Top 5 Mistakes Entrepreneurs Make in Raising Funding
Hall T. Martin
Texas Entrepreneur Network, Director
txenetworks.com
My background
Angel investor for over 10 years
Started three formal angel networks
Run an open funding forum series monthly
Seen thousands of business plans
Coached hundreds of companies through the process
I’ll share my experience with you today
So what mistakes do people make in fund raising?
#1 Unrealistic expectations
Expectation: It should take a few weeks to a month
Reality: It takes a year to raise $1M
Preparation of business and documents takes 2 months
You have to pitch investors in person
Investors take 3 - 6 months to perform due diligence
Signing legal documents takes 1 to 2 months
Holidays and summer vacations will slow things
down
#2 Lack of a strategy
Just pitching investors won’t work—you need a
bigger plan – better, you need a strategy
You need to know where you can find investors
You need to prepare the investor for the pitch
You need to understand what investors are looking for
Your plan needs to include finding a lead investor
You need a closing process to finish the round
#3 Lack of follow up
Many entrepreneurs never follow up. They wait for
the investor to call
You should contact the investor and ask for a follow-
up meeting
You should be sending monthly updates
You need to educate the investor on your deal
You should build a relationship with the investor
#4 Lack of key documents
Most entrepreneurs start the process unprepared
You should develop the core documents first
Executive Summary—1 page
Pitch deck--12 to 15 slides
Financial Projections
Due Diligence documents
Legal entity, Intellectual Property (IP), credit
reports, historical financials, etc.
#5 Focusing on the product
Most entrepreneurs talk only about the product
Focus on the business itself – target market,
competitive position, marketing plans, sales
channels, etc.
You are selling the company – not the company’s
product
Identify all the values you have built into the company
and communicate those values
Summary
#1 Unrealistic expectations
#2 Lack of a strategy
#3 Lack of follow-up
#4 Lack of key documents
#5 Focusing on the product
What are Angel Investors
High net-worth individuals seeking to make a return
Meet the Accredited Investor requirement
Seeking to make a return on their investment
What are Angel Investors
Typically they are not professional investors
They often have substantial business experience
Each angel has his own criteria
Why do you want Angels?
Angels bring expertise
Angels bring their network of experienced people
Angels have a standing in the community
Angels can join your board of advisors
Angels typically know other angels
So where do you find angels?
Start with family
Look to friends
Check out your coworkers
Go through your rolodex to see who might be a
potential investor
Formal angel groups
You can check out the formal angel groups
Angel Capital Association—largest trade organization
www.angelcapitalassociation.org
Informal angel groups
There are informal pitch sessions and funding forums
run in the local community
Even if they offer only mentorship and practice, they
often as angel investors participating as judges
Business plan competitions
Mentors and coaches are often angel investors
Accelerator programs also have angel investors
Service providers
Your attorney and accountant often know angel
investors
Social networks
LinkedIn can help you identify angel investors in your
area
Facebook can also be helpful
Crowdfunding websites
There are numerous websites that connect angels to
entrepreneurs
Called Crowdfunding sites they match investors with
deals
What is Your Timeline?
Expectation
“I want to finish the fund raise by the end of the
month”
Reality
It will take one year for every $1M you are raising
So let’s say you are raising $1M. How will you spend
the coming twelve months
Month 1—Check Readiness
Assess your company
Communicate with your team and investors
Check with your attorney
Month 2 – Prepare the company
Build key documents
Executive Summary – one-page version
Slide Deck – 12 to 15 slides about your company
Financials – Both historical and projected
Due diligence docs – legal entity, IP, etc.
Fill out the team with a board of advisors
Month 3-5—Prepare the investors
Identify potential investors for your prospect list
Add ten new investors each month
Setup meetings with investors to introduce the deal
Ask permission to keep the investor on the list
Start sending monthly updates personalized to the
investor – do not send ‘broadcast’ emails
Demonstrate achievement of milestones
Month 6-9—Pitch the Investors
Follow-up to pitch each investor
Identify the lead investor
Close the lead investor using investor-friendly terms
Offer an incentive to the lead investor for the risk they take
Month 10-11—Close the remaining investors Invite other investors to join the round
Close the document signing process
Month 12 – Maintain the relationship
Keep sending quarterly updates to all investors on
prospect list
Prepare those investors for the next round
Questions
Assessing Your Readiness to Raise Funding
Hall T. Martin
Texas Entrepreneur Network, Director
txenetworks.com
Are you Ready?
