Monthly Archives: December 2011

What Investors Look For In Deals ?

By Guest Blogger Rebekah Wu, Founder at Right-Hand Partners

 

In my ten years of experience working with the venture capital (VC) community here in the Silicon Valley, I’ve learned that VCs evaluate four criteria: team, market, intellectual property (IP) and business model. Of course, they always look for exit potential; that is a given.

The team is what many VCs consider before anything else.  Their priority is valid. If the team is made up of B- and C-players, what good will a huge market opportunity or defensible IP or disruptive business model do without a team that can execute?

Different VCs look for different DNA. For example, there are VCs that like to bet on young founders in their 20’s who have the passion, hunger to succeed with a disruptive idea. Other VCs look for teams with seasoned executives with previous startup experience and success. What is absolute is the current management team’s ability to attract and hire *A* players to join their company.  Another absolute is the current CEO’s willingness to hire a new CEO better than himself and take another position in the company if that is the right thing to do for the company.

Heads-up #1: During the due diligence process, the VCs will do both “front-door” and “back-door” reference checks on the management team. I’ve heard VCs say that LinkedIn and Facebook are their favorite tools they use for reference checks.

Though VCs never invest in advisory board members alone, they feel that key advisors can propel the company to scale quickly by opening doors at the decision maker level. Such advisors can add credibility to your company. For example, if Bill Gates wants to spend time advising you, there must be something credible there that you are doing. I typically advise my clients to put their advisory board slide in their appendix unless you have an “A-List” advisory board.

Board of Directors at the pre-Series A is not necessary. In fact, it can complicate matters as you are raising venture capital. The VCs that lead or co-lead are going to be on your board. If you already have three outside board members, someone or some people are going to be negotiated off the board at the term sheet.

Market opportunity is what many VCs consider before anything else. Their priority is also valid. If there is no market, what can a strong team or defensible IP or disruptive business model do without any customers?

Market opportunity is not just about the size or CAGR, it’s also about disruptiveness. Has Forrester already published a report on your market or is Gartner “coining” a new 3 letter acronym for the market you are creating in their next analyst report?

I often get asked by entrepreneurs about how to come up with a market size when they are creating a new market. Depending on your business, it can be as simple as looking at the number of target customers. How many people or companies can potentially use your product or service? And, how much are you charging for your product or service? Multiply those two numbers. Then think about what portion of that total addressable market (TAM) is your serviceable addressable market (SAM) today. This can be as simple as focusing on a specific vertical market or a demographic, such as the number of college students inFinland.

Heads-up #2: One trick of the trade is to look up your competitor or so-called competitor’s website and see what they quote as their market size and their source, and then figure it out from there.

Market validation is also part of the market opportunity evaluation. The VCs will take a close look at your referenceable customers and your competitive landscape. It can be helpful to investors if you can offer exit details about your competitors that have had recent activity in your space.

Heads-up #3: Customers and partners you mention in your investor presentation package can be called upon by VCs if they are seriously interested in your deal without you knowing.

Defensible IP is what many VCs consider before anything else. Their priority is again valid. If the IP is not defensible, what can a strong team or huge market opportunity or disruptive business model do if there is no barrier to entry and it’s only a hop, skip and a jump for any competitor to over take you at any moment?

Registered patents can be defensible for core technology and sometimes disruptive processes, but if you are software or a services company, patents may not be particularly worth filing. However, I’ve heard VCs mention other defensible competitive advantages such as:

  • A founding team of known top three domain experts in a particular market that have worked successfully together in the past
  • Exclusivity agreements with key partners or channels
  • Marquee referenceable customers that are leaders in their industry – this is because followers in their industry will follow      their lead to purchase the same system
  • A CEO that has made a lot of money for investors in his/her last two startups
  • Your working Rolodex

I’ve produced many events where the question of what is considered defensible IP was asked, and often the VCs themselves can’t always articulate their criteria for software and services companies. It seems to me that it is one of those unclear “they know it when they feel it” evaluation criteria.

I think it’s worth mentioning here that some VCs in the first meeting will assume that your technology works and focus more on your “bleeding artery” problem and how your solution solves that problem. It may not be until the technology due diligence process that you will be drilled on your technology and its defensibility.

