Building the Best Investment Pitch Deck

This is a Guest blog post by William E. Dyess, “Pitchmaster General” and Principal at TXN Advisors, a Washington, DC-region business consulting firm that provides corporate development, marketing and strategic advisory services.

This post is an analysis of the last 50 pitch decks we received at The Dyess Group’s deck review portal and our strategy on building a winning deck.

The Basics of Deck Building

At The Dyess Group (TDG) we generally follow the Sequoia Pitch Template when building decks for clients, but with our own spin. Whether you use the Sequoia template or not, it is important to follow a thoughtful narrative flow that induces and compels the reader to take the desired action. There are several effective, proven models and suggestions such as the Dale Carnegie Transactional Selling Steps from the 1950s:

1. Attention (What is the sizzle?)
2. Interest (Why does it matter? Why does the world need you? )
3. Desire (Are you better than a traditional solutions to the same problem?)
4. Conviction (How do you handle objections, what’s the traction?)
5. Action (Ask for the order, go for the close!)

The important practice here is to design a narrative flow that you believe fits your company the best and make it yours. Below we will present what we have found are the elements often forgotten, missed, or misunderstood when building an effective narrative flow. We do this using the first three slides of the Sequoia model.

Tip #1: Make sure people understand what you do, as quickly as possible (Don’t Waste Your Title Slide!)

We usually don’t hear about what the product or service does until the 5th slide.

The single most important thing you can do in your deck is to make sure people understand what you do. It needs to be in layman’s terms — meaning without using a lot of “marketing speak” and it needs to happen immediately.

When an investor, or any audience, clearly understands what you do, it provides much needed context to the rest of your story. The following is a front slide example from a deck The Dyess Group created for its client company Guac.

An example front slide from a Dyess Group deck

Here is another example illustrating how a very small amount of information immediately helps the reader (e.g., investor, partner, customer) orient themselves properly for the rest of the deck. This is for our customer, Socrates.

Tip #2: Find ways to combine key information into your narrative to make your deck more concise

Roughly 20% of the decks we review have the “Market Size” slide as the one of the first 3 slides.

And it almost always says one thing…the market is big. Unfortunately, putting this information so early is often disruptive to an effective narrative flow. Although Market Size is important and relevant, it is tangential information that can be a distraction at odds with understanding the opportunity. An alternative technique for getting attention with the size of the market is to combine the information with more important aspects of the narrative flow.

Tip #3: Combine traction and the solution to drive conviction to invest early

Only 15% of the decks we review feature customer referrals or actual market traction in the first three slides.

A solution without traction is really just an idea. You haven’t proven that you’ve solved anything. You want to eliminate as much risk from your offering as early as possible by enhancing the reader’s conviction. Introducing your product without any supporting traction in the same slide, or soon thereafter, doesn’t help the reader understand how far you’ve come in solving your problem. Inline with embedding statistics into the narrative, consider including some of the following along with your product:

• Customer Testimonials
• Success Rates
• Total Users
• Growth Rates

Applying lessons from User Experience (UX) research techniques to your pitch deck

UX research is the unsung hero of your favorite apps. A world leader in research-based UX consulting, Nielsen Norman Group have researched and documented the effectiveness of many UX techniques. We apply their forward-thinking UX methodologies to pitch decks we build for our clients.

UX Techniques

VCs only spend about three minutes reading your deck before a meeting. People can only keep seven things (plus or minus two) in their working memory. You have limited time and space to make your point, so raise the bar with respect to what information makes the cut. Key things to keep in mind through the body of your deck:

• Reduce the hard work for consuming key information (Rate of Gain)
• Don’t over-burden the reader with information (Cognitive Load)
• Be as succinct with your messaging as possible (“BLUF”)
• Organize information for max understanding (Progressive Disclosure)
• Give the deck some design basics for strong ethos (Halo Effect)

Each of these is discussed in greater detail below.

Rate of Gain

The Rate of Gain is the value a reader gets from new information divided by how much work that user needs to do to get it.

A measurement used in User Experience to measure ease of use and value to users

In the case of your pitch deck, the user is an investor, partner, or customer, and Rate of Gain measures how valuable the information on each page is divided by how many words are on the page.

