Business Coaching: Start Up - Raising Money For Your Business

[Applause] [Music] [Applause] [Music] [Applause] [Music]

Hi, I'm Simon Reynolds, and welcome to the Fortune Institute. Today, we're going to talk about a topic that is very dear to the hearts of entrepreneurs, and that is how to raise money.

There are thousands of entrepreneurs out there that really don't know anything about how to raise money for their business, and I have to be honest, I was once one of them. I remember years ago, I didn't have a clue how to structure a presentation to raise money or even who to speak to. But over the years, I've learned a lot about it. I want to share some of my best secrets for how to raise money with you today.

In my first venture capital deal, I raised $1 million for a new business. In my second, which was about 10 years ago, I raised $5 million for a new business. And in my third, about a year ago, I raised $12 million for a virtually new business. So I really have a lot of experience in the area of raising money from the side of someone looking for the money. But I've also invested in a lot of companies—anything from $10,000 to up to $1.5 million was the most I've ever invested in a company. So I really know both sides of the fence, and today I want to give you some of the very best stuff I've learned about how to raise money for your business.

Okay, my first recommendation when it comes to raising money for your business is actually to put it off for as long as possible. Now that may seem crazy—me introducing a lesson about raising money and then coming up straight off and saying don't do it now—but really, there's a lot of sense in what I say. If you put it off for as long as possible, when you need to raise money, when you actually go out there and ask for it, two things happen. First of all, I believe that you perform much better when you've got a lean business. When you've got a lot of cash around, when it's not desperate, you tend not to work as hard. But I've always found in my experience when I started businesses for virtually nothing, then I had to make it a success; there was no turning back, and I worked so much harder, with so much passion and so much more commitment when I had no money to fall back on.

By the same token, I remember investing $1.5 million into my business; we were $1.5 million in the red before we turned a profit. Now, part of the reason is we were so comfortable; we were all on high salaries, we could buy whatever we wanted for the business; we were getting soft slowly. If we didn't have any money, we wouldn't have been slack; we would have really pushed the pedal to the metal; we would have really made sure that we made the most of our opportunities. So I know it's counterintuitive, but trust me, usually the less money you have, the better your business will go.

The other great reason for putting off raising money as long as possible is you get a better price for your business. If you come in and you have no revenue and you have no history of growth and you say, "Put money into my business," the financier is going to ask for a big chunk of that business. But if you can just put raising money off for one year and show business success, show revenue growth, show that you're a really competent business person, well, you can charge more for that business; it's not just a startup now; it's a semi-successful business, and it gets a higher price. Or alternatively, as an adjunct to that, you don't have to give away as much of the company if you can just boot it a bit before you raise money.

Now it may amaze you, but some of the most successful businesses in the entire world have been started with very little money at all. Take the Inc 500; the Inc 500 is a list of the fastest-growing private companies in America. So some of the most successful companies in America's history are on that list. Now, how much money did it take to start an Inc 500 company? Well, a while ago, a survey was done, and get this: around 14% of the Inc 500 were started with $11,000 or less. Can you believe it? $1,000, and they built a multi-million, and in some cases, multi-billion-dollar business out of it. The survey also showed that around 27% of the Inc 500 was started for an amount that was between $1,000 and $10,000. So think about that; put those two figures together: 41% of America's fastest-growing private companies in the Inc 500 list were started for $10,000 or less. And incidentally, around 10% of the Inc 500 were started for between $10,000 and $20,000. So 51% of the Inc 500 were started for less than $20,000. So all the excuses that you might have that you can't build a business because you don't have any cash are simply not the case.

Now, I'm not saying that money isn't useful; of course, if you had money right now, you could probably expand at a faster rate. All I'm saying is it is not the determining factor in your success; it is not an obstacle that you can't surpass; and in fact, it may very well be in your favor that you don't have much money to start your business.

Perhaps you've been looking at starting an internet business. Well, there's really good news there. In the old days, back in, say, 2000, people were spending millions and millions of dollars setting up their internet businesses. But now the situation's different for two reasons. First of all, the culture of internet startups is different; no longer do people seek millions of dollars or even feel they need to raise millions of dollars; their thinking has changed. And the second reason, which is aligned with the first, is it's so much cheaper to start up an internet company now. Why? Largely because of open sourcing, outsourcing to other people—both staff and, in particular, software. Take website development, for instance; it used to cost tens of thousands, hundreds of thousands, sometimes millions of dollars to build a large website, but now there are companies like WordPress where you can get a pretty good website built for yourself, by yourself, in a few hours or maybe a few days. And what will it cost you? $0.00. I co-started a company a year and a half ago that has 30,000 websites, and almost all of them are WordPress sites. How much did it cost us? Very little indeed. That's the power of the new internet age; it's so much cheaper to start an online business.

