Preaching to startups in the midst of raising capital about what to prepare and what to say to investors is all well and good.
But without some rock-solid case studies then the pander becomes nothing more than rhetoric.
Every entrepreneur who has attempted to raise capital from investors knows how difficult the process can be. The endless round of emails, phone calls, meetings and coffees—not to mention running your actual business—means the capital raising process can quickly spiral into your worst nightmare.
Yes it's hard. But if you can get your message right in the first place then you can make your capital raising project a lot easier.
So if you're a young startup with very little operating history then keep reading. If you've recently secured much needed oxygen for your startup then you may also want to keep reading.
Lost, Now Found
About a month ago now I caught up with, John Anderton, one of the co-founder's of a young startup called FINDIT.ID. John is also the founder of Butterfly Creative—listed in the BRW Fast 100 in 2012.
FINDIT.ID has recently been able to close its $100,000 seed raise oversubscribed (nearly 2X). The funding came from a handful of angel investors.
The seed raise is the result of an enormous amount of hours finding, meeting, greeting and pitching to investors over the past two months.
Closing oversubscribed with very little operating history was an outstanding result for the FINDIT.ID founders. And a key component of their pitch was using the presentation materials prepared via our premium service offering at iEvoke.
This service is designed for startups that need to build a compelling investment case targeted at angel investors and sometimes institutional investors. More on this later though.
Where to Next?
FINDIT.ID came to us last year with a problem—how to structure and pitch their story to investors? We were happy to offer assistance because helping startups craft a compelling business case is what we do best.
Our solution on this occasion was to put together a business case that not only captured the attention of investors but also resonated with their hopes and desires, i.e. making money and being a part of something big.
What Did we Do to Help?
We put together a package of materials with the following key elements:
It’s important to note that we didn’t waste FINDIT.ID’s time putting together a lengthy and verbose document like a business plan or information memorandum—especially at this early stage (NOTE: the offer was targeted at sophisticated investors so a formal offer document wasn't required).
We focused on what matters.
What matters the most is having a clear and concise message for investors that elicits an emotional response via a story.
The Power of a Story
Of course that story can’t just be any old story—a work of fiction. FINDIT.ID’s story had to be substantiated with a war chest of supporting data and research since they had no operating history at the time they came to us.
Their story also had to be made memorable.
We’re happy to disclose that the secret to making your startup story memorable is contained in a single word: brevity.
And to build a story you need a plot. There are number of plots you can use to build the backbone of a story but the most effective framework to use when it comes to raising capital is the age-old plot of:
You know the structure well. The good guy defeats the bad guy and everyone lives happily ever after. Think Batman and the Joker, Luke Skywalker and Darth Vader, Superman and Lex Luthor, Erin Brokovich and Pacific Gas and Electric.
Making it Resonate
The next step is bringing the characters in that story to life.
In the case of FINDIT.ID, the bad guy (problem) is the billion dollar industry called “lost property”. And the good guy (solution)—a free, easy system for returning lost objects from ‘finders-back-to-owners’.
We built this story into FINDIT’s presentation materials. The procedure for presenting to investors was then transformed into a 3 Step Formula that looked as follows:
Rinse and repeat for each investor.
This proved to be a simple procedure for what is typically an exhaustive and complex process. And by putting together a concise set of materials, FINDIT.ID was able to go to investors with clarity and conviction.
The Underlying Message was Clear
“Billions of dollars of personal items go missing every year…” (PROBLEM)
“We’ve developed a free, easy system for returning lost objects from finders-back-to-owners…” (SOLUTION)
“This is how we expect investors to benefit 1. 2. 3. etc…” (HAPPY EVER AFTER)
And there were no awkward follow-up calls along the lines of, “Hi Mr high net worth. Did you get time to read through our business plan?."
The typical high net worth response is, “Ah what business plan?” or, “Uh, yeah but I only looked at the front cover and skimmed the rest so can you tell me more.”
Making it Stick
With a clear and compelling message, FINDIT.ID was able to achieve what a lot of startups fail to achieve—raise seed funding so they can grow their business and achieve their startup dreams and ambitions.
FINDIT.ID is now ramping up its human and I.T. resources in an attempt to bring its idea to reality.
If you’d like to know more about our premium service offering for startups like FINDIT.ID then please head to iEvoke.com.au. If you’ve lost your luggage or other personal items then head to FINDIT.ID to see what they can do for you.
