Mark McQueen, the guy behind Wellington Financial is quickly becoming a blog rockstar, and his latest post is no exception.
Mark deals in the Venture Debt business, a similar product to that of Silicon Valley Bank and a few others. He is the kind of guy you might end up talking to down the road when you need some growth capital. Who knows. All I know is that when I have asked Private Equity guys about Mark and Wellington, they have always gotten a little scrappy, so I take it as a good sign.
Here is his post, 7 avoidable capital raising mistakes. It is worthwhile advice for anyone pitching to VCs, angels or potential business partners.
In this first attempt to stick to the script, we?ll address seven of the more obvious mistakes that entrepreneurs make when trying to raise capital (this is not to sound patronizing, but to help make the capital-raising process a success):
1. False Sense of Urgency
Imagine the excitement when the email comes in: ?Can I see you tomorrow to discuss a new deal?? As a firm that prides itself in operating in real time, the natural desire is to say ?yes?. Drop everything and see what the fuss is about. Our natural request is for a corporate overview or something similar – gives us a chance to learn about the business prior to the session. Unfortunately, not everyone is as prepared for the request. If you don?t have the powerpoint / business plan ready to share, you shouldn?t be booking meetings for the next day.
Worse, if you aren?t currently looking to raise capital, there?s no need to try to get on a VC?s dance card for 24 hours from now.
2. Hurry Up and Wait
The ugly sister of #1 above. When you book a meeting with a capital provider, you have to assume that they?ll like the story as much as you do. Why else are you pitching the story? Which means they will invariably ask for detailed financial information. Like the financial model that formed the backbone of the powerpoint presentation. Far too often, the response is: it?ll be a couple of weeks. Why the rush for the 1st meeting if the financials weren?t ready?
We always wonder about that. What will take a couple of weeks? Did you not have a forecast when you presented the business plan? Or are the forecasts not yet sexy enough for sharing?
The other mistake is the: let?s get the NDA signed up right now. But 10 days sometimes goes by before the first volley of information is sent. Any hint of disorganization is a bad first impression.
3. ?Not Board Approved?
Then there are the financial models that ?haven?t yet been approved by the Board?. Having had the meeting, and received the financial forecasts, VCs are often told that the budget they?ve been given hasn?t yet received the sign off of the company?s Board of Directors. But you should still value/analyze the business on the basis that this is the working forecast.
Which begs the question: if the financial budget that is being shared with would-be capital providers isn?t Board-approved, what is it? Management-approved? Does the Board even know you are talking to potential outside investors? And how does this budget compare to the one that is currently ?Board approved?? Is it better or worse?
4. The Five Alarm Fire
Unlike #1 above, this meeting truly is incredibly urgent. The problem is, no one comes clean about just how urgent it is until the meeting is underway.
Imagine the scenario. Company (or Agent) requests a meeting. It goes well. Good story and strong management. The problem is, they ?need to close? the financing in less than two weeks. Huh? Whatever it is, acquisition, deposit, customer order fulfillment, etc. The timeline is critical. Assuming it is a new story to the firm, and not a follow-on, I can?t think of any institutional firm in the country that can do the primary due diligence, negotiate the deal, draft legals, and cut a cheque in 8 or 10 business days.
Serious case of lunch bag letdown. Having spent two hours on an interesting meeting, it turns out there is no way to do the deal.
5. Cell Phone Conference Call Pitch (aka persons of no fixed address)
This is a personal favourite. The virtual powerpoint presentation. They usually come via a known referral, who is less concerned about you wasting your time than you might be.
The scheduled one hour pitch comes from someone you?ve never met, and they sound as though they are lying down the entire time. They are relaxed alright, almost too calm. It can be disconcerting.
As the pitch continues, your mind wanders and you ask yourself – do they even have an office? How do they oversee the staff if they?re always elsewhere? What city are they calling us from right now? And why are they looking for money from us, residents of a foreign country? How do we due dili the deal if there?s no office? Etc.
just think of how it looks in a police report on television: the assailant had no fixed address (i.e., no job, can?t cover the rent, parents kicked them out of the basement long ago). Has a certain aura to it.
6. Thanks For Nothing
It may strike you as hard to believe, but this happens from time to time. A meeting is booked. The story is told. It goes well. Due diligence is done, and a term sheet is issued for a potential financing. Then, radio silence from the person who was looking for the capital. Perhaps they found the money elsewhere. Perhaps they changed their mind. Perhaps an existing investor did the deal instead.
That is generally just fine by us, as we look at 500 opportunities a year and understand that just as we can?t give every company money, not every company utilize our services.
But to have gone through the process to size up an opportunity and issue a term sheet, just think of how easy it would be to pen a two sentence email saying: ?thanks, but we are going a different direction?. The VC market is small, and while folks keep confidential business information to themselves, a reputation for rudeness is worth avoiding. It is so easy to say ?thanks but no thanks?.
7. ?These Forecasts Are Ultra Conservative?
I?m sure you are surprised that people would use the phrase ?conservative?, particularly at a time when 80% of private companies are missing their forecasts. But, you?d be wrong if you didn?t think it happened every week. At some point during the pitch, someone from the company says ?these forecasts are conservative?. Sometimes you?ll get the ?ultra? modifier as well.
This is certainly the ?#1 guaranteed to generate a laugh? line in the business. It is almost as good as the follow-up ?I know everyone says their forecasts are conservative, but these really are.? Just like you would never say ?I?m really good in bed? on a first date, just hide the conservative nature of the forecasts for the due diligence period. Some VCs won?t take a second meeting if they hear that line in the first go ?round; they assume, fairly or not, that you?re wet behind the ears.
