Courting Venture Capital
Tell a "story" that excites investors about your company's potential.
Whether you’re in the C-suite or playing a supporting role, the skills you’ve honed as a CPA can help you land that venture capital or private equity investment that either keeps your company afloat or contributes capital for necessary growth.
One of the most important ways venture capitalists and other private equity investors discover new investments and weed out the good from the bad is through the face-to-face presentation from company management. These presentations are notoriously difficult, a crucible for the company’s ideas and leaders.
What part does a finance professional play in this process? In some cases, the CFO or other finance professional leads the entire discussion. If that professional is you, you need to walk into that meeting prepared, and walk out knowing that you gave the potential investor all of the information needed to get you to the next step in the process, whether that is further in-depth meetings or the start of negotiations.
Typically, first presentations are less than an hour, sometimes as short as 20 minutes, so knowing what you need to say, and saying it in that short time frame, is crucial.
Fluency with numbers is usually among the strongest of the CPA’s assets and can help when presenting a company for investors. As much as it is a strength, however, it can also be a liability. Retreating to what they know, CPAs can frequently spend too much time on numbers, and not enough time telling their company’s story. The company’s background, niche, management, strategy and other less quantitative matters, are colloquially known as the company’s “story.” The story is what investors will typically remember and is generally what will drive them to invest. The story generates excitement where numbers alone usually do not.
The financials should support the story and play the role of confidence builder. The investors should be captivated by the story and convinced with the numbers.
If financial numbers aren’t the central focus of your presentation, then what should be? The most important elements of your presentation include:
1. Overview;
2. Management team;
3. Why you exist;
4. Competition and barriers to success;
5. Achievements to date;
6. Road map for the future;
7. Financials.
You should hand out materials, potentially printouts of your slides. These materials can give the investors details that your presentation won’t necessarily cover. Generally, including details in an appendix is a good idea.
OVERVIEW
Although it is common for investors to do a little homework before a first presentation, it is a bad idea to assume that they know much about your business. You should begin the presentation with a high-level summary of the business, including what the company does, when it was founded, and a memorable statistic or quote from a customer.
MANAGEMENT TEAM
There is a saying in the finance world that investors don’t invest in businesses, they invest in people. While this is an oversimplification, it contains more than a grain of truth. While your business ideas and execution must be sound, if the potential investors don’t believe in the management team, they are very unlikely to trust you and your company with their money.
To make investors comfortable with the business’s leaders, you should present short biographies of the most important team members, including years of experience, relevant prior employers, and exit prices of previous employers, in the form of purchase prices or initial public offering (IPO) amounts.
WHY YOU EXIST
Don’t think that the problem you address is as evident as it appears to you. Describe the problem that your company addresses. Explain to the investors why you exist. In this part of the discussion, describe the market you intend to compete in, and quantify it.
One way investors judge a potential portfolio company is by how big they think it can eventually become. If you tell them how big the market you intend to compete in is—and how big a piece of that market you believe you can capture—they can work out how big you can eventually become.
COMPETITION AND BARRIERS TO SUCCESS
Glossing over competition is a frequent hallmark of inexperienced presenters. Naturally, you want to portray your company in the best possible light, and talking about barriers can cast doubt on your ability to succeed. Your audience will generally be made up of seasoned professionals, however. They know competition exists, and they know that any market worth competing in has or will eventually have fierce competitors. Be honest about the competition and how much of a threat it represents.
Be sure, though, to point out why you think you can win. You wouldn’t be in this business if you didn’t think you had good chances of success. This is where you can point out why you can beat these competitors, or at least coexist with them.
ACHIEVEMENTS TO DATE
It is usually best to start a company with your own funds. Make as much of an investment as you can before looking for outside money. Use your own funds wisely, though. Make sure you turn that money into demonstrable successes, because when you ask for investment, you will want to point to those successes as indicators of the future. You will present the past as a report card.
If you have a product or a prototype, now is the time to demonstrate it. Show how the milestones you have met have turned your product into something that is salable. If you have customers in beta tests, talk about who they are and how they have aided in development. If you’ve had previous rounds of financing, now is a good time to talk about that as well, and to discuss how those financings furthered your efforts.