Business model is what many VCs consider before anything else. Their priority is again valid. If the business model produces low margins, what can a strong team or huge market opportunity or defensible IP do if the business isn’t VC fundable?

Business model is about how you make money. This encompasses the disruptiveness of your idea, customer value proposition, go-to-market strategy and revenue model.

I’ve often heard VCs say that your gross margin speaks to your business model. VCs are always looking for high margin deals. In general, they want to see software deals with potential of 70% or more, SaaS with 80% or more, systems (hybrid s/w and h/w) with 60% or more, hardware with 50% or more in gross margin.

Heads-up #4: Investopedia defines gross margin as: Gross Margin = (Revenue – Cost of Goods Sold) / Revenue x 100%. Make sure that you have this percentage in your financial projection slide in your deck. It’s also important to know that VCs DO look at your financial projections carefully. They want to know how far you drilled down in your long term plan and how much you’ve thought through your business model. I coach my entrepreneurs raising their Series A to have detailed financials available for VC in their first meeting that show quarterly numbers over the first 2 years. The spend numbers are key here.

Lastly, I hope you noticed that each criteria mentioned in this blog is a priority for different investors. This means it is beneficial to do your homework and find out which one criterion is most important to your target investor(s) and customize your investor presentation content accordingly.

About Right-Hand Partners (RHP): RHP is a VC Relations company and a trusted conduit to reach the venture capital community. RHP has relationships with hundreds of venture capitalists representing over 150 VC firms. 34 companies that RHP coached have raised over $167M since September 2001; 8 have been acquired.  www.rhpartners.com

Finnish startups that RHP coached that have raised capital in Europeinclude: DealDash, StreamPlay, Miradore and others.

RWu (at) rhpartners.com

Networking 101

By Guest Blogger Rebekah Wu, Founder at Right-Hand Partners

Your network is NOT your net worth.

Having said that, a substantial network of high quality business associates can propel your business forward at a much faster pace than if you didn’t have a network. How you build that network is by no surprise called, “networking”.

I immigrated with my family to the United States as a teenager from Japan and our family knew no one when we first arrived. I had to build my current network from scratch as an adult. And, I’m going to share with you how I did it over the past 12 years in the Silicon Valley.

I worked for a Fortune 2000 company back in 1999 where I worked with a couple really smart and generous Sr. Directors who were already in their mid to late 50’s. When I quit the company to become an entrepreneur, those two friends introduced me to several of their friends who were VP & C-level executives at various corporations in the bay area. I took these executives out to lunch and picked their brains.

You may have heard of the saying: “there is no such thing as a free lunch.” I quickly learned that to be true. The lunches I paid for got me more introductions to executives of other companies in the bay area. After meeting with them typically over lunch, I was introduced to other executives. Eventually, I met the right people to advise me in my startup.

As I was raising money for my startup, I showed up at a lot of evening networking events produced by nonprofit associations for entrepreneurs in theSilicon Valley. I was typically one of two female entrepreneurs in the room of 100 men at these events. And, like every other entrepreneur, I rushed to the front of the room to meet the VCs to give them my elevator pitch and my business card. Interestingly, entrepreneurs in those days followed the gentlemen’s rule of “ladies first” and often allowed me to get in front of the line where I had ample time to pitch, shake hands and exchange business cards with my target VCs.

Soon, my techie friends started to ask me for introductions to VCs I’ve met along the way. So, I started producing lunch events for my friends and other entrepreneurs to meet the VCs that I had met that month. And, my network started to grow.

Eventually when my startup died with the rest of them in 2001, I was able to capitalize on my network and start Right-Hand Partners.

Why am I telling you my story? Because there are three useful takeaways from my personal story you just read about me.

One, ask. Ask your highly connected friend(s) for intros that don’t conflict with their business or day job.  When you get an intro into a high quality business person that may be able to help you, ask them to meet you for lunch because everyone eats lunch. And, it’s the one hour people can use to get out of the office to meet people outside of work to talk about something other than “shop talk” during the day.

Then, ask them for intros to their connections. Most business people have friends of their caliber and higher. This is “A way” to keep your network very high quality.

Heads-up #1: LinkedIn.com is a great to place to start linking with business associates, former classmates, former bosses and co-workers, etc. You never know who your connection is connected to! Facebook is also used these days as a business networking vehicle. Many active high-tech VCs and entrepreneurs in the Silicon Valley are using Facebook and LinkedIn.