This would mean that a good slide would have the most valuable information possible in the least amount of words.

How to have a high Rate of Gain in your content

One of our partners hired a highly coveted speech writer for a Series B raise and the main piece of advice — delete more words.

The best piece of free advice we can give you about your deck is to delete more words.

Cognitive Load

It’s well documented that there are limitations of one’s ability to remember things while doing a task, aka working memory. People have a very finite working memory to consume the content of your pitch. This is why you should use techniques to be as succinct as possible to convey the most value.

A reader may naturally try and determine what information they need to know in order to preserve their working memory. This means giving the reader the ability to triage a page to decide whether or not they need all of the information is a good technique for keeping a user’s memory free to remember the main points.

This really forces you to boil down the words on a page to the point where you keep track of the cost and benefit of each word. Each additional word adds additional cost to the reader to try and understand.

Bottom Line Up Front (“BLUF”)

There is a concept in journalism called the Bottom Line Up Front, you can also think of this as TL;DR (Too Long; Didn’t Read). It’s the same reason that we put an abstract at the beginning of a research paper, or an executive summary at the beginning of a business plan. Respect the reader’s time and tell them the main point up-front so they can triage the page and decide if they need to look at the details or not.

If you use a “headline” based approach you will allow readers to skim the page and decide if it’s something that they think they need to invest the effort to further investigate. If the reader avoids taking in more information than they need, they can arrive at the end of the deck quickly having only read the information they cared about. This will reduce frustration and increase retention and overall satisfaction.

Progressive Disclosure

The concept of progressive disclosure in apps defers advanced or rarely used features to a secondary screen, making the learning process easier and less error-prone. For applications, this means showing the most important features front-and-center and leaving the seldom used, or less important features to be shown later or at the users request. This removes added complexity of needing to understand more features than may be necessary.

Take Google for example. The home page is literally just a search box, and the ability to search (or click I’m Feeling Lucky like I always do).

Now you’ve given the user the option, should they want more information, to go find it. In deck-writing, progressive disclosure serves two ends: keeping the deck clean and succinct, but also allowing the user ready access to any information they would need — perhaps even in an appendix.

Halo Effect

The halo effect is a phenomenon that causes people to be biased in their judgments by transferring their feelings about one attribute of something to other, unrelated, attributes. In the case of decks, the overall aesthetic and cleanliness of the deck will set the sense of sophistication to your reader. The easiest way to create this is to be concise; use abundant white space and be consistent throughout.

• Consistent margins (white space is your friend)
• Consistent use of font sizes (we use 32pt and 18pt fonts for everything)
• Consistent messaging (Whatever you call it, call it that every time)

We’ll cover this topic in more depth later in the series.

Pulling It All Together

The slide design below does a good job implementing the UX techniques we just covered.

• Rate of Gain: With only two to three lines (tops!) for the main message, the value of the information is high, and the workload to obtain it is low.
• Cognitive Load: By using the headline approach, we allow readers to triage whether supporting information below the headline is worth further investigation.
• Progressive Design: Byincluding the path to more information, you let users know that there is a way to learn more. In doing this you also free their minds to focus on the slide at hand.

Fundraising is always hard. Fundraising in the current climate is harder. There has never been a better time to make sure your company can stand out, effectively deliver its message, and spark the interest of investors who will be more selective than ever before. Use the Sequoia Pitch Template and our techniques outlined here to make it easy for them to understand what you do and why your company deserves to be at the top of the stack.

William E. Dyess is “Pitchmaster General” and Principal at TXN Advisors, a Washington, DC-region business consulting firm that provides corporate development, marketing and strategic advisory services. We work in partnership with executive management to save them time and advance the corporate mission by helping them create killer pitch decks, management and investor presentations, board reports, corporate dashboards and the underlying business strategy and messaging to maximize growth and value. William can be reached at wdyess@thedyessgroup.com

Email your deck to deck@thedyessgroup.com for a free deck review.

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Be Unique, Get Funded

This is Guest Blog post from CONNECTpreneur Coach and partner Ines LeBow.