ROAD MAP FOR THE FUTURE
After you’ve shown your product, and talked about your history, it is time to move into the heart of the presentation. Use a considerable portion of your time explaining a vision of the future, and the short- and long-term plans that will get you there. If you haven’t talked about how your product makes or will make money, now is the time to talk about monetization. Discuss pricing and why you think your pricing will be accepted by the market. Now is the time to set up the milestones by which you will eventually be measured.
If you are fortunate enough to convince the audience to invest in your company, what you are describing now will become your report card. Tonnage processed? Users gained? Customer base growth? This will give investors a way to tangibly see your vision for the future. It also sets the stage for a discussion of when you may need to raise additional funds in the future, and how you will support that fundraising effort.
This is also an ideal time to tackle a difficult subject: Exits. Most investors won’t be with you forever. They will want to invest in your company and eventually sell their investment at a significant profit. Talk about the exit strategy that you currently are working toward, but remember that you need to frame the talk of exits from the investor’s perspective, not your perspective.
Talk about how they will exit, not how you will exit. Investors do not like to hear about how the leaders of the company are planning to get out. An exit for your investors may be an IPO, or perhaps a sale to a larger competitor. This is exciting stuff, so make sure that your enthusiasm for the company as an investment is transferred to the audience.
FINANCIALS
Finally, you’ll need to discuss financial history and prospects. Note that financials are only one small part of this discussion, and financial metrics from the past—typically the CPA’s bailiwick—are an even smaller part of the financial discussion. The CPA needs to present forward-looking numbers. Where is the company going? Be brief when telling them where the company has been. When presenting prior-period results, make sure to link them to goals achieved, or show how they indicate a positive trend. Then focus on the future, and be sure to incorporate the numbers into the story so that the potential investors can see how the story is borne out in the modeled future performance.
Another area where a CPA’s experience can be useful is in explaining financial or accounting intricacies peculiar to the company or industry. The software industry, for example, is fraught with complex accounting for revenue recognition that can easily mislead investors who aren’t aware of the basis of presentation for revenue figures. A CPA can translate the arcane literature that produced the numbers into more accessible language for the audience.
CPAs are also in a unique position to address the financial fit questions that investors will be asking of a potential investment. Investors typically fund according to an investment thesis. Sometimes it will be geography based—perhaps they only invest in North America; or industry based—with the investor only holding shares in a single industry, such as media and advertising.
Other times the thesis will be heavily financial. With financial metrics, investors can define the size of the company they look to invest in, the growth rates they look for, or perhaps the ultimate size of the exit opportunity. Some firms will have combinations of all of these theses, but if you know what the investor is looking for, make sure you explicitly demonstrate how your company fits their thesis.
Finally, you need to discuss how much you’re asking for in this round of financing. You should have set up this discussion when you outlined your road map for the future. Now you need to quantify your plans and ask for the amount that will enable you to get to the next stage of your company’s plan.
Remember, your audience may be seeing a dozen presentations in a given day. Be sure you give them something memorable: a sound bite, a good story, or a surprising or useful statistic that lingers after you leave.
In an initial presentation, you won’t have much time to give the presentation and make a good first impression. Make sure you tell the whole story.
EXECUTIVE SUMMARY
J.D. Kern (jkern@creativecollaborationllc.com) is the corporate controller for East Rutherford, N.J.-based Management Dynamics.
To comment on this article or to suggest an idea for another article, contact Matthew G. Lamoreaux, senior editor, at mlamoreaux@aicpa.org or 919-402-4435.
AICPA RESOURCES
JofA article
“CFO 101: Five Prerequisites,” Sept. 2009, page 38
Use journalofaccountancy.com to find past articles. In the search box, click “Open Advanced Search” and then search by title.
Publication
Valuation for M&A: Building Value in Private Companies, 2nd Edition (#WI604410)
For more information or to make a purchase, go to cpa2biz.com, or call the Institute at 888-777-7077.
OTHER RESOURCES
Websites
- AngelBlog, angelblog.net
- Both Sides of the Table, bothsidesofthetable.com
- Cracking the Code, cracking-the-code.blogspot.com
- Feld Thoughts, feld.com/wp
- Get Venture, markpeterdavis.com
- StartupCFO, startupcfo.ca
- VC in DC, startups.typepad.com
- A VC, avc.com
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