Two, show up. As Woody Allen said, “80% of success is showing up.” Show up at the events where you can meet your target customers or investors.

When you show up, be genuinely interested and participate in the event activities. Stand out above the crowd and be the approachable one. Go up to someone, greet them with a smile, shake their hand and start a conversation. A simple, “what do you do?” is a great conversation starter at any entrepreneur event.

If you see your target VC wandering around, take big confident strides toward him, greet him, introduce yourself, and then go right into your elevator pitch and watch the line form behind you. Just make sure that you have a refined elevator pitch to use for this spontaneous meet and greet. (Read my “Is Your Elevator Pitch Ready?” post.)

Here’s a fact. VCs are always looking for the best fundable deal flow. This means that it is their job to meet entrepreneurs like you, shake your hand, listen to your pitch and exchange business cards. It also means that you may have something they want — an elevator pitch, an executive summary of a HOT fundable startup and possibly your network of quality entrepreneurs and potential customers for their portfolio companies! What a concept?!

Three, become a resource. Give and you shall receive. Heard that before? In theUS, there is an idiom that says “you scratch my back, and I’ll scratch yours.” Essentially, when I do a favor for someone, it makes it easy for me to call that person for a favor in return when I need it. Vice versa obviously works.

Especially when you are an entrepreneur, if you can help a fellow entrepreneur, why not help? That entrepreneur is potentially going to introduce you to a paying customer, a high powered business associate or THE investor who funds your deal. Or, he/she will spread the generosity to other entrepreneurs and eventually it will all come back to you as the source…though, help may not come in a form expected or from the person(s) you helped.

I encourage you to attend quality events and conferences like those that Oulu Wellness Institute produces to meet high quality entrepreneurs, active investors and advisors.

Be a cheerful resource for others – even if you get to a point when you think you’re always giving and no one is giving back to you.  Know that your reputation as a quality resource will spread. And, soon you will begin to receive introductions from people, to people, that you never would have met otherwise. Even C-Level executives need intros from quality resources. How do you think they got there in the first place?

About Right-Hand Partners (RHP): RHP is a VC Relations company and a trusted conduit to reach the venture capital community. RHP has relationships with hundreds of venture capitalists representing over 150 VC firms. 34 companies that RHP coached have raised over $167M since September 2001; 8 have been acquired.  www.rhpartners.com

Finnish startups that RHP coached that have raised capital in Europeinclude: DealDash, StreamPlay, Miradore and others.

RWu (at) rhpartners.com

Is your elevator pitch ready ?

By Guest Blogger Rebekah Wu, Founder at Right-Hand Partners

You walk into an elevator with Tim Draper from Draper Fisher Jurvetson, and you casually strike up a conversation and he then asks you, “What do you do?” Do you have an elevator pitch ready for such a serendipitous meeting?

An elevator pitch is about a minute long that tells the venture capitalist (VC) what you do very quickly. It’s a teaser that can get you in the door for a meeting with your target investor…or not.

First, you want to tell them what your company, which I’m calling “GR8 Oy”, is. Are you enterprise software, SaaS, a platform, gaming, e-commerce, social advertising, mobile application, cleantech, medical device, etc.?

Once you tell them what you are, you can follow it up by telling them what your “solution” provides at the 1,000 meter level, and not the 100,000 meter level. The investors want to hear a clear description of your solution and size of your market in one short sentence.

For example: GR8 Oy is a scalable BI “app exchange” SaaS platform to deploy and exchange on demand BI solutions without IT disruption in the 1.1B € Fortune 2000 market.

Here are a couple reasons why you want to offer fast details. If BI is the “flavor of the month,” which it is not at the moment, you will perk an immediate interest from the investors to inquire more about your company. Or, if SaaS is not one investor’s personal investment focus, but it is one of the firm’s focuses, then s/he will continue to listen to your pitch and may refer you to the partner who invests in SaaS deals.

Heads-up #1: VCs rarely invest in tools because the market is typically too small. They look for solutions w/ huge market opportunity with 10X exit potential for Series A deals.