Attracting investors to get your business funded is all about being unique, even if the product you’re presenting isn’t a new invention or innovation. Earlier this year, I highlighted 7 Factors for Startup Success based on the philosophies of Shark Tank star Mark Cuban.

He believes that you need to find a way to make at least one aspect of your product or service uniquely your own. You can do so by thinking about the special characteristics your product will have, to whom you will market it, and how you differentiate it from the entrenched competitors. Trying to be the same results in competition based on price, which is not how you want to compete.

In Mr. Cuban’s own words about being unique:

Creating opportunities means looking where others are not

and

When you’ve got 10,000 people trying to do the same thing, why would you want to be number 10,001?

Not Just Socks

Socks have been around for a long time. Even the athletic sock category has been pretty saturated, but that didn’t stop Bombas from their start-up business focused on making a better athletic sock. I covered the case of Bombas in an earlier article entitled 5 Keys to Convince Investors Your Product Can Make Money.

They invested a lot of time and effort into identifying what made athletes, fitness junkies, hikers, runners, speed walkers, and other heavy users of athletic hosiery disappointed, frustrated, and annoyed about their existing sock of choice. They designed and produced their socks to address those issues, conducting significant product testing to ensure the user feedback hit the bullseye.

Successful Close

If you are an early Shark Tank devotee, you’ll know that the founders of Bombas went on the show and left with $200,000 in funding. That’s right…$200,000 of someone else’s money to launch an athletic sock. So it wasn’t about an exciting new technology product but about a unique take on a product for which there was already a defined, established market with committed customers who are continually looking to improve the equipment and accessories they use to perform their activity.

So what is unique about your product? Perhaps you can approach real-life users who are enthusiasts and get their perspective on the unique benefits your product offers. Often, it’s the little things that make the biggest impact to your target audience, which translates to how you differentiate yourself to potential investors.

To learn more on how to stand out with an epic fundraising story, contact me for a complimentary consultation by phone at 314-578-0958 or by email at ilebow@transformationsolutions.pro. You find her on LinkedIn Profile at www.linkedin.com/in/ineslebow or her ETS website at www.transformationsolutions.pro.

2021: The Year to Get Funded

This is a Guest blog post from Ines LeBow.

RIP Tony Hsieh. This article is dedicated to you and the inspiration you provided to me and so many entrepreneurs, helping us to put our passion and focus into the vision and values that led us to our start-up dreams. The investors and the funding are out there!

$69.1 billion! That’s how much has been raised by entrepreneurs in venture capital funding in the US so far in 2020 according to VC, PE and M&A news outlet PitchBook. This figure represents a new high, breaking the record set back in 2018.

And it’s not just in the US that businesses are getting funded. PitchBook also reports early-stage and late-stage venture investments in Europe are booming, riding a wave of optimism from both established VC firms and non-traditional investors who look to put their money into sectors that have thrived during the pandemic and into pandemic-proof technology innovations.

Here are some other key stats for 2020 that indicate a solid and growing foundation for investment in 2021:

Seed Pre-Money Valuation

Although there have been declines in deal valuations and a rise in equity ownership stakes with angel investors, the velocity of value creation for seed-stage companies has been very strong. Overall, pre-money valuations for seed-stage companies is strong compared with 2019, which was a strong year too. In addition, valuations for the smallest and largest seed deals have both increased over 2019, with the middle two quartiles holding steady.

• Median seed-state pre-money valuation is consistent with 2019.
• Top and bottom quartile seed pre-money valuations at historic highs.
• 44% annualized growth in seed-stage company valuations.

Early-Stage VC Activity

Pre-money valuations for the median early-stage venture capital investment set an all-time high in 2020, despite many believing that Covid would hinder the market. The one major impact that the pandemic has had in VC funding is an increase in the time between funding rounds for early-stage companies. There are some indicators that VC investment in early-stage companies is slowing a little, including the step-up multiple and the velocity of value creation, but the drops in those metrics are from the all-time highs set in 2019 and are consistent with performance in 2018.

• Early-stage venture capital valuation is at a record high.
• Median time between funding rounds for early-stage VC investments has increased to 1.2 years, meaning entrepreneurs are running leaner to extend their runway.

