The venture capitalist is actually looking for a the reason not to invest in your company

This entry is part 16 of 16 in the series Closing the deal

Warren BergenIt is an industry accepted standard that venture capitalists will fund one of 100 deals. Some entrepreneurs will not be given more than a few minutes to pitch, others will get a longer meeting, while a lucky few will move into a process of successive interviews and discussions.

But, in the end, only one deal will get funded.

The venture capitalist is actually attempting to find the reason not to invest in your company as quickly as possible in order to turn his attention back to other prospects, current portfolio companies and to raising his next fund.

Most entrepreneurs will, after successfully raising capital, tell you that it was a difficult process. Of course there are the some stories out there of single meeting financings and over-subscriptions for hot offerings. But these are not the norm.

And experienced entrepreneurs who know the difficulties polish their pitches and plans to a fair gleam before they ever sit down with a prospective investor. Many of them go to boot camps to learn as much as they can about pitching, planning, term sheets and investor expectations. In the end, however, most pitches and plans still do not support a sufficient case for funding because most boot camps miss what is most important.

In the past 10 years, I’ve seen well over 1,000 startup deals. Most had business plans which contained all the boilerplate text about the market, the problem, their solution, their management and numbers in the back of the plan that went up. Nearly every deal was pitching a variation of the same theme: a massive market opportunity with little or no competition resulting in an enormous accumulation of wealth in three to five years.

The issue is that there is rarely any connectivity between the text of the business plan and the numbers in the back. The How is missing.

The average pitch contains an assumption that the brilliance of the solution alone justifies the unsupported but wildly increasing projections. The unsophisticated investor falls in love with the product or the founder and makes an investment. The sophisticated investor, on the other hand, sees another deal that hasn’t done the work of creating a proper implementation plan to pass muster.

Without an implementation plan, even the unsophisticated investor is forced to fantasize and create a scenario whereby all of this growth is going to happen. Without an implementation plan, the venture capitalist will, at best, see a good market opportunity offered by an ill-equipped team. And as most investments are team bets vs. market opportunity bets, they will either pass or begin thinking about who they could get to replace you.

Business is math first, so before projections can even be attempted, the implementation plan has to be done. Identify each functional area of the company and create all achievements that will be required of each department for each quarter for the next year. SmallCo can be a company of two and still have departments of marketing, sales, production, finance and human resources.

Then identify what are the key performance metrics by which you can measure each department. If you’ve escalated sales from $100,000 in Quarter 2 to $250,000 in Quarter 3, make sure you have the data to prove the system or the framework by which you plan to do so.

If $25,000 investment in marketing was required to generate 20 leads which resulted in four sales totalling $100,000, your projection of $250,000 better be based on the same math and increases in marketing and sales. Support and/or administration should be acknowledged in human resource columns and operating expense estimates. If you expect next quarter sales to happen more quickly and at a lesser cost, that assumption should be noted and explained and quantified by the metrics.

A proper implementation plan is not a short document and it’s a lot of work. But the great result is that, once this work is complete, the whole implementation plan can be summarized onto a single page: next four quarters across the top, functional areas of the company down the side. Each cell should contain bullets of required accomplishment for each quarter.

Once this is done, this summary is the map of the company. Each leadership team member will keep this and everyone now is, quite literally, on the same page with respect to direction, accountability and expectations. This summary is also how you can stop sending business plans that investors won’t read.

Instead, go for coffee and bring this single sheet. Because you’ve done the background work, the investor can point to any highlight of the plan or metric and you have the answer. Very few entrepreneurs are this prepared. Then again, very few entrepreneurs get properly funded.

Warren Bergen is President of Alberta-based AVAC Ltd.


venture capitalist

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