It’s important to note here that Silicon Valley (SV) VCs want to see a $1B market size in one market vs. collectively by adding three markets together. They want your startup to become a sustainable $100M company in one market that can extend to other markets after you dominate your target market. The risk is too high to bet on a company playing in a $300M market. They will typically deem a startup targeting a small market as a “non-venture-backable” deal and encourage you to look for angel investors.

After you tell them what your solution provides, it’s a good time to give the investor your value proposition. Believe it or not, the value proposition mantra has stayed the same over all these years – How is your solution faster, cheaper and better? And, I always tell my clients: quantify, quantify, quantify!

For example:

  • reducing cost by factor of 10 and time to market by 85%
  • increasing bottom line by ~5M € over 12-mos
  • unifying currently disparate BI information and solutions

Now is a good time to mention your marquee/referenceable customer(s), current revenue stream and your sales pipeline.

Heads-up #2: If you are at the beta, know that VCs like to see *paying* beta customers even if they only pay 1,000 € each. These paying beta customers will have a stake in your success and will contribute valuable feedback more often than pilot customers who are evaluating your product for free.

Sales pipeline (a.k.a. sales funnel) is the total sales revenue from all the warm leads you have already communicated with and/or have been introduced to. Keep in mind that if you have 10M € in your pipeline today, the VCs are going to cut that number into 1/10th and assume that you will close 1M € in revenue over the next 6-12 months depending on your business model.

If you don’t have a revenue stream, you should at least tell the investors how you make money.

For example, it can be as simple as: Our SaaS revenue model is 50 €/user/month. We  expect 250 users on average per customer.

Heads-up #3: In a meeting, a SV VC will often ask how many customers you will need to become a $100M company. I suggest that you have this answer prepared in case you get asked in the elevator. J

At this point, if you have signed distribution partners, you should mention them. And, if your contracts with them include expected annual revenue terms, it’s definitely worth mentioning in your pitch.

Now that you’ve highlighted the value proposition for the investors, this is a good time to tell them very quickly how much capital you are raising.

For example: We are raising 2M € in Series A. We have raised 500K € from two founders and 2 angels in convertible debt so far.

Lastly, don’t forget to introduce yourself and spell out your domain expertise. You want them to get an impression that if ANYONE can create a market leading company, it’s YOU!

Domain expertise includes number of years in your domain, which companies you worked for, in what capacity, how your contributions increased their bottom line and by how much over how many years. If you have been a VP level and higher manager at a company that went through an IPO or a substantial M&A, you will want to mention those experiences. VCs particularly in the SV want to know your proven track record over what degree you have from some top school.

If you have a management team member or a co-founder that has IPO or M&A experience and/or with deep domain expertise, you will want to tout that as well.

Heads-up #4: Don’t give the VCs what IRR they can expect from your deal. It’s a pet peeve for most VCs!

This is pretty much all the time you have in about a minute.

Don’t be stuck without a refined elevator pitch you can use at any moment! You never know who might walk into the elevator with you.

Trick Question Alert: If a VC asks you in your first meeting what valuation you are expecting, the answer is always – “fair market value”.

 

 

About Right-Hand Partners (RHP): RHP is a VC Relations company and a trusted conduit to reach the venture capital community. RHP has relationships with hundreds of venture capitalists representing over 150 VC firms. 34 companies that RHP coached have raised over $167M since September 2001; 8 have been acquired.  www.rhpartners.com

Finnish startups that RHP coached that have raised capital in Europeinclude: DealDash, StreamPlay, Miradore and others.

RWu (at) rhpartners.com

Hello – terve !

Hi all

We are a non-profit foundation based in Oulu, Finland. We focus on creating successful wellness business together with clients and partners in our community.

This blog is about sharing experiences and stories about building wellness business. After all, when it comes to health and wellness, people all over the world are all the same.

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Terve

Olemme Oulusta käsin maailmanlaajuisesti toimiva, voittoa tavoittelematon säätiö. Haluamme rakentaa menestystarinoita hyvinvointiliiketoiminnasta yhteisömme asiakkaiden ja kumppaneiden avulla.

Tässä blogissa jaamme kokemuksia ja tarinoita hyvinvoinnin liiketoiminnan rakentamisesta. Terveyden ja hyvinvoinnin tavoittelu yhdistää loppujen lopuksi maailmanlaajuisesti meitä kaikkia.

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