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: 
​

1. Elevator Pitch
2. One Page Summary
3. Slide Deck Presentation

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:

• Good Guy +
• Bad Guy +
• Happy Ever After 

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:

1. Use Elevator Pitch when introducing business idea to investors for the first time.
   
   
2. Arrange time to meet with investor and present Slide Deck Presentation to investor.
   
   
3. Leave One-Page Summary with investor at the conclusion of presentation. 

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.

FREE REPORT

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:

• Market dynamics
• Corporate structure
• Your business model
• Key success factors
  
  

5. Risks
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:

• Broader economic conditions for your industry
• Gaining market share
• Capital adequacy and working capital
• Cash flow and revenue growth
• Continuity of core personnel
• Changes in business model
• Key management and consultants
• Currency conversion
• Manufacturing and supply risks
• Intellectual property
• Majority shareholder risk
  ​

This list is only scratching the surface in terms of possible risks so be transparent. You know better than anyone what the major risks are facing your business.

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:

• Allotment and issue of new securities
• Minimum subscription requirements
• Opening and closing dates for the offer itself
• A reference to the Privacy Act and how you will keep details of any applications confidential
  
  

10.  Glossary of Terms
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.

Get busy
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 protected].

Disclaimer
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.

So you've been up seven nights in a row burning the midnight oil writing a business plan that you can take to prospective investors.

You've also spent a mountain of time creating a pitch deck presentation and rehearsing an accompanying dialogue.

All this while running your business day-to-day and looking after the millennia of other items that quickly dispel the apparent ideals of freedom and liberty that come with running your own business.

It's time now though for you and your team to get out there and start presenting your business case to investors so you can secure some much needed oxygen for your startup.

But where exactly do you go to find these mystical investors that the media always keeps referring to as if they grow on trees down at the local park?

You can't just head on down to Woolies and start whispering in the ear of random strangers "I have a secret". Well you can, but you'll probably get locked up. So where do you go?

​In my previous job as a matchmaker for startups and investors it was my job to find as many high net worth individuals (commonly referred to as angel investors) as I could.

There always seemed to be an inverse correlation between the wealth of an investor and their discover-ability so the big fish can be hard to catch. This doesn't mean it is an impossible task though.

In fact, it is a common myth among first time entrepreneurs that they don't know any investors. Nothing could be further from the truth.

You'll actually find that you aren't that far removed from finding your next investment partner. They may even be living in your neighborhood, or living next door watching re-runs of the Wonder Years. 

To make the job of building a shortlist of investors a little easier, I wanted to highlight some resources that I used in my previous job to find the sometimes elusive high net worth individual. Here they are in no order of importance:

Your friendly accountant is one of the best intermediaries you can use when it comes to finding suitable investment partners for your startup. If you haven't got an accountant then get one. 

Accountants have intimate knowledge of their clients balance sheet and P&L, not that they will ever disclose any of these details to you.

They are perfectly placed though to give you a friendly introduction or referral to someone they think might be a suitable investment partner for your business.

Ditto for this group. They have intimate knowledge of every aspect of their clients business but they will never disclose any of this to you.

They might be able to arrange a friendly introduction for you though depending on suitability and capital requirements.

It is only natural that your business colleagues would have an interest in your new startup or business. Ask around with your current workmates if still employed, former colleagues if not, close business associates, and even the colleagues of your spouse, de-facto, family or friends.

A small allocation to high-risk venture capital investments is looking more and more attractive for superannuation accounts post the release of the Government's Innovation Statement. So this method is not so far reaching and the appetite for startup investment is expected to grow. 

Here's a great article here from Sydney-based accelerator Blue Chilli that goes into more detail on the expected impact of the Australian Government's new stance on innovation.

University (college in the US) professors are some of the most networked people on the planet—some make Anthony Robbins look like a loafer when it comes to networking.

A select few have a serious commercial streak as well, despite their preference for the hallways of academia.

The professors inside the Technology and Innovation departments of city and regional universities are especially fruitful. Start reaching out with some of your old professors, or professors at your local university.

Have a think about the people you used to go to university with. There's bound to be someone who is interested in what you're doing.

If you didn't go to uni then think about friends from high school. Some of those early dropouts that everyone laughed at can turn out be very successful business people so you might want to do a brainstorming session here.

This method is often overlooked but it can be a treasure trove of introductions and referrals.

Think about a startup who has recently raised capital. Chance are they have had a 100+ coffee meetings with investors. One investor among the 100+ that they have met with might be a perfectly good fit for your startup.

Get in the habit of asking other startups if they know of anyone that might be interested in investing in your business.

I read an article the other day about how Sherpa—a peer-to-peer delivery platform—closed a $1.2 million funding round from private investors including Hotels Combined co-founder Michael Doubinski.

​This tells me that Michael Doubinksi has an appetite for marketplaces like Sherpa that connect private couriers with customers via an app. 

If you have startup with a similar business model but in a different vertical—say on-demand graphic design projects via an app—then it might be wise to try and reach out to someone like Michael Doubinksi. If he's not interested then he might know someone who is.

Go to Twitter or LinkedIn to find a common connection or even an email address so you can get in touch. The world is pretty small these days so don't view this as an impossible task. This is a good article on how to connect with online influencers. 