Late-Stage VC Activity

Late-stage venture capital investments continue to dominate the US market, with almost 69% of total deal value in 2020. The average deal size is up from 2019, driven largely by an increase in mega-deals.

Non-Traditional Investor Activity

Non-traditional investors have been highly active in the venture market throughout 2020, including their participation in mega-deals at a rate of 96%. When it comes to early-stage funding for non-traditional investors, the pre-money valuations have remained steady with 2019, which was a banner year in that regard.

Deal Terms

One other area to keep an eye on when it comes to the funding environment is deal terms. Terms on deal sheets that are “founder-friendly” continue to proliferate, as cumulative dividend terms are at a 10-year low.

The bottom line is that now is the time to get your business funded. Exit values have recovered and are gaining strength, meaning investors will have more capital to invest throughout 2021.

This year, I’ve published a group of articles to help you get out there in front of potential investors, including content on creating and delivering a digital investor pitch (“Now’s the Time to Get Your Business Funded: Coronavirus Edition”), on unique ways to attract potential investors (“How Far Will You Go to Get Your Business Funded?”), and on featuring the sustainability of your business in any market (“Pandemic-Proof Your Funding Pitch Deck”).

What are you waiting for?

To learn more on how to stand out with an epic fundraising story, contact Ines for a complimentary consultation by phone at 314-578-0958 or by email at ilebow@transformationsolutions.pro. You find Ines on LinkedIn Profile at http://www.linkedin.com/in/ineslebow or her ETS website at http://www.transformationsolutions.pro.

How Far Will You Go to Get Funded?

This is a Guest blog post from Ines LeBow.

Entrepreneurs are going to extremes to make themselves memorable to investors.

Earlier this spring, at the beginning of the pandemic in the US, I published articles on creating and delivering a digital investor pitch (“Now’s the Time to Get Your Business Funded: Coronavirus Edition”) and on featuring the sustainability of your business in any market (“Pandemic-Proof Your Funding Pitch Deck”). Some of my contacts have shared how great the advice in those articles was, but were struggling to get the opportunity to pitch or even engage with investors.

I read a Wall Street Journal article a few weeks ago called “Startups Turn to Remote Fundraising” (9/21/2020 print edition). It mentioned the lengths that many entrepreneurs are going to stand out with investors or even simply to get in front of investors. Here are a few examples:

• Elocution Lessons – A start-up CEO took voice lessons to improve his speech, tone, emotion, and inflection to be more compelling and effective on voice and video calls.
• Guitar Playing – A founder played his acoustic guitar to the Eagles song “Hotel California” during a fundraising meeting.
• Custom and Animated Backgrounds – One executive even built his own solution to create animated and custom backgrounds for video calls that turned into its own startup that got funded.
• Highway Billboards – An entrepreneur advertised his start-up idea on several miles of California highways frequently traveled by Silicon Valley investors using the Adopt-A-Highway program.

Initially, I got a really good chuckle. Then I thought about it more and realized that these were examples of people who inherently understood that they needed to stand out to the investor audience. To do so, they needed to do something different than all the other entrepreneurs. As Dr. Seuss famously said, “Why fit in when you were born to stand out?”

Investors are still investing. But, more than ever, entrepreneurs need to do something to capture and hold their attention and stick in their minds.

What are you going to do to stand out?

To learn more on how to stand out with an epic fundraising story, contact me for a complimentary consultation by phone at 314-578-0958 or by email at ilebow@transformationsolutions.pro.

Ines LeBow is the CEO, Transformation Executive for ETS. She is a known catalyst for business operations, bringing 30+ years of hands-on experience. Ines has a long history of being recruited into senior executive roles to improve the execution of business operations and to drive revenue growth. You can see her LinkedIn Profile at www.linkedin.com/in/ineslebow, view the ETS website at www.transformationsolutions.pro, or email her directly at ilebow@transformationsolutions.pro.

Overview of Financial Instruments for Startup Funding

 

This is another awesome Guest blog post from Andre Averbug.