My second tip is to build relationships with the people you're going to ask for money before you have to ask them. If you just turn up and haven't created a relationship and say, "Hey, I need $300,000 for my new business," well, it's going to be very difficult to get that money because, like most of life, success depends in business on the quality of our relationships, and they can't be built overnight. You've got to work on them; you've got to treat it like an emotional bank account where you make deposits consistently into the emotional bank account between you and them, and then later on you ask for money. So one great system is to create a list of 10 or so contacts—people that you think could potentially give you money in a year's time or a year and a half's time or two years' time—and you go out and make your relationship strong. You tell them about your business; you show them why it's going to be a great business, but you don't ask for any money. You literally say, "Hey, I just wanted to keep you in touch; I really respect your opinion; I'd love some advice, but no, I'm fine for money now; perhaps in the future." When I first started my group, Photon Group, my financial partner was very, very good at this. For three years, he went out and kept in touch with a whole variety of people who could potentially give him money, never asking for money. And finally, the time came when the environment was right economically, and our business had grown to a point that was strong, and he went out and he raised about $12 million in one week. Now, he could not have done that if he didn't already establish credibility for our business, credibility for me, and credibility for him. It made a huge difference to do that investment up front before he actually requested any funds.

The next tip is to get an introduction to whoever you want to ask for money. If you cold call them, it's going to be difficult. But because of that concept of six degrees of separation, usually you will know someone who knows someone who knows someone else who knows that person. Dig around; see if you can find a connection and get a friend of yours to call them—someone that they trust and who can give a testimonial for you, who can say, "Hey, it's worth the time; give this person half an hour; they've got a really good idea for their business, and they're a terrific person as well." Now, quite often that potential financier won't want to meet you, but they'll feel obliged to see you because of the friend. Now, once you're in the meeting, that's when you can turn them around. But really, it's the number of face-to-face meetings you have with potential financiers that's really going to be the determining factor, along with your business plan, as to whether you get the money. So you need to maximize that. Don't just think of who you know; think of friends who might know key people as well.

Number four: Use your contacts first. If you're looking for money, if you go out to venture capitalists or you go out to people you don't know, it's going to be tough. Look at your friends: Are there any friends that might like to put some money into the business? What about your parents? Would they like to put some money into the business? What about professors from university? Is there a professor or a lecturer that you got on well with who may put in money themselves or even better may know prominent business people in your particular field that could help you out? What about old bosses? Frequently, if you had a boss that respects you, that really admires what you did, if you go out and create a new business, they may well finance you. What about entrepreneurs in your community? They don't have to be multi-millionaires; just people that have made serious money—maybe a million dollars or $500,000 or just earn a lot from their shop or their small business. A lot of those people have a lot of spare cash, and they'd be excited sometimes to put money into a brand new business. Also, look at trade journalists—that is, journalists from trade magazines that cover your industry. They know everybody—from the people who own the companies in your industry to the people who run the companies in your industry. If you get in well with them, take them out for lunch, butter them up a bit, and then say, "Hey, do you know anybody who could help me out with the finance?" You'll be surprised how often they can give you a really good reference. The other thing about going to friends, family, and entrepreneurs around town is you'll probably get a better rate. If you go to the professional lenders, you're going to get a hardcore low valuation on your business, and they're going to try and get as much of your business for as little as possible. But if you go to people who know you and trust you and even love you, you're going to get a much better rate when you borrow money.

Number five: The next people you go to after your friends and family and your contacts are angel investors. Well, what is an angel investor? Well, the term originated when, in the theater industry in New York, often people would come in at the last moment and save a theatrical production. So they were people who just loved the theater and really just wanted to get the show off the ground; they were like angels to the theater industry, and that's how the term started. Who are they? Well, they're normally rich individuals, and they're normally very experienced in business; they have successfully built a business themselves, and they know a lot about it; they're pretty damn smart, and now they're semi-retired, and they think, "Well, I'd like to assist some other people; it'd be fun to do it." Now, in the United States, there's well-established angel groups, and you can just Google them. In Europe or in Australia, there's a lot less angel groups; you can still find them, but it won't be as easy; you may have to look for individual angel investors, and you just ask around, and everyone will know someone in town who has previously invested in a business similar to yours.

Now, the great thing about angels is they are less demanding, and you can sometimes get a better price than if you go to investors higher up, like venture capitalists. Now, that doesn't mean they're walkovers; a lot of these people are highly successful; in fact, a lot of them are more successful than the venture capitalists; they've actually run their own businesses successfully, so they're pretty smart, but they have more generosity sometimes in how they price deals. Typically, you could raise anything from $10,000 to a million dollars, sometimes even more, from an angel investor, but the usual amount is probably going to be $50,000, maybe $100,000—not that much. A typical angel investor might have a total of a million dollars that they want to invest in, let's say, 10 different businesses, and they've got to make sure that they diversify enough that they get a return averaged out, so they're not going to be putting $800,000 of that in one business. So they're good for smaller chunks of money, but they're actually a terrific way to raise capital.

