5 tools to make raising capital easier

Off to Ottawa on Air Porter for a “Fast 50” event with Deloitte (our firm is proud to be one of the Fast 50 national sponsors). Capital raising very much at the forefront of the agenda tomorrow. Since yesterday’s post looked at the things to avoid when trying to raise capital (see prior post “7 avoidable capital raising mistakes“), here are some of the more straightforward and easy “Do’s”:

1. Do You Really Need an NDA?

Everyone in the putting-money-to-work business gets these calls from time to time, where folks ask us to sign an NDA before we’ve even heard the first thing about the investment opportunity. Small subset, but it happens. Tough question to answer “I know you don’t yet know what our business is about, but will you sign this non-disclosure agreement so that I can tell you?”

The more meaty topic is simply this: do you truly need a prospective investor to sign a non-disclosure agreement prior to having the first meeting?

It may well be that you do. But that begs the question, what is it about your business that is so easy to rip off? Is the IP that indefensible? If you have customers that generate revenue, there are a bunch of people who are aware of what you do who might not think twice about chatting about your solution to their pals. Be practical about what secrets can be kept, and from whom, and when.

If you are able to get through a 30 minute discussion with a potential investor without disclosing your “state secrets”, that’s something to seriously consider. If the VC is keen, they’ll want to go to the next step, and executing an NDA at that point will be a no-brainer.

But if you need one signed before the first minute of the first discussion, the chances of your introductory email or vmail staying stuck in “in-box hell” are seriously enhanced.

2. Prepare a Presentation

It seems so simple, but it is difficult to raise capital from VCs or the like if you haven’t put something together. A word document “business plan” might seem like an obvious work product if you are at the pre-revenue stage, but if you’ve got some clients and revenue, it generally isn’t necessary. Think 20 powerpoint slides, and imagine that each page will take about 60 seconds, or maybe 90, to go through – without questions, that is.

Sending it in advance can be useful, as many of us in the business find it beneficial to go through it before sitting down. If it isn’t yet ready, then ask yourself if you should be booking meetings just yet.

On the question of paper vs. laptop, each has its merits; but imagine what happens if you get your 30 minutes at Fund X to make your pitch, and the laptop takes 5 minutes to figure out how to link to the Viewsonic screen. Even Joe Timlin, great company that he is, doesn’t have five minutes of jokes to carry you through that deathly lull. Ok, Joe could keep you laughing for five minutes, but Rick Segal?

3. Do The Pitch In Person

I recognize this is easier to blog about than to do, as so many entrepreneurs live outside of the traditional VC Canadian “moneycentres”: Vancouver, Toronto, Ottawa and Montreal. There are institutional VC doors to knock on in Waterloo and Halifax as well, for example, but the chance to see several different firms over a compact 2 day / 1 night period is greatly enhanced if you make the trip to one of these fine cities.

You have to be sure that you are seeing the right groups. And that shouldn’t be too hard. If the website of the fund says they look at mid-to-late stage deals, don’t put them on your agenda if you have $1.2 million of revenue. If their website isn’t clear, check the www.canadavc.com and www.cvca.ca websites and see what types of deals they do, and the profile of their investee companies.

4. Show the Upside, But Don’t Smoke Crack

A three year forecast is all that a VC would expect you to be able to imagine, at least credibly so. A five year forecast for a relatively new company is unnecessary, and will be difficult to validate during due diligence.

You can imagine what goes through a VCs’ mind when presented with a forecast that shows revenue going from, say, $4 million in year one to $168 million in year five, with EBITDA margins of 30% at the backend. Those are the folks who are suspected of being on Crack. It is natural to want to entice an investor with an attractive upside, and some will tell you they need to see a “10x” to be able to put their money out. Fair enough, but they don’t mean a 10x in the first 36 months.

Demonstrate what you’ll do with the capital, and how it’ll add sustantially to building equity value. No one in VC land needs to see what you think EBITDA will be five years from now — at least not in the first few meetings — to get excited about the business.

5. Keep The Momentum Going

It seems so self-evident, but timing is never on your side. Once you get a warm lead, you need to stick with it. If you have multiple irons in the fire, manage them with great care. If a VC thinks they’d like to do a deal, don’t think of this as Texas Hold ‘Em poker. You can’t win by “slow-playing” the prospective investor.

Now, if they’ve called you out of the blue, suit yourself. Play all the footsie you want, recognizing that they may move on to other opportunities. Making it hard to coax them back down the road should you realize that it is hard to grow a business without external capital — even Reseach in Motion (RIM:TSX, RIMM:Q) raised several rounds of outside capital before they hit the big time.

For most entrepreneurs, you are searching for capital at some crucial stage in the growth of the business. Which means that if someone is prepared to do the work required to get to a term sheet, help them get there in a timely fashion. They’ll want a financial model (balance sheet, cash flows and the income statement), a capitalization table, some “case studies” about how your solution helps solve a customer’s needs, a few personal references perhaps, resumes of the senior business leadership team, a white paper on the technology (if appropriate).

And don’t hide in email land. Use the telephone. If you just sent a flurry of material, let the person know with a quick telephone call. We know of potential deals that went into a ditch solely because of what appeared to be email problems. Spam filters are hunting for emails with the word “capital” or “financing” in them. These filters assume the email is about the $9 million unclaimed estate of your fake Nigerian relative. If a week has gone by since you sent the financials, and you haven’t had a follow-up note, check in via telephone.

If the VC didn’t get the promised info volley, they may well assume that you are fishing in another capital pond and are intentionally slowplaying the hand in the hopes of getting a better valuation elsewhere. Trying to restart the original interest four weeks later can be difficult, particularly if an attractive new opportunity has come along for the VC partner in the meantime. Most Canadian VC firms have between five and seven professionals; which can ben smaller than your entire administrative team (finance, legal, admin., etc.). If they do four new deals a year they are on fire. Plus there’s the existing portfolio to manage; money which is already at risk.

In the clear light of day, since most new over-the-transom Series A tech investment opportunities have a 1 in 10,000 chance of playing out like RIM (forget Google), it is a sad reality that there is too little fear sometimes that a missed opportunity will turn out to be a heartbreaker of a situation.

MRM