And if you haven't already done so, please feel free to DOWNLOAD your FREE REPORT: “6 Capital Raising Myths Exposed” by clicking CLICKING HERE.
Ben Hucker is the founder and principal of iEvoke. He has 10 years’ experience consulting to listed and private companies in Australia. Ben thrives on being an active member of the startup community and uses his passion for writing and business to help clients create a powerful business case for investors.
An information memorandum (IM) is one of the first things an investor will ask for when you begin your capital raising mission.
An IM lays the foundation for your capital raising and sheds light on the past, present and future plans for your business.
Following is an outline of the main headings you will need at a minimum when preparing an information memorandum for your capital raising:
1. Letter to Investors
This can be a Chairman’s Letter or Director’s Letter. This letter gives a summary of where you’ve been and where you plan to go. Keep it short and punchy and no more than a page in length.
2. Investment Highlights
Pretty self explanatory. This can be five bullet points on what sort of return investors can expect if all goes to plan. It’s not just about the numbers though. If you are one of a few accredited providers of a product or service then this can indicate high barriers to entry for competitors, for example.
3. Executive Summary
This section is basically a short excerpt of all the proceeding sections. It is designed to give a snapshot of your business and why you want to raise capital. It saves prospective investors the time of reading through an entire document. You want to give enough info here to keep investors interested but it is not meant to be comprehensive by any means. Think of it as a teaser to the rest of the content in your document. It is also a chance to cover some milestones that your business has achieved to date.
4. Business plan and growth strategy
Now you’re getting into the nitty-gritty. This section can be a cut paste job from your business plan that you prepared before starting your new venture. Of course your business may have changed significantly since you last looked at your business plan so you want to update as appropriate. You want to give specific detail on the following aspects of your business at the very least:
Unless you are selling government bonds, then there is such a thing as risk. Even if you have a monopoly position or license to print money, you are still exposed to risk. It comes in many different shapes and forms, some of which you have control over and some of which you have none. Here you want to talk about risk factors related to:
6. Executive Team
This is a big one for SMEs. It is a good chance to extol the value of your senior management team. You also want to give more detail on your board of directors or advisory board members. Having a good management team is a big point of leverage as it shows reduced reliance on one key person with the backing, hopefully, of key executives via your board of directors or advisory board.
7. The Investment Offer
Time to go into detail with regard to your investment offering. What will investors receive in return for investment in your business? If you’re generating healthy profits and cash flow then your focus will be on an appropriate earnings multiple combined with an assessment of strategic value to find a valuation. 2x profits is the starting point for most private companies when discussing valuation. If you are an early stage company with little revenue then you will be more focused on strategic value by itself. This could be a database of subscribers, a patent, a signed contract from a potential buyer, a trademark, successful clinical trials, etc.
8. Financial Statements
Most investors will want to see at least two years of operating history including Balance Sheet, P&L and Cash Flow statements. Pre-revenue start-ups with little operating history need to focus on forward looking estimates for these items. When you are done forecasting, cut your revenue projections in half and double your expenses. Be realistic. You want to round out this section with some comments or assumptions underlying your financials.
9. How to Invest
Time to see the light and tell your prospective investors how they can apply for securities. Relevant instructions on how to access your application form are included here. Other details will include information on:
Here you want to highlight key terms and provide definitions. This is especially important for tech based companies in manufacturing or biotech for example.
11. Corporate Directory
Include details here for your solicitor, accountant, auditor, company secretary, registered office and provide a link to your website.
12. Application Form
This provides a chance to collect key information from prospective investors and provide an efficient means by which they can apply for securities and deposit funds.
The outline above at least gives you an idea of the minimum level of information required when raising capital. The bulk of this you can prepare on your own. Assistance may be needed when it comes to preparing financials, both historical and forecast, and when drafting relevant disclaimers.
The internet is littered with examples of effective IMs and disclosure documents so time to get googling if you want to see some real life examples.
Ben Hucker is the founder and principal of iEvoke. He has 10 years’ experience consulting to listed and private companies in Australia. Ben thrives on being an active member of the start-up and small business community and uses his passion for writing and business to help clients create a powerful business case for investors.
If you need help crafting your Information Memorandum to ensure you attract the right investors, for your business or property development, contact me for a no obligation quote at email@example.com or 0403 757 226.
This article is general in nature and cannot be regarded as legal advice. It is general commentary only. You should not rely on the contents of this article without consulting professional advice from a corporate lawyer or adviser.