So what are angel investors looking for? Well, firstly, they're looking for a clearly identifiable market. You can't just say to them, "We're going to go after the female market." You've got to say what type of female it is—economically, from a mindset position, from an age position. You've got to know everything about that market. When they sense that you've got a handle on exactly the market that you're going to be going for, then they'll relax a little bit; that's the first step you've got to get over. The next thing thereafter is that your business is in a growing market. Now, the truth is, business analysts like Jim Collins have shown that plenty of people can create extraordinarily successful businesses in markets that aren't growing, but the reality is an angel investor will almost certainly only invest in a market that is clearly growing—not declining or that is just stable. Why? Well, as Warren Buffett said, "A rising tide lifts all boats." If you're in a fast-growing market, you don't have to be that good to make money; the actual increase in size and velocity of the market actually helps you get a lot of your growth; it's a lot easier to be making money in a fast-growing market than it is in a slow market. So angel investors are going to look for that. They're also going to look for a growth strategy. What exactly is your plan, once you start the business or once you develop the business, to actually make money? And you can't just say, "Oh, we're going to get our products and start advertising them." You've got to have a clear strategy. You've also got to get over one very important question in an angel investor's mind, and that is: What are the barriers to entry? They will never invest in a business that can easily be copied because, otherwise, you'll start your great business, and then a big competitor will come in and eat your lunch and take your whole market share away from you. They're looking for protection. Now, that could be intellectual property; maybe you can get a patent on some aspect of your business; maybe you've got an innovation that it takes a long time for people to copy; maybe you have specialized knowledge—simply by being in the industry for so long, you know a few key points that other people simply don't know, and it's going to take them a long time to find out; maybe you have an advantage in distribution. When people look at a company like Coca-Cola, they assume it's a success because it's a really tasty drink, and of course it is, but the key to Coca-Cola's success, other than marketing, is its distribution; it has a far more sophisticated distribution system than all of its competitors; you can find a Coke almost everywhere. And when a new soft drink comes into town and tries to compete with Coke, they offer the store owners all kinds of incentives not to stock that brand. And because of their powerful distribution, it's incredibly difficult for any other soft drink company to actually compete with them. Another area is high initial costs. So if it costs a fortune to get into your industry, but you're already into it, then you know there's not going to be that much competition coming. If it's an absolute nightmare to create the systems or build the factory or get the machinery to be in your business, then that is a great barrier to entry.

Okay, next up, angel investors are going to be looking for a realistic valuation of the company. So you can't walk in there and say, "Yes, we have no revenue, but it's worth $3 million." It just doesn't work, and it doesn't work particularly in this economy; people are getting very, very hard-nosed. You've got to give a realistic valuation to your business; if it doesn't earn much, it's not worth that much, no matter what you think it will be. You've got to remember that when it comes to angel investing, they're seeing good investment ideas almost every week. So if you come in with a reasonable idea, but it's charged at a fortune, if it's at a ridiculously high rate, even if they like the business, they're not going to invest. Ask for a realistic valuation—not too high, but also not too low; don't sell yourself down the river—and you've got a real chance of getting a deal. I'll talk a little about valuations later on in this lesson.

Angel investors are also looking for systems and procedures. A good idea is not enough. So many people come to angel investors and they think because they've got an interesting idea for a business that somehow people are going to open up the money floodgates and it'll all pour all over them and they'll be rich. The truth is, a good idea is not enough. What you need is systems; you need procedures; you've got to have a system for your budgeting, a system for your financial projections, a system for your logistics, for your distribution; there are so many areas that need systems. Now, if you're a nascent business, if you've just started up, then you at least need to cover with them that you understand the basics of the systems that are needed; you don't have to flesh it out into incredible degrees, but you do have to show a comprehension of the need for systems and have some basic ones developed. If you're already in business, though, you really do have to show that you're not just a business idea; you're a series of business systems inside your business idea. They're going to be looking for a good management team as well. It's probably the number one or number two, depending on the investor, reason that someone invests. The truth is, most investors would much rather have a mediocre business idea run by outstanding people than an outstanding business idea run by average people, and it makes sense because they're the people day to day who'll make it work. And if they're in an ordinary business or if they're in a great business, they're going to find a way to get to profit, and that's what an angel investor looks for. So what's your team like? Do you need to build your team up? Do you have a history of success in this industry? Do you have a history of success in business? Do you show passion? Do you look like a crack team? You've got to be very careful about that.