Most entrepreneurs ask, “Do I need funding?”
Many don’t ask the next question, “Am I ready to
raise funding?”
Legal Entity
Is your company formed under a legal entity?
Is it the right entity? – C-Corp
Product/Service
Do you have a product in the market?
If not, will you have one in the market in 3 months or
less?
Do you have customer interactions with your product?
Sales
Have you sold a few units?
Product validation -- shows the product works
Market validation -- shows customers will buy at the
price you asked
Business Model
Have you identified the business model?
Can you site metrics?
cost of customer acquisition
product development costs
profitability
Management Team
Do you have a complete management team?
Someone building it
Someone selling it
Financials
Do you have financial projections developed?
Income Statement
Cash flow Statement
Sales Forecast
Due Diligence documents
Do you have your Due Diligence docs
Articles of incorporation
Patent filings
Financial records
Attorney
Have you talked with your attorney?
Proper legal entity
Fund raise documents
Your Team & Your Investors
Have you talked with your team?
Have you talked with your current investors
Questions
How to Write an Executive Summary
Hall T. Martin
Texas Entrepreneur Network, Director
txenetworks.com
What is an Executive Summary?
One-page version of your business
Non-confidential information
Include your name and contact details
Let’s look at the key elements to include
Problem the company solves
It must be a large problem
It must be specific
Use numbers
Product/Service offered
Describe your core product/service
Avoid too many details on how it works
Highlight the economic benefits to the customer
Competitive Advantage
Use a matrix to list your company and competitors
Show four to five key advantages of your solution
Include indirect competition as well
Target Market
Show three market views
Total available market – Anyone who could use it
Serviceable market – Your target market
Beachhead market – Your initial customer target
Show size and growth rate of each
Business Model
Show how you generate revenue
Show how you spend money
Two key metrics
Cost of customer acquisition
Lifetime value of customer
If complex use a customer example
Sales Model
Describe your sales channel
Direct
Distributor
Web
Other
Intellectual Property
Discuss Patents, Trade Secrets, Trademarks,
Copyrights, etc.
Show what has been filed and when
Discuss any ‘office actions’
Management Team
Show top management team
List years of experience
List relevant work experience
Include board of advisors
Summary Financials
Show Revenue, Costs, and Profits for five years
If you have historical financials, include as well
Funds Sought and Use of Funds Show how much you are raising
Show what results to the business you expect
Exit
Show how you plan to exit the company and return
funds to the investor
Highlight example acquirers and show their history
of acquiring companies similar to yours
Questions
Building a Team
Hall T. Martin
Texas Entrepreneur Network, Director
txenetworks.com
Importance
Critical factor in raising funding as well as success in
business
Investors look for completeness
Investors look for critical skill factors
Investors are on guard for unnecessary headcount
Core Team
Core team consists of someone building it and
someone selling it
As the company grows this division of labor becomes
more sophisticated
Future hires
You should identify future hires to bring on when
revenues and funding justify it
A full management team slide doesn’t mean all are
working full time or even paid
People from large companies are not as helpful
Startup skills are different than big company skills
Board of Advisors
People who help out even though they are not
compensated
Not a Board of Directors
Make a list of areas you need help in
Recruit people to fill those areas
Meet once a week for coffee to discuss
Also use for potential C-level recruits and investors
Service providers
Recruit service providers who know your startup
space well
Seek those who can help beyond their core service
offering
Questions
Agenda
Crowdfunding– what it is and how it works
Five most common mistakes in crowdfunding
Example crowdfunding sites
Three critical elements to successful crowdfunding
Q&A
What is Crowdfunding?
Sourcing funds for a startup through a web portal
It creates another source of capital
The amount of funding comes in smaller increments
$25 to $500 typical donation
some websites focused on $1K to $10K
investments per donor/investor
How does it work?
1. Choose a crowdfunding site based on project
2. Submit your application (target funds & timeline)
3. Gain approval and publication
4. Promote your deal to your network
5. Respond to questions and feedback
6. Raise your funds
Two types of crowdfunding sites
Donations
Non-accredited investors
Examples: Kickstarter, Rockethub, IndieGoGo
Investments
Accredited Investors ($1M in net worth)
Examples: Microventures
What is the JOBS Act of 2012
Jumpstart Our Business Startups (JOBS)
Signed into law April, 2012
Investor crowdfunding will have a limit of
$1M/company and $10K/investor (Jan 2013 effect)
There are other parts to the JOBS act including:
506 status—general solicitation (July 4, 2012)
Regulation A filings--$5M limit moving to $50M
See more at Jobsactlinks.com
What does it mean to you?