A number of start-ups in the midst of raising capital can fail miserably when it comes to capturing the attention of investors. One of the common reasons that I see is an inability on behalf of the entrepreneur to articulate a distinct problem that they are trying to solve.
If you are unable to articulate a definable problem then no one—let alone investors—is going to be interested in your solution. And you cannot raise capital for a business that does not address a definable problem.
Got a problem?
Your problem needs to be thought of as the bad guy. Who is the bad guy that your business seeks to conquer?
Defining your problem is the very first step in your journey as an entrepreneur. If youare able to articulate a definitive problem then what is your solution? Or better, who is the good guy in your story?
How is your good guy—solution—going to beat your bad guy—problem? Of course all good stories have a happy ending. In the case of raising capital, the ending needs to be a happy financial ending for investors. Your goal in life might be world peace but the end-game for investors is making money.
Once you have clearly articulated a definable problem that you are trying to solve, then you have not only past first-base, you have also taken the first step in defining a compelling plot for your company’s story.
Oldie but a goodie
For a business story, far and away the best structure to adopt is the familiar one of bad guy, good guy, and happy ending. The good-guy-beats-bad-guy plot is older than time immemorial. Think Superman and Lex Luther; Batman and the Joker, Luke Skywalker and Darth Vader, Erin Brokovich and Pacific Gas and Electric. You get the drift.
When it comes to your company’s story, the bad guy does not need to be a human. It could be inefficiency, loneliness, hunger, inertia, ignorance or excessive waste. The same can be said of your good guy. Your good guy could be efficiency, inclusion, food, movement, education, or less waste.
This can sound simplistic, and it is. That’s the beauty of it. The essence of your company’s storyline is its simplicity. Billion dollar industries can be examined via this simple prism. Medicine? The happy ending is a longer life. Insurance? The bad guy is catastrophic loss. Banking? Well your money is safer than it is under the mattress—presumably.
So your good guy fights the bad guy and your good guy wins. Everybody’s happy. If you force yourself to look at your own business idea and make it conform to this centuries old story structure, you actually strip away all but the essential drivers of your business. Picture a Ferrari without the body-kit.
It is essential that you think long and hard about this simple story structure and how it relates to your business idea. And ideally before you invest any time and energy in any other business-building activity.
Renowned author and entrepreneur, Bill Fisher, goes as far as saying that if you don’t get this part right then almost nothing else you can do will make any difference to your success.
If you do get it right, i.e. you have a compelling bad guy (problem), good guy (solution), and happy ending, then you not only have the keys to the castle, you have an inherently exciting business story, and the most powerful tools in the business-building trade.
The yellow brick road
Let’s apply this mode of thinking to some successful modern-day companies to bring this principle to life.
Who is the bad guy in Uber’s business story? Modern, real-time, dispatch of taxi services. “It is so hard to get a taxi sometimes, it takes so long and then I have to put up with poor quality service and pay undisclosed fees at the end”.
The good guy in Uber’s story? Showing customers where Taxis are in real-time via a mobile app, getting the taxi driver as close as possible to customer demand, and providing a convenient and seamless payment solution that requires no exchange with the taxi driver.
And the happy ending? Billions of people across the globe with access to better quality taxi services, and a more efficient means for payment of such services. This has created a colossal company with nearly $10 billion in revenue inside its first four years of operation. Yes $10 billion!
In his book, The 6 Secrets of Raising Capital, Bill Fisher uses the example of Google. Who is the bad guy in the Google business story? Lack of access to information. “I know the answers to my questions are out there somewhere, but I can’t find them, and so I remain in the dark”.
Who was the good guy? Google’s search algorithms and technology that collect and make available an unprecedented amount of information to billions of people. And that is the happy ending: Billions of people, performing billions of searches and, in the process, creating one of the most profitable companies in the history of commerce.
Make sure you have a long hard think about the problem you are trying to solve. This is the bad guy that you need to conquer and defeat. It’s the very first step in your journey as an entrepreneur. Knowing this will help you build a compelling story-line that better engages investors.
And remember, there is no civilization in the history of time that hasn’t told stories. Stories came before the wheel and they help us teach, influence, and bind people together. And hopefully they can help communicate your company’s story more effectively.