Finally, angel investors need to know that there's an exit point for their investment. You can't just say, "Hey, invest with us, and we'll eventually pay you back or we'll give you a good return." Really, what you've got to show for an angel investor is that they can get out of their business and actually liquidate their holding and get some cash. Now, I remember I had the opportunity of investing in a very well-known cosmetics company in Australia, and it was a terrific business, and I was going to put around $3 million into this business; they were great people; they were absolutely superb products; they just expanded into America and were going terrifically. So why didn't I invest? Purely for one reason: There was no exit strategy; there was no methodology for me actually getting my money out. The owner said quite openly, "We're not sure we want to buy back your investment stake in a few years." So how could I invest? I couldn't get out of the company. It was a terrific company, but it didn't have an exit strategy for me. So be careful when you do your business presentation.

To an angel investor, you've always got an exit strategy. Now, typically that's going to be one of two things: that's either going to be a trade sale, selling to another company, or it's going to be an IPO, an initial public offering. That's when you float your company to the public. Now the truth is, for the vast majority of businesses, it's going to be a trade sale. Most businesses simply aren't big enough to end up on the stock exchange, and frankly, it's an incredibly expensive exercise to list your company on the stock exchange. Don't you say, "Yes, we're going to take the company public when it's made a million dollars." It's simply too small a company to take public. You'll be selling to the trade or getting out privately, not publicly.

Next up, remember the angel magnets. What do I mean by angel magnets? Well, the interesting thing about an angel investor is they're not just in it for the money. What they want to see is passionate people, and they get excited by passionate entrepreneurs who want to change the world, who really want to create something great. Remember, the typical business angel is older, and he's looking back on his life, and he's looking for people who were like him or her when they were young. You've got to look like that; you've got to be enthusiastic and passionate and bright-eyed about the possibilities of your business. You've got to get them excited about that because they're buying into the fun of investing in your business as much as the financial reward. They're also looking for nice people. The second angel magnet is just to be nice. Don't forget an angel investor, or in fact any investor, has a choice. There are hundreds of companies that they could invest in, or they could just put the money in the bank. But if you're not only a passionate person but you're a nice person, then often that can get you the investment. They feel good about you; they want to help you out; they'll slip you 50 grand or 100 grand for your company. It makes a big difference to be nice in business generally, but particularly when you're asking for money. They also want to be included. Including the angel in your business a little bit is a great angel magnet. They want a bit of excitement in their life, and you can give it to them by including them in a monthly board meeting or ringing them every week for their advice or going for lunch with them, and just being inclusive. That makes an angel feel really good. If you get all those angel magnets right and you have a good business idea with a good business plan, it's almost certain that you will be able to raise the money.

Point seven: after you've had a look for friends and family who can raise the money and after you've had a hunt around for angel investors, the next group to look at are venture capitalists and private equity companies. So what are they? Well, let's start with venture capital first. Venture capital is the big leagues of finance. They mostly invest in tech companies. I've got to say the vast majority, but not all, of venture capital money goes to technology-based companies, and they tend to invest larger amounts. Now that could be anything from a few hundred thousand to $10 million, but it will frequently be around the million or two million mark. So it's a bigger lick of money, and typically the company has already been established and probably got close to cash flow positive before they invest. Now that's not exclusively the case; there are some companies that specialize in startups, but that is generally the case with venture capitalists and private equity. Now venture capitalists can be tough. They may want a greater proportion of the company; they may want more control on the board. Luckily, they very rarely want to own most of the company because they want the entrepreneurs to be highly motivated, but you've got to be careful. These are highly sophisticated people financially. For instance, they may give you what's known in the trade as a clawback deal, and they can be really dangerous. The clawback deal is they give you the money, but if you don't reach your targets, they take more and more of your business over. Now I remember investing as an angel investor in a terrific company, which is now listed on the Australian stock exchange, and back then the people who were running that company thought that it would be absolutely huge within two years. So in comes the venture capitalist—in fact, I brought them in—and what happened? They didn't meet their targets, so the venture capitalists ended up owning about 80% of the company. Now that went on to be a successful company, but it just didn't grow as fast as they thought in the early stages. So be very careful what you promise to venture capitalists and how you structure your deal because they can claw back a large chunk of your shares.