Small firms can now raise up to $1M without having
to register with the SEC
Non-accredited investors can invest without having
to meeting accreditation requirements
There will be some limits based on annual income.
“Funding Portals” will act as broker/dealers to ensure
compliance
Proposed Requirements for investments What are the reporting requirements:
< $100K CEO certifies the financials are correct
$100K to $500K -- a public accounting firm
certifies the financial statements
>$500K -- audited financial statements are
required
How does crowdfunding compare?
40+% of posted projects to CF sites get funded
15% for angel deals
1% for VC deals
Kickstarter’s track record 2011
Launched Projects: 27,086
Successful Projects: 11,836
Dollars Pledged: $99,344,382
Total Visitors: 30,590,342
Project Success Rate: 46%
Launched Projects: Up 143.4%
Successful Projects: Up 202.7%
Dollars Pledged: Up 259.4%
Total Visitors: Up 268.8%
Project Success Rate: Up 7.0%
Who should use it?
Startups seeking to raise startup or growth capital
How much can I raise?
For donation sites most raise less than $20K
For investment sites most raise less than $500K
What does it cost?
Currently most sites charge a listing fee of 0% to 5%
and an additional 4% to 10% of funds raised.
Do I have to raise all of it?
You specify a target fund raise amount and
timeframe
On some sites you keep what you raise and in other
sites you have to raise the entire amount to get the
funding.
Most deals raise their funding within 60 days
We’ll show you examples later in this presentation.
Handling donors & investors
Donors— get cool perks (music downloads, sample
product, naming a cupcake after you).
Investors –get an equity stake in your business
Five most common mistakes
1. Not making the pitch compelling enough
You need a great team doing something great
Mediocre projects don’t attract much attention
Five most common mistakes
2. Not promoting the pitch outside of the site through
blogs, emails, newsletters, and social media
Engage your network to start
Leverage your social network to expand
Develop and run a broader PR campaign
Five most common mistakes
3. Not demonstrating a detailed plan
You need to show how the funds will be used
The plan needs to look realistic and achievable
Vague or fuzzy plans do not get funded
Five most common mistakes
4. Not asking for realistic amounts of funding
You need to raise enough funding to accomplish
the project
Asking for too much or too little will kill the raise
Five most common mistakes
5. Not responding to questions nor asking for
feedback
Respond to questions quickly and with competence
Start a dialog and then build a relationship with the
investor
Example Crowdfunding Sites
Kickstarter
Rockethub
IndieGoGo
Microventures
Angelist
Kickstarter
Focus: Design and Crafts
Success Rate: 43% to 46%
Cost: 5% Success fee (if you reach your goal)
0% Success fee (if you don‘t reach your goal)
Funding model: All-or-nothing
Investor: Non-accredited
Website: http://www.kickstarter.com/
Rockethub
Focus: Creative projects
Success Rate: 85% for those using their consulting
Cost: 4% Listing Fee
4% Success Fee (if you reach your goal)
8% Success Fee (if you don‘t reach your goal)
Funding model: Keep what you raise
Investor: Non-accredited
Website: http://www.rockethub.com/
IndieGogo
Focus: Creative projects
Success Rate: Not published
Cost: 4% Success fee
9% Success fee (if you don‘t reach your goal)
0% if funds are refunded
Funding model: Keep what you raise
Investor: Non-accredited
Website: http://www.indiegogo.com/
Microventures
Focus: Tech, social, mobile, gaming
Success Rate: 100%
Cost: 10% Success fee
$100 to signup & $250 for due diligence
Funding model: Keep what you raise
Investor: Accredited
Website: http://www.microventures.com/
Angelist
Focus: Angel deals
Success Rate: Not published
Cost: Free
Funding model: Matchmaking site
Investor: Accredited
Website: http://angel.co/
Three critical elements
1. Make a pitch video
- Keep it short and cover the basics
- Use good audio
Three critical elements
2. Demonstrate credibility and success
- Show use of the funds with financial statements
- Polish your online image including your social networks
Three critical elements
3. Create a community with a cause
- Investors want to engage and contribute to a community
- Donors often fund based on interest in having the product
- Examples: The iPhone watch team raised $8.4M
Questions
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