In a previous post I discussed the different types of investors available to entrepreneurs. But choosing the right investor depends also on the types of financial commitment you are willing to take on. Therefore, in this post I will discuss the main financial instruments used to fund startups – equity, debt, grants, and convertibles – and their pros and cons.

EQUITY

Equity fundraising is when a firm raises capital through the sale of shares in the company. For example, a startup raises $50,000 by selling a 10% ownership to the equity investor (e.g.: angel investor, VC fund), representing a post-money valuation for the startup of $500,000. The investor gets the return on the investment through an exit event (e.g.: buyout from another investor at a higher valuation, IPO) and sometimes through dividend payments.

Pros:

– No obligation to pay back:  The equity investor becomes a partner and takes on the risk of the business. Differently from debt, you have no obligation to pay back. An equity investment, therefore, capitalizes your firm without limiting your future cash flow.

– Accessibility: Equity investors do not expect you to necessarily have revenues, creditworthiness, or collateral. They are betting on you and your business venture and their dollars should be accessible as long as you have an attractive and solid business proposition. For this reason, equity is often the ideal type of investment instrument for startups.

– Interests aligned: Because these investors become partners, their interests overall are aligned with yours. All parties want to see the business prosper in the medium to long term, differently from creditors, who might only be interested in your ability to pay back the debt regardless of the broader success of the business.

– Non-monetary support: Because incentives are aligned, equity investors often bring a lot more than money to the table. They may help you with mentoring, moral support, connections in the industry, introductions to strategic partners, and pulling in more investors in the future.

– Signaling: Receiving equity investment, especially from institutional investors such as VC funds, serves as seal of approval. It signals to the market that your business has been validated by a professional (and demanding) player. This brings status and opens doors when it comes to sales, negotiations, contracts, and further fundraising.

Cons:

– Loss of control: When you sell shares of your company you are also giving away part of your control. The extent varies according to how much the shares sold represent of the total equity, but first-round investors might typically ask for anywhere between 10-30% ownership. This normally comes with a sit at the Board and the right to participate in key business decisions.

– Share success: Well, this is more of a reminder than a “con” per se, but obviously, the more partners you have the more you will have to share the profits of the business and returns from a potential exit. This is normally not a problem, though, because hopefully investors help you “grow the pie”. As the saying goes, “it’s better to have 20% of the Empire State building than 80% of an old shack” (or maybe I just made this up?)

– Binding relationship: Equity investment is similar to a marriage. When entrepreneurs and investors become partners, they are tied in an open-ended relationship. The investors do want to exit at some point but, differently from a loan, which has clear terms and an end date, one never knows how long and how rough the partnership ride will be. If all goes well, this shouldn’t be a problem. But if the relationship becomes difficult, which is not uncommon given all the risks and stress involved, it can turn into a debilitating factor to the business.

DEBT

Debt is when a firm takes a loan from a backer (e.g.: bank, person, government institution) with the obligation of repaying principal and interest in a defined schedule. For example, a startup might take on a $50,000 loan from a commercial bank, at 10% annual interest to be paid monthly, with principal (i.e., the original $50,000 borrowed) to be repaid in 2 years, after a 6-month grace period (i.e., no interest payment is due in the first 6 months).

Pros:

– Ownership: With a loan you are not giving shares of your company to the creditors, you are simply borrowing money. This means that, differently from equity investors, creditors do not become your partners, do not dilute your ownership, and will not have a saying in how you run your business – you keep the control.

– Predictability: When you take a loan, you know all the terms of the relationship in advance. For example, you will have to pay X dollars every month, for 24 months, and then repay the principal after that. After repayment, the relationship with the lender ends. This makes it straightforward to incorporate the liability into your cash-flow plan and the broader corporate strategy and goals, without major uncertainties.

– Discipline: The obligation to pay back debt tends to make entrepreneurs more careful with the way they manage their resources. When you know you need to honor monthly payments and return the amount borrowed at the end of the period, you become more careful with the way you handle your expenses, procure suppliers, manage your costs, and go after your goals more broadly. This often brings positive lasting results in terms of financial management and corporate strategy.