Now, a bit like angel investors, venture capitalists will be very, very serious about your exit strategy, and they would typically want to exit the investment between three and seven years, normally between three and five years. Then there's private equity. What's the difference between private equity and venture capital? Well, these days, there's not that much difference. The deals tend to be structured a little differently, though, and the style of company thereafter is a little different. They're normally after much bigger companies, and they'll seek, for example, a management buyer. Now what's a management buyout, an MBO? Well, that's when the chief executive and his senior staff will go to a private equity firm and say, "Hey, we've been running this company, but we have an opportunity now to buy the company. Will you give us the money?" Now that's very attractive to a private equity company because they go, "Wow, we've got a really experienced team; they've already done a good job, and now they'll be incentivized as being owners. Yep, we'll give you the money to buy that business." So an MBO, a management buyout, is very typical of a private equity situation. Private equity companies also look for distressed companies. So that's a situation where the company's going really badly, and they can put in a new team, turn it around, and then sell it a few years later for a much higher amount of money. A classic example in Australia was Myer, the huge department store. They came in, and within three years, vastly improved the company's position and then put it on the stock exchange and made hundreds of millions of dollars out of it. But the truth is that typically the private equity situation is only for much larger companies; in fact, the larger the better. They'd like to apply a lot of debt to their purchases. So if they can find some huge company and then ratchet up the debt in the purchase to 60% of the value of the company or even 90% of the value of the company, then that's a good deal. The bigger the company they can buy, the bigger the potential profits. So for the sake of our course, most of the people listening to this aren't going to be after private equity. Incidentally, private equity companies often buy the entire company just outright and install their people to run it. So if you want to sell only say 10% of your company or 20% of your company, they're probably not the right option for you. However, if you are an expert in your industry with 15, 20 years' experience and you've got a great reputation and you know of a large company that you could buy, you really can knock on private equity companies' doors, put your proposition to them, show you how you can improve it, and even raise 10, 20, $30 million or more and go and run it, and they'll give you a slice—maybe 5% of the company, maybe 2% of the company—to go off and do that, and that is a strategy that a lot of executives have used to become mega-rich.

Now it's all very well for me to talk about these grand plans about how to raise millions of dollars from private equity groups and venture capitalists, but don't forget simple advertising to raise money. I know a lot of people who raise their money by putting a little ad in the financial press or in the businesses for sale or business opportunities section of a newspaper. How much did it cost them? Well, as little as $10 to, in one case, around $2,000. It really depends on the newspaper and the size of the ad, obviously. Could be a classified ad, or maybe you go to an online group, an online site that has a business opportunities section. And if you can do that and place an ad and in the headline give a compelling reason why an investor might want to invest in your company, you'll be surprised at the calls you get. Advertising works, and it works for this reason: so many private investors actually can't find good investments. So if they see an ad in the paper, they're often delighted to ring it up and just see, have coffee with a person and see if it's an investment that's of interest to them. Take advantage of that.

Okay, number nine: follow a pitching format. Now what I want to give you is a proven system that you can use to actually raise money, and it's two parts: first of all, getting the meeting. Now that's very simple: you send a letter out to 300 companies or potential investors, and you follow it up with emails and phone calls. You be nice, but you be persistent, and you'll find that 5% of them will see you, or they'll at least ask for an executive summary, which we'll talk about soon. Now ideally, if you can get a meeting rather than just sending a summary, this is what you do: first of all, you do not ask them to sign a confidentiality agreement. So many company heads do that, and venture capitalists, angel investors, or private investors usually will not sign it. Why? Because three days earlier, someone could have come in with the same idea, and now they're legally in a tough situation; they can't invest in either company. So be very, very careful about that. There's no need to ask for it; most people are trustworthy, and if you don't think the person is worthy of your trust, you shouldn't go into the meeting in the first place.