Ben Hucker is the founder and principal of IEvoke Communications. He has 10 years’ experience consulting to listed and private companies in Australia. Ben thrives on being an active member of the start-up and small business community and uses his passion for writing and business to help clients create a powerful message for investors.
There is a common trait among leading CEOs and entrepreneurs that sometimes goes unnoticed in mainstream media.
Energy, passion, risk-taker, competitor, ambitious, street-smart and other adjectives are all used to describe successful entrepreneurs and corporate executives.
A less typical description is ‘plain-speaking’. The ability to speak plain English is a mark of simplicity and sophistication—and is a lot easier said than done when it comes to business.
The Oracle of Omaha
The king of plain-speak is arguably the world’s most successful long-term investor, Warren Buffett. Buffett's writings and annual shareholder letters are legendary for containing quotes from sources as wide ranging as the Bible and Mae West.
Buffett also delivers advice in a folksy Midwestern style with a sharp wit and canny sense of humour. This is not by accident though. Buffett is a man who takes his financial writing very seriously and he is well regarded as an expert storyteller by communication experts.
Buffett consistently tries to picture his sisters as his main audience—the reason? Intelligent non-finance people should be able to understand what he is saying.
Apples Ain’t Apples
The actual quote, “Simplicity is the ultimate sophistication” was used by a business leader who utterly transformed the lives of billions of people. The late Steve Jobs was a bastion for the plain-speak movement.
Jobs borrowed the phrase from another master of elegance, Leonardo Da Vinci, to promote the first line of Apple products in the late 1970s.
Jobs stayed consistent with this approach to simplicity throughout his working life. Take the launch of the iPhone in 2007 as an example—the slogan used for the launch of this new product? “Apple iPhone: Reinventing the phone”. That’s it.
Thousands of years of gradual advancements in technology and Jobs summed up the launch of one of the most successful consumer products in history in three words.
Jobs stacked up quite well against his contemporaries when it came to using simple language. A number of studies have been conducted on the language used by Jobs, Bill Gates and Michael Dell.
Studies have consistently shown that Bill Gates mirrors the vocabulary of a university student—Michael Dell—a high school student, and Steve Jobs? When Jobs spoke and promoted a new product, it was found that he mirrored the vocabulary of a 5th grade student.
It's hard to think that one of the most successful entrepreneurs in history could have comfortably waxed lyrical with a classroom full of fifth-graders.
Further evidence of the link between plain-speaking CEOs and their success as business leaders is highlighted in the book, Why Business People Speak Like Idiots: A Bull Fighter’s Guide, authored by Brian Fugere.
Fugere makes note of the close link between plain-speaking CEOs and resulting admiration among their peers. On the contrary, Fugere found that CEOs who are difficult to understand can be closely linked with scandalous behavior.
Fugere used the Flesch Reading Ease test to assess the language from annual shareholder letters written by a number of different CEOs. The results:
CEOs of admired companies / Flesch Reading Ease Score
That Cat Sat on the Hat
Writing and speaking in a plain manner does not mean you have to sacrifice on meaning and tone—equivalent to dumbing-it-down. Using simple language means you should be expressing ideas in the most straight forward manner that you possibly can.
Doing this is particularly relevant when attempting to communicate with private and institutional investors. Having a clear, succinct and compelling message can be the difference between raising capital, and not raising capital.
Adding more weight—verbose and lengthy prose is usually an indicator that something other than getting a point across is the end-game. It can be the case that the writer just wants to sound impressive, or is attempting to obscure a hidden motive, or make cover for the fact that they aren’t entirely sure what they talking about—as was the case with Enron.
There is a practical way to test the readability of the language that you use in your everyday business dealings. For example, you can use Microsoft Word to conduct a language assessment at the end of every spellcheck by following the instructions in this link. This assessment will tell you what your Flesch Reading Ease score is, along with a bunch of other stats.
If your audience is highly technical and they have a good understanding of what you actually do then measuring your Flesch reading ease is not relevant. It is super important if you are attempting to communicate your story with private investors for the first time though.
Keep It Simple
To sum up: if you are trying to raise capital for your business—or communicating with important stakeholders in general—then aim to write your story as naturally as possible. If you weren’t born as a corporate entity then there is a good chance that you are at least one thing: human. Don’t leave your personality at the front door each morning.
And the Flesch reading ease for this article? 50/100—with a very healthy average of 15.8 words per sentence—well below the maximum recommended average of 20. I hope you enjoyed it. Remember to keep it simple.