– Cost: If your startup is successful, and the terms of the loan are aligned with market rates, debt is probably cheaper for you than selling equity. The value of early-stage startup shares can increase multiple-fold over just a couple of years. Therefore, if you believe in your startup and manage to get a loan instead of selling stocks, this will likely (hopefully!) cost less than selling equity prematurely.

Cons:

– Accessibility: Banks and other lenders are notoriously risk averse. This means that they will only lend to companies that can prove they can pay back. This is often a challenge for startups, which may not have steady revenues yet, little or no collateral to guarantee the loan, and limited receivables. Therefore, even if this seems like the best option, it might be hard to get.

– Obligation: With a loan, you either honor your payments “or else”… Depending on the laws of the country and what you used as guarantee, if you fail to pay back you may end up having issues liquidating the business, facing legal consequences, or even losing personal assets such as your house. The lender, differently from the equity investor, is not willing to share the risk of the business with you. Therefore, you must feel confident that you will be able to pay back the loan and understand the legal consequences before embracing this commitment.

– Discipline: The same discipline that can be an advantage can also be a limiting factor. For a startup, depending on how the business goes, servicing a loan monthly can mean that you need to tighten up your budget, cut your expenses, and even reduce investments to ensure you honor your obligations.

GRANTS

A grant is when a firm gets funds, normally to be used in particular functions, without the obligation to pay back or give shares of the company in exchange. For example, a company is awarded a $50,000 government grant as part of a program to support innovation and R&D. The startup’s only obligation is to use the funds as agreed and report on its progress.

Pros:

– Ownership and no obligation to pay back: A grant offers the best of both worlds in terms of the advantages of equity and debt. You don’t have to pay back and you don’t give away any control. Simply put, grant is free money!

– Accessibility: If a grant targets startups, much like equity, it usually does not require the company to prove creditworthiness, to have revenues, or collateral. It should be accessible to most startups that fit the profile the grant is meant to support.

– Signaling: Much like equity, receiving a grant also serves as seal of approval. Grants have highly competitive processes (who doesn’t want free money!) and winners are often praised publicly and receive good publicity. Winning a grant also places you favorably to win future ones from the same or complementary funders, as donors want to see you succeed to justify their programs.

Cons:

– Competitive: As mentioned, a grant attracts a lot of attention and normally gets thousands of applications. It is usually not something you can count on winning and incorporate into your business planning. At the end of the day, depending on the market, it might easier (or at least more predictable) to raise equity or get a loan. The grant would be seen as the icing on the cake.

– Time consuming: Well, nothing is really free. Applying for grants is very time consuming as the application processes are usually lengthy and bureaucratic. It requires a lot of time and focus and therefore it has a high opportunity cost. Also, if you win, usually there are thorough reporting commitments and you need to produce detailed periodic reports and show how every penny has been spent.

– Strings attached: Grant money is usually earmarked to certain types of investments or expenses. Therefore, you may not be able to spend the money as you wish. For example, even if you land a large grant of say $500,000, if it is part of an R&D program, you may not be able to spend a penny of it on what you might need the most at the time, say payroll or marketing and sales.

CONVERTIBLES

A convertible note (or debt, or bond) is a hybrid instrument, with debt and equity features. The firm borrows money from an investor (e.g.: angel investor, seed fund) and the intention of both parties is to convert the debt to equity at a later date. Typically, the note will be converted into equity in the subsequent round of equity investment, at a discounted valuation. For example, a company raises $50,000 in convertible debt, for 2 years, annual interest rate of 5%, and a 20% conversion discount. If a new round of investment (e.g.: VC fund) occurs within 2 years and shares are valued at $1, the convertible investor will purchase them for $0.80, buying 62,500 shares instead of 50,000. However, if after 2 years no new investment is made, the company needs to repay investors the $50,000.

Pros:

– Fairness: Convertibles solve a major problem in early-stage funding: valuation. It is very hard to come up with a sensible valuation for early-stage startups, especially those in ideation and pre-revenue stages. Convertibles solve this problem by pushing the valuation conversation forward in time, for only when/if the business is more developed and a professional investor is able to make a more educated assessment.

