September 18, 2008

I found the following Executive Summary tips in an article in IP Marketing E-News, Tuesday September 16, 2008 edition.

Calling all angels: 11 tips for improving your executive summary

An executive summary is a great way to introduce a university start-up to potential angel investors, but not all of these documents are created equal -- and investors will quickly discard those that don't hit their hot buttons quickly. Here are 11 tips from Frank Peters, chairman of Tech Coast Angels, for getting the most out of your executive summary:

  1. Limit it to two pages. Keep the presentation short, and angels will be more likely to respond.
  2. Don’t use a fancy cover page or other "window dressing."
  3. Create a “footer” on each page with your contact information, but forget the confidentiality notice or NDA. "None of us sign non-disclosure agreements; we just see too many deals to be bound by your concerns about trust; get over it! If you really do have some secret sauce, keep it to yourself for now; we can agree on a NDA if we go into due diligence," Peters says.
  4. Make your audience feel they are getting a “sneak peek” for insiders.
  5. Use bullets: Busy angels may just glance at the summary. "I want to be able to scan the 2 pages and see the most important issues jump off the page," Peters advises.
  6. Get right to the point. Peters' advice: "Avoid the mistake of creating context; I don't need you to tell me how your opportunity fits into the history of the personal computer age. Tell me what this company is all about, quickly!"
  7. Cover all the bases: "What are you doing? What's the product or service? How will you market the product? Got competitors? How do you compare? Create paragraph headings (another form of eye candy) to delineate these topics," he says.
  8. Briefly describe your team, and your inventor. If you have an advisory board with top credentials, include that too. Recognizable names and institutions do impress investors.
  9. Provide financial projections -- a five-year estimate, if possible, using tables but no fancy graphs. Include revenue, units sold, cost of goods, "but keep it simple," Peters urges. And don't overstate the potential. "Avoid showing us projections with 70, 80 or 90% gross margins. You think we'll start drooling, right? Wrong! We see entrepreneur naivete. With margins like that you obviously have no idea what it costs to run a successful business."
  10. Specify the amount of money you are looking to raise, and make sure it's in the angel's range. "Like Goldilocks, not too much or too little," Peters says. "If you're asking for $6M then you're wasting my time, I'm an angel investor and our sweet spot is $1, $2 or maybe $3M; go to a Silicon Valley VC if you really need that much."
  11. Include a pre-money valuation if you have one. If you haven't gotten a good ballpark number from discussions with potential investors, Peters says, "leave it for a follow-up meeting where there will be some give and take. Many, many entrepreneurs overstate their valuation; it's a hot button and a huge turn-off for investors," he comments.

Go to: The Frank Peters Show

September 5, 2008

Early-Stage Venture Capital in the Midwest

According to Midwest Venture Partners, early-stage venture capital is investment after angels and seed money, but before expansion / later stage Venture Capital firms. There is a strong need for early-stage venture funding in the Midwest. This region has the raw materials and resources to build successful companies, but lacks this integral round of funding. Additionally, Angels and Seed funds are noting the quality and quantity of the deals coming out of the Midwest. Right now, technology start-up companies are typically able to raise $1-1.5 million from initial investors. To get to the next level and attract national Venture Capital firms and partners, they need $3-5 million. This is causing the best companies in the region to go elsewhere for funding. What is the reason for the gap?

Funds invest their money based on the amount of capital raised. For example, if a fund raises $20 million, it can invest in 10 companies at $2 million per company average. The fund has an accepted period of time to invest the money, usually 3 – 5 years. There are roughly three segments of funding available to start-up companies. Angels or seed funds are small and typically invest early in the business with small amounts of money, in the $500,000 to $2 million range. Once that round has been completed, early-stage venture capital ideally comes in with larger amounts of money, in the $3 million to $5 million range. Finally, after the company has proven their product in the marketplace, and is ready to ramp up, National Venture Capital firms take interest and invest large amounts in the multiple millions.

Historically, it has been shown the early/seed funds outperform investment alternatives. Over the course of 10 years, they return close to 35% compared to the S&P 500 return of 5% in the same timeframe. As a fund becomes larger by attracting more investors, it becomes harder to invest in early-stage businesses. The average investment size has to get bigger forcing the management to look to later in the business cycle, which have larger needs. Early-stage funds are making up a smaller segment on the investment arena as the investors put more money into the successful early stage funds, making them to big to bother with small investments. The management is more than willing to participate in larger funds with higher fees and potential payoffs for them. Why not create more small funds to maximize the return, and make money available to more companies in this critical stage of development? If we are truly interested in growing entrepreneurial firms, this issue has to become a priority.