Next up, I want you to try and limit your presentation to just 10 slides. Now a lot of people say that's just too few slides to get all I've got to say over with, but I can tell you if you keep it really simple, you will do a much clearer and better and more persuasive presentation. So what should be on those 10 slides? Well, here's a system for you. The first one I call the grab, and that is just a single sentence or two that comes up first that sums up what your business is about in a really compelling way. So they read that or you read it to them; they go, "Wow, now you've got my attention." So it's got to have two things: it's got to be impactful, and it's got to be a succinct summary of your business. Slide two: the intro. Now that's where you turn around and you introduce the other people in your team to the investor. You can't just have them sitting there without an introduction. Now that introduction doesn't have to be long; it doesn't have to go into their whole history of their life and their experience in the business, but rather just give them a one-minute or a 30-second chance for them to introduce themselves and say something relevant to this business that you're about to ask for money for. Next slide: I call the problem. So this is where you address what is the problem in the industry that we are going to solve with our new company, and the key word here is pain. What is the pain that customers are experiencing that we can eradicate? Now if you can't find any real pain, if you can't find a whole stack of customers that aren't feeling financial pain or emotional pain or logistical pain, then you just don't have a great business. Your business has to solve a problem. So in this slide, you really emphasize what that problem is and how it's a real problem, not just a tiny problem; that it's meaningful that your company come along and solve this problem. Logically enough, the next slide is the solution: how do you solve it? Now here you don't go too deep; you can leave that to your business plan afterwards or in subsequent meetings, but you just give a few points, simple points about how you can solve the problem that the market has, that the customer potentially has. Then you follow it up with the market slide. Now that talks about what's your competition, who are they, what size companies are your main competitors, what's the growth rate in that market, what are the parameters of that market? Now the one thing you don't say in an investment meeting is, "We have no competition," because A, that's almost certainly not the case, and B, that's what everybody says. But the truth is, of course, you've got competition. They may not be directly competitive with you, but at the moment the consumer is buying another product or service, not yours; so that is your competition. The next slide is the model: how exactly are you going to make money? What's your system for making money? What's your distribution? What are your gross margins or your suggested margins for this business? It's really just a succinct summary; remember, it's only one slide, but it gives them the sense that you've really thought about the business model. This isn't just some crazy idea that you're running by them. Next up is the marketing slide: how do you reach your customers? Now most people have never even thought about this; they go in asking for money, and they have an answer like, "Oh, we're going to advertise on TV." You want to know the exact methodologies you're using, in what order, and what the message is that you're going to say in your ads. Now that doesn't mean that you need a full advertising campaign fully written out to present to them, but that your core marketing strategy is absolutely clear. Then there's the protection slide. Now that's any patents you have or what your barriers to entry are, and that's a very important slide. The investor is going to be looking at that: how do you stop, if you've got a really good idea, the competition coming up and taking over that whole section of the market? Next up is the deal slide, and that's really just a simple summary of what percentage you're giving away, what valuation you're giving the company. And finally, the summary slide: there you just summarize the key points of your presentation and any particular ones that you really want to emphasize. That's where you give them the final bit of impact. So that is a formula that you can use anywhere, in any country in the world, in front of anyone to do a presentation, and it's succinct, but it's got everything you need to make the sale.

Now some tips: do not hand out a document before you do your presentation, because what happens is they just go straight to the numbers on that document, and they're not listening to you. Just save the document for the end. How long should your meeting be? Well, aim for about 20 minutes for your presentation time because they're going to ask questions during the meeting, and they're certainly to ask questions after. They will have allocated probably about an hour to speak to you. Now you can't do your presentation for an hour because some of the most important stuff that occurs happens in question time, so you've got to leave plenty of time for the questions. And also, by keeping it really short, it forces you to get very, very clear about what the critical points are of your presentation. It stops your waffling. Keep your slides short and sharp—not more than two or three sentences, maybe four at most, on each slide. Don't have whole paragraphs of information. The more they look at your slides, the less they look at you, and you want to be the piece of magic, not your slide deck. If there's famous people or experts involved in your company, drop names. This is probably the only chance you're going to get to make a big impression, so use everything; drop as many big names as you can. Be truthful. Now I guess I really shouldn't have to say that, but some people, they get in a presentation and they just start exaggerating, shall we say. You're going to get caught out, if not in the presentation, you're going to get caught out eventually when they get closer to investing in the company. It just doesn't make sense not to tell the truth. Use case studies and examples in your presentation, typical parallels with other industries or with competitors. Now don't fill a whole presentation up with it, but it adds a bit of meat; it makes it look like you know what you're talking about. And follow the established norms: don't put weird type or strange colors in your presentation; keep it professional; have it so they don't notice the slides themselves, but they notice what's on them.

Point 10: your executive summary is very important. Now what is the executive summary? Well, it's, I guess, the document between the slides and the business plan. The business plan has every piece of information in it; the slides have just the basics; and the executive summary has a little more. Now it's very, very important because often an investor will say, "Just send me your executive summary," and as a result of that executive summary, if it's really good, you get the meeting. So make it basically like your slides, but just add a few extra areas: for instance, use of funds—what are you going to do when you get the money; critical milestones; what your projections are; that type of thing. Just add a little bit more meat. It shouldn't be more than two to three pages. Now it's a small document, but truth be known, you should spend the most time of all on your executive summary because it's the first thing they see, and it's really the document that they're going to judge you on.