– Win-win: This is a financial instrument both entrepreneurs and investors are quite comfortable with, especially given the fairness argument above. Entrepreneurs are not giving out equity sooner than needed and investors are not running the full equity risk.

– Most equity pros: Most equity pros discussed above – except, before conversion, for the “no obligation to pay back” – apply here.

– Some debt pros: The debt pros of “predictability” and “discipline” also apply here.

Cons:

– “Worst” of both worlds: While grants get you the best of both worlds of equity and debt, convertibles, in a way, may get you the worst. This is because, if the business is being successful and you raise more funding, you will be selling your valued equity at a discounted rate. Alternatively, if the business is not going well, or even fails completely, you will still need to pay the investor back. The former scenario is certainly less of an issue because the investor surely deserves the discounted valuation for having backed you early in the process. But the latter might put you in the “or else” situation discussed above for debt, exactly in a moment your company might not be doing well.

– Equity cons: All equity cons apply here in case the note converts.

– Debt cons: All debt cons apply here, except for what regards principal repayment in case the note converts to equity.

Choosing the right financing instrument is a key strategic decision for any startup. Stay tuned because, in the next post, I will discuss the main questions entrepreneurs need to ask themselves when it comes to making this decision.

 

 

Andre Averbug is an entrepreneur, economist, and writer. He has over two decades of international experience working in the intersection of economic development, entrepreneurship, and innovation. He has worked and lived in multiple countries across North and South America, Europe, Africa, and Central Asia.

Andre has started and run four startups, in Brazil and the US, and was awarded Global Innovator of the Year in 2009 by World Bank’s infoDev. He has extensive experience supporting companies as mentor and consultant, both independently and as part of incubators such as 1776 and the Kosmos Innovation Center, and programs like Shell LIVEWire, StartUp Weekend and WeXchange.

As an economist, Andre has worked in topics ranging from innovation ecosystems, entrepreneurship and MSME development policy, competitiveness, business climate, infrastructure finance, monitoring and evaluation (M&E), and country assistance strategy for the World Bank, the Inter-American Development Bank (IDB), and the Brazilian Development Bank (BNDES). He has also consulted for clients such as DAI Global, the Economist Intelligence Unit (EIU), TechnoServe, among many others. He holds a master’s degree in economics from the University of London (UK) and an MBA from McGill University (Canada). Andre lives in the Washington, DC area.

He writes an awesome Blog called Entrepreneurship Compass and you can sign up here: https://entrepreneurshipcompass.com

8 Tips for Friends and Family Fundraising

This is a Guest blog post from Andre Averbug.

 

Startup fundraising is never easy and the current pandemic crisis makes it even harder. Typical early-stage investors, such as angel investors and venture capital funds, today might be more reluctant to take risks and bet on early-stage startups. In such situations, entrepreneurs often turn to friends and family (2F’s) to support their endeavors.

Asking people close to you for money, however, has its challenges and needs to be done in a planned, sensible way. Here are a few best practices to follow:

1. Select potential leads carefully – Make a list of potential investors among friends and family based on two key factors: net-worth and personality. In terms of the former, you should only consider people you know have the resources to support you. Don’t put people close to you on the spot if you don’t think they can afford to lose the investment. If the business fails, you don’t want to see them struggling financially, no matter the circumstances. Regarding the latter, only approach people you have a good relationship with and that you think have the right temperament. Make sure the person is reasonable and understanding. Remember they will become your partners (or lenders) and business partnerships are often hard to manage. Money comes at a very high cost if the person is difficult to deal with or might freak out at the first adversity and become a headache for you and your other partners.

2. Prioritize those who might help – From your list above, try to identify people who might be business savvy, well connected, and who can bring something else to the table besides money. For example, prioritize the uncle who is a corporate executive or entrepreneur, and might help you with mentoring and contacts in the industry, over a friend who might even be more well-off, but is a medical doctor or an artist with no business knowhow or networks.

3. Approach them professionally – Just because these are people close to you and that you know might be inclined to help, it doesn’t mean you shouldn’t be professional when approaching them. Quite the opposite. Show them you are serious about your business and that you are proposing a business partnership that runs parallel to your personal relationships. Only approach them when you know exactly how much money you need and for what: present them with a use of funds table. Make them a compelling presentation of your business case and bring (or send them) printouts of your business plan, Lean Canvas, or executive summary. They will appreciate your professionalism.

