Monthly Archives: April 2017

Looking for startup investors

If you’re looking for startup investors, having a good business idea is only half the battle. You won’t convince them based on your idea alone. The person deciding whether your business is worthy of their investment requires a well-thought-out plan, with details about the business, its growth potential, target market and more.

Business News Daily spoke with Michael Mocatta, partner and COO of Neta Ventures, and Keri Gohman, president of online accounting software company Xero Americas, about investor pitch meetings and how to ensure the relationship is a win-win for you and your investors.

 

1. Show investors you’re a low risk.

Benchmarks for raising venture capital have gone up over time as the cost of product development has decreased, said Gohman. Investors need to see a realistic business model and, in many cases, some initial traction. They also want to see how well the business has been thought out, an acute understanding of the business’s unit economics, and the lifetime value and cost of customer acquisition.

“Investors like to fund growth, rather than product development,” Gohman said. “A startup needs to be able to show an investor month-over-month growth over a certain period.”

 

2. Sell them on your team.

Your team is what makes your idea happen, and potential investors are looking at the people behind the idea.

“When fundraising, it’s important for business owners to show that they’ve been able to recruit a team, inspire the team to develop a solid product, a small subset of people who like using the product, and that the product has grown toward product-market fit,” Gohman said.

Mocatta noted that a common mistake is presenting yourself to a potential investor with a missing link, such as when you’re still looking for the “tech guru.”

“You’ll stand out for the right reasons if the people on your team have experience as well as contacts,” he said. “A diverse team with complementary strengths is what will turn an idea into reality.”

 

3. Create a simple tagline that shows your value proposition.

Entrepreneurs who live and breathe details of innovation find it hard to distill a concept into a simple idea that grabs the imagination of investors. You need to condense the vision of the business into a clear benefit that is compelling and dramatic, said Mocatta. A tagline is even more succinct than an elevator pitch, he added, so have this worked out and memorized before presenting your vision to others.

To define a meaningful vision, Gohman advises going beyond the business’s day-to-day operations and think about the “why.”

“A business with a true vision empowers those involved, giving them a reason to wake up in the morning,” Gohman said. “A vision should be used as a north star, guiding an organization in everything it does: hiring, development, customer acquisition, [etc.].”

 

4. Have a plan for distribution.

Having a plan and some initial traction for distributing your product or service is not a nice-to-have; it’s a must-have, said Gohman.

“An entrepreneur needs to have clarity on what they’re selling to their customer and how they’ll reach them,” she said.

Gohman suggested running a few test scenarios to understand how your distribution and demand work. Ideally you should have initial partners or contracts locked down to demonstrate that the business idea can get off the ground.

Stretch Your Startup Dollars

Initial startup costs are some of the biggest expenses a new business owner will have to encounter. Before you turn a profit, there are many parts of the business that need to be covered up front, and entrepreneurs don’t always anticipate some of these expenses.

To reduce your startup costs and stretch your dollars a little farther, follow these tips.

 

Have a budget, and stick to it

A simple way to save money as a new business owner is to set spending and expense limits. However, a surprising number of business owners don’t have a formal budget, said Carissa Reiniger, founder of small business support community Thank You Small Business.

“There is so much power in knowing what is going on in your business, for better or for worse,” Reiniger told Business News Daily. “Managing the finances of my business is not something I naturally enjoy, so I’ve put rules in place to help me stay on track. I advise setting up a standard time every week or month for reviewing and managing your budget.”

Angie Segal, an ActionCOACH business coach, advised entrepreneurs to factor their own salary into the budget as soon as possible.

“When you don’t pay yourself, you take money out of the business elsewhere to cover your own expenses,” Segal said. “Giving yourself a salary forces you to make everything in your budget work.”

Thatcher Spring, CEO of GearLaunch, said entrepreneurs should always do as much as possible with what they have before they add more fixed costs.

“At my company, we only hire when there is too much for the current staff to reasonably accomplish without additional help,” he said. “I’ve also found that hiring less-experienced, smart, adaptable employees, instead of only those that are senior and highly experienced, can help keep salaries under control.”