Point 11: always have a detailed business plan. Now this is a document that you leave behind if the presentation has gone well and it answers all their questions. That being said, don't waffle. Having a giant document doesn't impress anyone intelligent; it's what's inside it. Discipline yourself to make it only about 20 pages. If it's 80 pages, you might think there's some gems in there, but they probably won't even read it. Brevity is power. Include references in your business plan; have some people that they can call up so they get a bit of a sense of your character, or include some letters of reference actually in the plan at the back. Be sure to include projections in your business plan. Now with projections, you've got to balance optimism with realism. You've got to say that this business has enough growth to get the investor excited, but at the same time, every document you ever see of this type has year three a hockey stick—the sales just going through the roof. They've seen it a million times before, so unless it really is absolutely true, temper it; make it more realistic, and you'll get more respect from the venture capitalists, angel investors, or the private equity groups. Emphasize in your projections the path to cash flow positive; that's what they're looking for. How long does it take till this company sustains itself, that it actually makes money month to month? So how should you do your project? Well, I think give them five years of projections and make the projections quarterly, quarter by quarter for the first two years, and then year three, four, and five, just your estimate of the annual figures. Now the truth is, obviously, the further you go out, the less accurate your projections are going to be, and believe me, the venture capitalist is going to take that into consideration. So get very tight in the first two years and then go wider for the additional three. If you're an already existing business seeking capital, be sure to include a profit and loss statement and a balance sheet. Remember that what they'll be looking at is not just your figures, but include a set of assumptions behind those figures: what are the key drivers that make you conclude you can do this? Have some justification to the figures. How long should this section of your presentation be? I think the financial projections should only be about two to three pages; keep them sharp. Any decent investor will be able to look at those figures and see if they're realistic or not. You don't need 10 pages to create your financials. Also, remember this: nobody actually believes your financials. They've seen a million of these presentations; they've invested in quite a lot of companies, and frankly, no one ever lives up to their presentations in some way; they're always different in reality. For the investor, these documents are just to see whether you're smart, whether you make sense, whether you've got a realistic appraisal of your business's chances. They're not going to live and die on you hitting those particular targets; they'll accept them as being a very, very rough outline; they won't actually believe them.

Number 13: decide a

Realistic Valuation

I talked to you earlier about this; now let's get into a few details. First of all, how do you establish a valuation for your company? Well, the number one method is to look for industry norms. Literally look around and find out; ask friends, ask owners of companies, ask business brokers what a company gets sold for in this industry, because you can bet your last dollar the investor will be doing that, and you need to stick to industry norms when it comes to your valuation.

Now, usually the key component of the valuation is what's known as the multiple. So what does that mean? Well, it will be a multiple of what you're earning that establishes the business's valuation. So there are two ways you can look at that: you could look at your current earnings and be paid a multiple of that, or you could be paid next year's earnings or even your projections for the next three years' earnings and be paid a multiple on that. That's known as a future-based multiple.

So what if you don't have any profits? Well, if you don't have any profits, there are two ways a valuation can be handled—there's plenty of them, but two main ways. First of all, you do an estimate of your future earnings and base your valuation on that, a multiple of that. For instance, you might say, "Okay, over the next three years, we intend from scratch to get to this point, and therefore we want to be paid X multiple on that amount." Now normally that will be a pretty low multiple because it's all about the future, but it can be done. So the next method is a price-to-revenue ratio. So you might be turning over a lot but not actually making much profit, so you don't want to be paid a multiple of your profits, obviously. You want to be paid somewhat on how much revenue you've actually reached rather than your low profit. So how do you do that? Well, you look for a price-to-revenue ratio. So typically that shouldn't be lower than 1 to 3. Now that might mean that, uh, they will give you a dollar because you're doing $3 worth of revenue, and you should seek above that and certainly not any lower than that.

So in order to really sell compellingly to a venture capitalist, you've really got to know what are their expectations for themselves. You may not know this, but a venture capitalist is really a fund manager; other people or typically institutions have invested in his or her fund, and they want a return. Now what are their expectations? Well, they're expecting about a 20 to 25% return. So if you're an investor in a venture capital fund, you're expecting about a 20 to 25% return. Now here's the problem: that venture capital fund may invest in 10 businesses, but half of them will get written off; half of them will totally fail. So they have to be looking at a return that's much greater than 20 to 25% for your business. So what are they looking for? Well, usually an angel investor or a venture capitalist is looking to get 5 to 10 times their investment back in a period of 3 to 5 years, and that is one of the key criteria that you should take notice of when you're talking about your valuation to them. That's what they're looking for; that's what you're going to have to give them.

Point 14: Consider convertible notes. So what is a convertible note? Well, it's when you take out a loan for your company that can be converted to stock in your company later. So the advantage is to you that you don't have to give away a slice of the company necessarily; you might do a convertible note, and they get an interest rate, and they actually just get paid back. It's like a loan, but later on they may take a stake, or you may elect to give them a stake in the company. And what's the advantage for the convertible note holder? Well, they get paid back with interest, so it's actually a good use of their money, and if the company really goes through the roof, they can convert that to a stake in the company. So it allows you as a venture capitalist or an angel investor to have the best of both worlds: you get the return on your money, but if it's a great success, then you ride it with the owners of the company all the way to the top.

