Venture capital can be the ticket to meteoric success for a small business, but securing it involves winning over hardened investors with your enthusiasm and business expertise. Geoff Sankey, director of The Capital Fund, speaks about some of the dos and don'ts of pitching for investment.
For SME owners that lay awake at night dreaming about reaching the big leagues, venture capital investment could be one way to bring your misty reveries to pass. However, parting venture capitalists from their precious cash is not an easy feat to achieve.
Do your research
The thing to have in mind right from the start is that by accepting a venture capital investment, you are committing yourself to selling the company at some point in the future. You're not going to the bank and asking them to lend you money, you're going to sell a piece of your company and your investors will want to sell their shares at some point in order to get their money back. This means you need to have a very good idea of how much the business is worth.
The Capital Fund receives around 40 applications to finance new businesses every month. Of those, only a quarter make it to the pitching stage and only 2.5 percent of those seen ever receive investment.
Preparation is the name of the game, both in the information you'll need to have ready and your knowledge of the people you're going to be pitching to. Geoff Sankey is the director of The Capital Fund, a £50 million London-based venture specializing in SMEs with high growth potential. "If you've been invited in to make a pitch, you should spend as much time as you can talking to someone at the organization, finding out how it wants you to present," he advises.
"Whatever they ask for, try your best to do it because it does make a negative impression if you don't and a very positive one if you do."
Investors want you to explain several key points in the first minutes of your pitch. They're not interested in how you're going to revolutionize the world of toilet-roll holders or any of your other marketing concepts. What is your product or service? Who and where are the potential customers? Who else is out there that can satisfy this demand and how are you going to compete with them?
Geoff Sankey, director, The Capital Fund
"It's like going to see the doctor," explains Sankey. "You could do a tap dance but he's just going to say: 'For goodness sake! I'm not interested in your tap dancing. Sit down and tell me what's wrong'!
"What you need to convey as early as possible, in simple terms, is what the product is all about and why people want it," he adds.
Tell it like it is
Make sure you've constructed a comprehensive business plan. This is vital to a new business for a number of reasons: You'll be asked very specific questions and will be expected to provide equally specific answers. But, having worked up your business plan (which, of course, you will have learned back to front), you should be able to answer virtually anything. A common mistake is to neglect the sales strategy which should really be central to the plan.
"We see a lot of people who really understand technology, really understand their products and they might even understand the industry very well. It's rare to find someone who really understands how to sell," says Sankey. "We expect a quarter of the businesses we invest in to fail, and many do because they can't sell the product."
An important thing to remember is that evasiveness is your enemy. If you're asked how many units you've sold to date when your only customer so far has been your mother, answer honestly. If the answer is, 'no we've sold none yet', that's what they want to hear, rather than some vagary.
Venture capitalists investing in SMEs are not going to be surprised when they encounter an organization in its very early stages. Don't be afraid to admit you don't have this information or you haven't achieved a certain target yet. "People don't want to say anything they feel is detrimental to their case," says Sankey. "But their attitude is the detrimental thing."
Be honest. Investors are not going to kick you out the building because you haven't sold anything yet. Sankey says when he asks what a business' weaknesses are, it is music to his ears to hear an honest run down of the areas that need attention. "We want to back people that we feel we can trust and relate to," he adds.
Geoff Sankey, director, The Capital Fund
A person who comes across outstandingly with a reasonable idea is far more likely to gain support than someone with an amazing idea who comes across as difficult. One-man-bands are rarely successful. It's too rare to find a single person with all the managerial attributes necessary to run a fast growing company - for instance, with a sales strategy and people and finance management.
For this reason, as many of your senior team as possible should attend the initial meeting. The completeness and perceived competence of the management team will have a massive bearing on your chances of success. Everyone should know what they're going to say and who is going to field which questions.
The last thing you want to do is start bickering amongst yourselves which, hard as it may be to believe, happens quite often. "It really is true that a good management team can actually make much more out of a bad idea than the other way around," says Sankey. "It's all about the people."
- Find out how they want you to present; follow it to the letter.
- It's not as quick and easy at you might think. Securing investment takes time, so expect months of meetings and negotiations.
- Don't wait until the last minute. No one wants to invest in a company that's going to run out of money in a month.
- Don't try and sidestep a difficult question. Be honest.
- Investing your own money in the business demonstrates that you have confidence in the concept.
- Don't be reluctant to break it down in very simple terms. You shouldn't assume that investors know anything about your market.
This article first appeared on our sister site, AccountingWEB.co.uk