 

Be flexible

When you created your business plan, you might have envisioned all of the latest office equipment, lavish holiday parties and enough staff to take on big projects. However, not all of those business luxuries are guaranteed.

Office Evolution founder and CEO Mark Hemmeter said small business owners can suffer from a lack of flexibility in their grand plans.

“Your ego and vanity can get in the way,” he said. “You want that car or that perfect sign, but it just isn’t a good fit for the core of the business.

Hemmeter recommended looking into short-term solutions, like using shared office spaces and hiring freelance workers, until you can afford to make long-term commitments such as acquiring private office suites and hiring full-time employees.

Spring added that business owners should always plan for every effort to take longer than expected, whether it’s launching a new website, signing up customers, sourcing new products or hiring employees.

“Make sure you always set aggressive goals, but realize that there will be unexpected terrain on the pathway to success,” he said.

 

Go inexpensive, but not cheap

Startup costs for a new business add up, but there are tips and tools for finding the best areas to spend the money and those where you can cut back a bit. Spring noted that there are numerous cost-effective, self-service tools available to small business owners who want to save money by taking care of their own branding and website development.

However, it’s wise to be wary of “free” opportunities, warned Raad Mobrem, CEO and co-founder of Lettuce Apps (acquired by Intuit).

“Free tools can be a bad idea — they’re free for a reason,” Mobrem said. “Always pay for the important things, like software. You can ask for discounts with B2B services. People understand that you’re a small business just starting out, and if they offer discounts, you’ll want to work with them in the future.”

That said, spending money on the lowest-priced items can mean getting the lowest quality. As a result, you may have to replace things multiple times, and that can be more expensive than going with a pricier option in the first place.

Tech Innovation than Angel Investors

Like all startups, young tech businesses need to find adequate sources of financing to ensure they can get off the ground. But how can you tell which source of financing best positions your new enterprise for success? Recently published research from the University at Buffalo School of Managementsuggest that tech entrepreneurs might be better off partnering with venture capitalists than angel investors.

While researchers note that both angels and VCs are important, they found that VC-backed companies enjoyed several advantages. Tech startups backed by VCs were more likely to issue stocks sooner and often found buyers sooner than those backed by angels, according to the research published in the Journal. The difference, researchers posit, is that venture capital comes along with a larger network, giving them a greater reach when looking for additional investors.

“Angels and venture capitalists are both critical to innovation in business,” said study co-author Supradeep Dutta, assistant professor of operations management and strategy in the UB School of Management. “But it’s not enough to just get a patent. You need a strong network to shape the impact of the innovation, and venture capitalists have that network.”

Dutta attributes the influence of VCs largely to the difference in how money is invested; angels are investing their own capital, he said, whereas VCs are managing a fund capitalized with other investors’ money, meaning tighter controls, stricter contracts, and harder deadlines. Because angels are more flexible, they often put less pressure on startups to quickly innovate and grow.

Of course, sometimes an angel’s flexibility can be an advantage, Dutta added. While their limited influence means angels can only guide innovation so much, it also helps keep founders happy and willing to experiment, which can sometimes lead to breakthroughs.

“While the stringent control rights that venture capitalists have can move startups toward success, it can also create conflict with founders,” Dutta said. “Angels, who are investing their own money, tend to be more flexible and less focused on immediate financial returns, allowing longer-term experimentation.”

The results of the research is based on an analysis of 350 investments from angels and venture capitalists. Dutta’s fellow researchers are Timothy Folta, professor and Thomas John and Bette Wolff Family Chair of Strategic Entrepreneurship at the University of Connecticut School of Business.

Investors confidence increased in the third quarter of 2016, according to the Silicon Valley Venture Capitalist Confidence Index. The index, which is based on a five point scale, now stands at a 3.88, up from a 3.60 last quarter, indicating that investors are more optimistic and willing to pledge capital to startups. University of San Francisco Professor Mark Cannice attributed the boost in confidence to technological progress and the new opportunities that progress is creating.