Number 15: In the methods of raising money, negotiate intelligently. Now I'll give you an entire lesson on negotiation later on in the Fortune Institute's curriculum, but for now I want you to keep in mind these important points when it comes to valuing your business, when it comes to asking for an actual amount of money: Start high, but be realistic. It's very hard to increase the offer once you've started low, so start high and let them pull you down. There's a lot of research on this that shows that if you start high, you end up with a better figure than if you started low and built it up. Make small concessions, not large ones, as soon as you can. When it comes to the deal, try and give in on points that don't matter; rack up a few wins in their favor, and then when it comes to the large concessions, that's when you hold firm. A lot of people do the opposite; they fight over every little point, so by the time it comes up to a big issue, the venture capitalist or the investor is a little irritated; they're not feeling as much goodwill towards you, and they want to win. That's the last thing you want. Give in to the little things fast. And finally, remember, and this is a very important point, that no matter what people may say, there really is no true valuation of a private company. There are so many variables, there are so many arguments for why it should be less or why it should be more, that no one really knows what the actual valuation should be; we're all guessing. So take advantage of that flexibility in your negotiations.

Finally, stay in touch with investors. So few people do. They do a presentation, and the investor might like it but decides to pass, and they don't stay in touch, so they take it as a no, but in fact, it was a no-stroke-maybe. If only they'd stayed in touch, then maybe six months later or nine months later or a year later they'd have got some money out of that investor. Don't forget, times change; the investor's particular situation may change; they may have more money in nine months; they may have changed their point of view about the industry in a few months; they may have actually had a life change where they have a different point of view about the style of stuff they should invest in. You don't know, so come back to them; build your relationships. You know, a classic example of this is Zappos, the world's biggest online shoe store. The truth is, a billionaire venture capitalist and head of, or one of the heads of, the Sequoia Venture Capital fund, they thought, "Okay, we're a fast-growing business; we may be small, but we've dealt with Michael before; he's sure to invest in this," and they were really surprised when he said no. They came back a few months later; he said no again. They came back a few months later after that; he said no again, and they came back again a few months later after that, having continued to build their business, and they got capital. So be sure that when it comes to your business, you don't just turn up once to a venture capitalist; you keep in contact.

Okay, what's our summary of all these points? You've had an absolute mountain of information here, but let's see if we can summarize it. Number one: Put off raising capital as long as possible; you get a better price later, and it'll also make you meaner and keener to build the business. Build relationships with potential investors before you need them. Get an introduction to a potential investor; don't just cold call them if you can possibly avoid it. Use your own personal contacts first: your friends, your family, your relatives; they're going to give you a better price, and they care for you more, and they probably, if you lose the money, not going to send in the uh, liquidators and the receivers on you. Friends first. Next, go to the angel investors, and remember the angel magnets: people want to see passionate, interesting, nice, fun people; they're the type of people they want to give their money to. If they're angel investors, they're in it for the lifestyle, for the enjoyment as much as the investment return. Next up, go to the venture capitalist and use my strategies for talking with either venture capitalists or private equity companies. Don't forget advertising; it can be one of the cheapest ways of raising capital. Put an out in your local paper asking for investors; you'll be surprised what you can get. Follow my pitching format, or at least follow a pitching format from an expert; don't just do it yourself and go off in all directions. Shorter is always better. Don't forget your executive summary is incredibly important; really spend the time on it. Always have a detailed business plan; don't give it to them straight off; give it to them later, but make sure it's comprehensive; include projections and the justifications for those projections. Decide a realistic valuation; be real, not pie in the sky. Consider convertible notes; they're an excellent instrument for both the company that receives the note and the investor. Negotiate intelligently, and then stay in touch after the initial meeting, even after the initial rejection, so that you create a relationship. Who knows what's going to happen in the future?

Okay, your weekly work: It's very, very simple. Number one: Contact three investors, whether you need them now or not. Literally ring up people who could potentially give you money, even if you only want it in two years or in six months or a year, and say to them, "Hey, let's have a chat. I want to tell you what's happening in my business; don't want to ask you for anything; maybe you give me a little bit of advice, but I really respect you, and I'd really love to come around and just show you what I'm up to." And then number two: Create a pitch to get money, whether you need it or not. It's fantastic to do that early because, number one, it clarifies exactly what your business proposition is for an investor, and number two, you never know when you're going to be at a dinner party and someone's going to say, "Send me some stuff about your company," and you could get an investor the very next day. Have your investment proposal ready; you never know when you're going to use it. So there you have it: a whole heap of ways that you can raise money for your business quickly, efficiently, and at a good price. Now don't be too hard on yourself if it was all a bit of an information hit, a bit of a bomb of data for you. It does take a while to digest all this information; it certainly took me some time. So just play this video again, read your notes again and again every week or so, and you'll get very used to it, and it'll become second nature to you. Every business skill is learnable, and raising money for a business is exactly the same. Next week I'll be talking about the biggest mistakes I've ever made in business. Now I've made a few, and I really want to save you from making them. Until then, work hard, think big, and I'll see you next week at the Fortune Institute.