About halfway through the event, Don Dodge, a serial entrepreneur, angel investor, and member of Microsoft’s emerging business team, gave a short talk on the value of networking in the fundraising process.

Don confirmed what I said in a previous post, i.e., with the potential of being inundated with business plans coming through mail and email, investors must necessarily have some way to filter which new startup they will look at in detail. And that filter is usually a warm introduction to the startup (by a colleague or friend), or positive personal contact with someone at the startup. Hence the need to not only network, but to be prepared with an elevator pitch to catch their attention.

In his closing remarks, he said something that struck a chord with the entrepreneurs in the room. He asked everyone in the room to think about their stock portfolio and think about why they invested in those particular companies, out of thousands of others. That is, why did you invest in just 1% to 5% of the market?

VC and Angel investors are no different — out of the entire universe of businesses that they see, they invest in perhaps just 1% to 5% of the ideas which they think will make them money, whether because of technological superiority, market leadership, or a belief that it is the next big thing.

As you are going around seeking funding, you need to make sure you can position your company as one of the top 5% of startups.

So, are you in the top 5%?

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It’s not simply a matter of identifying the target market, you need to be able to articulate who the buyer is, why they will buy your product or service, and how you expect the market to grow.

A few years ago, an entrepreneur was pitching an idea for a startup to an investor client — a device to allow older generation mobile phones to have speaker phone capability. The idea was that this would appeal to many business phone users that wanted speaker phone capability on their cell phones.

During this period of time, speakerphone-capable cell phones were just then beginning to be introduced to the market, so at first blush, there would seem to be a ready market for this product idea.

But there’s a disconnect here: the target market they were trying to sell to, i.e., the business cell phone users that need speaker phone capability — are generally the high-powered successful business person that has no qualms upgrading to newer phone models. So, the question remains: who will buy it?

The other thing to note is that by its very nature, a “retrofit” market is a declining market — there will be buyers as long as there are old phones to retrofit, but as users start to upgrade to newer phones, the market eventually dries up. So while there is a market initially, it’s not a growing market.

Asking investors for money is hard enough. If your primary target market is a question mark and your overall market is shrinking, it will be impossible to convince any investor to bite on your story.

In the end, the entrepreneur ended up using a combination of SBA loans and bank loans to fund the company. I don’t know what this says about the SBA or banks, but I guess it is a good thing that these institutions have different metrics for making their decisions.

But you have to wonder, did they ask the question: Who Will Buy It?

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The other day, two entrepreneurs came to see me with an investor pitch they insisted was ready. Everything seemed in order until they reached the slide that said “Funding Requirements” — and all it said was $10M first round funding required. That’s it. No discussion of how they got to this nice round substantial figure.

I was stunned. These two had both worked for startups and were obviously bright. Did they honestly believe that investors would just agree to give them $10M without explaining to them what they would do with the money? (I was thinking myself that $5M each would make for a nice start in Brazil!)

At a minimum, your funding requirements should be backed up with a few words on use of funds, milestones, and any expected follow-up funding required. Show your work.

There were several other places in the presentation where this same poor attention to detail manifested itself.

On their Financial Projections slide, they showed me a classic hockey stick chart with projected revenues starting from the low hundreds of thousands in year one, rocketing to several hundreds of millions by year five.

Not seeing any references to one, I had to ask: “What’s your revenue model?”

“We have several avenues to revenue, from OEM deals with major manufacturers to distribution deals with industry channels, to direct sales,” came the reply.

Which begged the question: “What’s your revenue mix?”

The exchange of looks between the two of them gave me my answer. They didn’t show their work because they didn’t do the work.

Can you imagine going to an investor with a seemingly half-baked business plan? Because that’s what an investor pitch is — an oral presentation of your business plan.

Don’t attempt to set up a meeting with an investor if you haven’t done your homework and can show all your work. You will only succeed in getting you and your team branded as amateurs or incompetents. And it is a reputation that will haunt you.

Do Your Homework. Show Your Work.

© Eye on Startups & The Startup Guidebook

While entrepreneurs understand that starting a startup is risky business, they also know that being employed by a company during a recession isn’t all that secure either – U.S. employers slashed 80,000 jobs in March, the most in five years and the third straight month of losses.

The good news for entrepreneurs is that angel investors, as a group, are decidedly more optimistic than the general populace. Angel investors are high net-worth individuals who invest in startups and entrepreneurial ventures, and as a group, invest just about as much as the venture capital (VC) firms do.

In the Angel Confidence Report survey released by the Angel Capital Association (ACA) about six weeks ago, 55 percent of the respondents said the number and total dollars invested will increase this year, while 32 percent expected it to be the same as 2007. This is good news, indeed, as angel groups prefer to invest in seed and startup companies (81%) and early-stage firms (85%) as reported by that same survey.

I think part of this optimism is rooted in the fact that angel investors are an optimistic bunch in the first place — you have to be, to invest in a seed and early stage startups. But it is also because angel investors know they are investing for long term growth, not immediate returns. They expect that their investment will grow into something substantial years from now.

So if you are an entrepreneur, go ahead and ditch that cubicle. If you have a great idea and a solid business plan, chances are you’ll be able to get some angels to help get your startup off the ground.

© Eye on Startups & The Startup Guidebook

Some time back, an entrepreneur came to my office seeking advice on an investor presentation he was creating to pitch his idea to investors. While the basic idea has been around for years now, his implementation is unique (which I won’t divulge). At any rate, the general idea is quite compelling.

It is a Medical IT application that would enable primary care physicians to more easily share patient information with other doctors and specialists. By eliminating the prevailing practice of doctors sending paper copies of patient files to a specialist where the same information is usually retyped, this application has the potential to reduce errors and maybe even save lives.

He went on to explain that if this was standardized (as the medical community was asking), it could also be used to share medical data with the patient’s insurance company. This would reduce the time to approve procedures and at the same time eliminate the paperwork swamping insurance companies. “Looks like a win-win for everyone,” I thought.

And then he said, “and then we are going to put in an interface for social networks like MySpace and Facebook.”

Huh?

If he were presenting to an investor, he just basically kissed his credibility goodbye.

With all the concern about privacy, social networks are clearly not the place to be sharing medical information. Everyone knows this. Investors will wonder just how well this entrepreneur really knows his market if he doesn’t know this!

As you are building your pitch to investors, be very wary of falling into the trap of latching on to the current hype. Instead, make sure you do your homework and know everything there is to know about your target market, and then hone your pitch around your core value proposition to this market.

In the end, investors won’t fund your idea simply because it is somehow part of a new movement. First and foremost, investors invest in people — credibility counts for way more than any hype.

© Eye on Startups & The Startup Guidebook