much capital do you needto get started?”
The Question?
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The QuestionCapital RequirementsA Review
! At least they understand they need marketing money; many entrepreneurs assumetheir products will “sell themselves” based upon the sheer brilliance of the solution.
! Plan to complete software V1 and demonstrate viability before raising second roundof financing at (hopefully) a higher valuation.
! Frightening use of proceeds without project plan for software development
! Wasteful spending on the wrong expense items; this is 2007, not 1999.
! Unintended insult and arrogance (raising money in New York), implying that “thisdeal will get too big or you”.
Positives
Negatives
The Bottom Line
! Investors must see well-planned use of proceeds with spending “appropriate”to the deal.
! Amount of capital to be raised in Round 1 should finance achievement ofsignificant value creation step + at least 6 months at then-current burn rateto allow time for raising Round 2.
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“What valuation are you putting on thedeal, and are you speaking with other VCs?”
The Question?
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The QuestionOther VCsA Review
! Understands the process
! Consultation with others in management team undermines credibility, followedby blatant lying on getting another term sheet to attempt to obtain negotiatingleverage.
! Unrealistic timing
Positives
Negatives
The Bottom Line
! Never misrepresent ANYTHIING during the process; it undermines trust ineverything else.
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“Isn’t online gambling illegal in Canadaand the US? How will you operate?
The Question?
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The QuestionLegal Structure & DocumentsA Review
! Their plan MAY be legal, but clearly violates the spirit and intent of the gaming legislation andtax code.
! Their plan MAY be legal, but clearly violates the spirit and intent of the gaming legislation andtax code.
! Impossible to obtain legal opinions on legality and tax from credible sources.
! Deviation from “tried and true” convertible preferred share structure is a “red flag” toVCs; it always makes things more complicated, consumes time and is expensive to paperwith the lawyers.
! Structure makes it VERY difficult to sell to a third-party buyer (except another onlinegaming company) and very difficult to have an IPO.
Positives
Negatives
The Bottom Line
! Keep the structuring very simple.
! Use standard documents.