4. Think through instrument options – Make sure you understand all investment instrument options before you approach friends and family because you will need to explain it to them. For example, are you selling shares of your company (equity)? If so, at what valuation (make sure it is not overvalued to be fair to them)? Do you want a loan (debt) and, if so, under what terms, ideally? Are you considering convertible notes, where the investment starts as a loan and can be converted into equity at the next round of investment, at a discounted valuation? The latter, by the way, is likely the best option for early stage startups. [Note: I will be covering these instruments in a future post – stay tuned by signing up to receive notifications of new posts by email].

5. Make them comfortable to say “no” – Unlike professional investors like angels and VC funds, these people are listening to you specifically because they like you and want to help you personally. Therefore, you have the moral obligation to not take advantage of that (which you might do unconsciously) and you must put them in a comfortable spot. After presenting your pitch and explaining how much you need, for what, and under what terms, answer all the questions they have, and give them time to think. Don’t ask for an answer on the same day (unless of course it is a clear negative) and tell them to sleep on the offer and come back to you on a later day.

6. Consider a “2F club” – Depending on the amount of money you are asking and the number of people on your list, it might be a good idea to have more people invest smaller pieces. For example, instead of getting $50,000 from your big sister, get 5 x $10,000 from her and four other friends. This is good for diluting any one person’s risk and might also provide you with extra help. If you are going for equity, though, be mindful of having too many people as partners – i.e., too many voices at the table. Get help from a corporate lawyer or legal mentor to design an effective way for these people to become your partners, perhaps by having them all come in through a company of their own, with each owning 20% of it.

7. Tell what you expect (and don’t) from them – When friends and family invest, with their best intentions, they often want to help in many other ways too. They may want to opine on the business strategy, suggest hires, introduce you to this or that person, try the product before you launch it etc. If not managed properly, this situation can escalate to your aunt, who’s a dentist, wanting to participate in your biggest contract negotiation! Therefore, before the investment deal is closed, make sure you tell them the level of involvement you expect from them. You may simply not want them to get involved at all, which is fine, as long as this is part of the agreement and they are ok with it. In any case, keep in mind that, as partners, they do have the right to at least receive updates and participate in quarterly or biannual meetings.

8. Be 100% transparent about the risks! – Avoid problems in the future. These are people you care about and may know nothing about startup investing. They are doing this because they care about you too. Ensure they are aware that this is a risky endeavor and that they might lose their investment (equity) or that you may take a long time to pay them back (debt) if the business fails. Certify that they are ok with the risks and that they can afford losing their investment without major personal financial consequences.

Times of crisis call far stringent cost management measures and creative fundraising, including from friends and family. If you do it right, the 2F’s can be a good option to help you through these troubled waters.

 

Andre Averbug is an entrepreneur, economist, and writer. He has over two decades of international experience working in the intersection of economic development, entrepreneurship, and innovation. He has worked and lived in multiple countries across North and South America, Europe, Africa, and Central Asia.

Andre has started and run four startups, in Brazil and the US, and was awarded Global Innovator of the Year in 2009 by World Bank’s infoDev. He has extensive experience supporting companies as mentor and consultant, both independently and as part of incubators such as 1776 and the Kosmos Innovation Center, and programs like Shell LIVEWire, StartUp Weekend and WeXchange.

As an economist, Andre has worked in topics ranging from innovation ecosystems, entrepreneurship and MSME development policy, competitiveness, business climate, infrastructure finance, monitoring and evaluation (M&E), and country assistance strategy for the World Bank, the Inter-American Development Bank (IDB), and the Brazilian Development Bank (BNDES). He has also consulted for clients such as DAI Global, the Economist Intelligence Unit (EIU), TechnoServe, among many others. He holds a master’s degree in economics from the University of London (UK) and an MBA from McGill University (Canada). Andre lives in the Washington, DC area.

He writes an awesome Blog called Entrepreneurship Compass and you can sign up here: https://entrepreneurshipcompass.com