If the entire pipleine is already contracted, have the VC figure that out during due dili and say ?wow, are these ever conservative forecasts!? You?ll catch a lot more fish that way.
nice list to think of but not sure about #5. most of the people i work with are mobile workers who work on the road or home. that doesn’t mean at all that they are not serious or that they can’t be trusted.
nice list to think of but not sure about #5. most of the people i work with are mobile workers who work on the road or home. that doesn't mean at all that they are not serious or that they can't be trusted.
I agree, and should have said so in the post. Mark deals with larger companies though, looking for an order of magnitude more capital than we normally talk about, so in that case I can understand his position.
I agree, and should have said so in the post. Mark deals with larger companies though, looking for an order of magnitude more capital than we normally talk about, so in that case I can understand his position.
Mark missed one big sin. Serial pitching. This is when people pitch a fund or two and see these discussions through before adding new funds to the pipeline.
(Most) VCs can’t say “no”. Inexperienced entrepreuners might actually think they are in a deal cycle, when in reality they’re not.
As a result they lose time and burn cash. A big sin!
Mark missed one big sin. Serial pitching. This is when people pitch a fund or two and see these discussions through before adding new funds to the pipeline.
(Most) VCs can't say “no”. Inexperienced entrepreuners might actually think they are in a deal cycle, when in reality they're not.
As a result they lose time and burn cash. A big sin!
My number one pet peeve is people who don’t do a bit of research on a potential funder before the pitch… Marketing 101… Know your audience. All funders are different — figure out which funders fit your company in terms of (1) stage (2) industry sector (3) geographic market etc. This information is readily available on most VC/venture debt firm websites.
Identify, before the pitch, what the funder cares about. For example, Mark mentions financials above. In contrast, in a recent blog post (http://blog.techcapital.com/2008/08/25/venture-funding/), Tim Jackson at our firm said:
“We get sent some massive spreadsheets and while we appreciate the hours (or days) that went into detailing the information, it is not something we need to evaluate an opportunity. The reality is, that with the experience we have, we can usually ballpark the financing requirements with a few simple questions. Eg Q – how many people do you plan to hire. A – 10 FTE. Q – How long do you think it will take to get to Beta. A – 12 months. Assuming you hit your plan, we know you will need approximately $1.25 million, so allowing for slippage and capital to fund the period between beta and next fundraising round we will probably assume this will be a $2 million initial investment.”
We invest at the seed/early stage of a company’s development so it is almost impossible to pull together somewhat accurate financials.
My number one pet peeve is people who don't do a bit of research on a potential funder before the pitch… Marketing 101… Know your audience. All funders are different — figure out which funders fit your company in terms of (1) stage (2) industry sector (3) geographic market etc. This information is readily available on most VC/venture debt firm websites.
Identify, before the pitch, what the funder cares about. For example, Mark mentions financials above. In contrast, in a recent blog post (http://blog.techcapital.com/2008/08/25/venture-…), Tim Jackson at our firm said:
“We get sent some massive spreadsheets and while we appreciate the hours (or days) that went into detailing the information, it is not something we need to evaluate an opportunity. The reality is, that with the experience we have, we can usually ballpark the financing requirements with a few simple questions. Eg Q – how many people do you plan to hire. A ? 10 FTE. Q – How long do you think it will take to get to Beta. A ? 12 months. Assuming you hit your plan, we know you will need approximately $1.25 million, so allowing for slippage and capital to fund the period between beta and next fundraising round we will probably assume this will be a $2 million initial investment.”
We invest at the seed/early stage of a company's development so it is almost impossible to pull together somewhat accurate financials.
Also, the entrepreneurs we work with often have no office or staff… :)
Also, the entrepreneurs we work with often have no office or staff? :)
RE: Jacqui’s comment on financials – I think the difference for Wellington is that as a venture debt player (a lender) they have more interest in financials and how they will be repaid than a traditional VC would…
RE: Jacqui's comment on financials – I think the difference for Wellington is that as a venture debt player (a lender) they have more interest in financials and how they will be repaid than a traditional VC would…
Re: Mark MacLeod’s comment above.
Yes absolutely and the point I was trying to make. Different funders have different needs/wants and its a good idea to know what a funder cares about before meeting with them.
Re: Mark MacLeod’s comment above.
Yes absolutely and the point I was trying to make. Different funders have different needs/wants and its a good idea to know what a funder cares about before meeting with them.
Re: Mark MacLeod's comment above.
Yes absolutely and the point I was trying to make. Different funders have different needs/wants and its a good idea to know what a funder cares about before meeting with them.
Re: Mark MacLeod's comment above.
Yes absolutely and the point I was trying to make. Different funders have different needs/wants and its a good idea to know what a funder cares about before meeting with them.
Well thanks for this info. It will definitely help me in my entrepreneur career.
Well thanks for this info. It will definitely help me in my entrepreneur career.
This is great info, that will help many young entrepreneurs. Thank You
This is great info, that will help many young entrepreneurs. Thank You
The problem is, they ?need to close? the financing in less than two weeks. Huh? Whatever it is, acquisition, deposit, customer order fulfillment, etc. The timeline is critical. Assuming it is a new story to the firm, and not a follow-on, I can?t think of any institutional firm in the country that can do the primary due diligence.
The problem is, they ?need to close? the financing in less than two weeks. Huh? Whatever it is, acquisition, deposit, customer order fulfillment, etc. The timeline is critical. Assuming it is a new story to the firm, and not a follow-on, I can?t think of any institutional firm in the country that can do the primary due diligence.
thanks so much for these tips. would help a lot, specially #5, I'm not aware of that. It happens that I deal with that kind everyday :D