You can rinse and repeat this cycle a number of times using the daily gamut of media updates on companies that are closing out funding rounds.

Marketing guru and serial entrepreneur Seth Godin says you should always ask yourself what the hard part is when starting a business—the easy part is building a website, setting up a company, doing your business cards, designing a logo. The hard part is marketing your business and finding customers.

The same holds true when trying to raise capital for your business—the easy part (by easy I mean it is only 20% of the process) is putting together a business plan, slide deck and one-page summary.

The hard part is finding investors.

The above list provides seven methods for finding investors. They are all viable methods but there is definitely no short cuts. You really have to hustle your butt off to find the right investment partner.

I haven't even talked about online Angel investment groups. This is deliberate. The methods listed above will get you connecting with real people and get you building real relationships.

I hope you can use this list to find your next investment partner, or partners.

The process isn't easy but if your business has serious traction—customers, sales, a good business model—then you'll probably find that investors start falling over themselves to get a piece of your business once you start spreading the word.

Just remember it takes 6-9 months on average to raise capital for your startup so stay patient and persevere. 

Happy hunting and comment below if you are in the midst of raising capital for your business, or have raised capital in the past and you want to share some of your own experiences.

DOWNLOAD your FREE REPORT: “6 Capital Raising Myths Exposed” by clicking CLICKING HERE.

It’s a typical situation: entrepreneur has great business idea, or solid proof-of-concept, but entrepreneur needs to raise capital to scale their business and compete.

So they need to raise some seed, or expansion funding to take their business to the next level.

Entrepreneur puts together a lengthy business plan and begins firing it off to investors en masse--otherwise known as the scattergun approach to finding investors.

Hang on…is that the sound of crickets?

All those hours spent knocking together a beautiful business plan covering every last detail of your future ambitions and not a sole is interested. 

This is a soul crushing experience for entrepreneurs and an uncomfortable experience for seasoned investors who are on the receiving end of your solicitation to invest (usually via a cold call, or cold email). 

This is the common approach to finding investors for your startup. We’re here to eradicate that approach. 

A little knowledge goes a long way and a lack of knowledge regarding startup investment has to be one explanation for the continued use of this ineffective method. 

Or it could just be the sheer excitement of knowing that you’ve discovered the Elixir of Life and you just want to tell the world one email, or phone call, at a time. 

The number one way to overcome this problem is to stop firing off emails and phone calls to Johnny Longpockets (don’t worry, I am guilty of this) and his cronies immediately. 

Second, it’s time to smarten up and start thinking like a pro. 

Third, is knowing that the best way to engage with investors is to establish CREDIBILITY before you start talking to them. 

Without this crucial third step, Mr or Mrs Investor will be less concerned with your Elixir, and more concerned as to the reason why you are talking to them in the first place. 

Until you get past the issue of credibility, the investor you are talking to will not listen to what you have to say. If it seems like they are, then they are just being polite, trust me.

A better way... 

If you are giving your elevator pitch to an investor for the first time then chances are you have had some type of conversation leading up to it. 

During that initial conversation you must establish credibility in such a way that the investor knows exactly why you are talking to them. 

The conversation might go something like this, “Hello, I am Bill Smith, and I was referred to you by Johnny Longpockets who mentioned you might be interested in…” 

If you have a name that means something to this person then use it (of course, you will need permission from that person first). 

If you have not been referred to an investor then the conversation might go something like this instead, “Hello, my name is Bill Smith, and I read in the Financial Review that you have an interest in…” 

You need to take whatever link you can that allows an investor to see why you have specifically targeted them with your proposal. 

No investor is going to listen to you until you do this. If you’re Bill Gates then feel free to just introduce yourself as Bill Gates. But if you’re not, then don’t. 

It is highly likely that you will need to borrow some credibility from some firm, or person, who has a fair amount of salience with your investor. 

For example, “Hi Johnny, I bumped into Peter Jones, your accountant, and he encouraged me to give you a call about…” 

It doesn’t have to be the local accountant. This will work with a friend of the investor, a former colleague, a nephew, a niece, a law firm, or simply a social contact, such as a golf or tennis partner. 

If you don’t get out much then sites like LinkedIn and Xing are great tools for discovering common connections. 

There are also sites like Crunchbase, AngelList, Gust, Angels Den, etc. that have profiles for investors made available once you’ve registered with them. 

In Australia, similar sites include the Australian Investment Network, AAAI,Melbourne Angels, and Sydney Angels. 

Even a simple Google search will often turn-up mutual connections. 

By researching investors online you are likely to see where they have worked in the past and with which businesses they have partnered. 

Chances are you know someone, who knows someone, who knows someone. All you need is a link. The world isn’t that big anymore (just think 6 degrees of Kevin Bacon when you’re prospecting). 

Any common ground with your targeted investor can allow you to borrow sufficient credibility. 

Finding and then referencing this common ground at the outset of your initial conversation is essential to your prospects of starting a relationship and securing investment. 

Time for some feedback. 

We’re keen to hear from entrepreneurs who are going through the process of raising seed or expansion funding for their startup, specifically: 

1. How are you going about finding investors?
2. Are you using a common link to establish credibility? 
   
   

Please comment in the field below. We want to hear from those who’ve been there, done that, in the past as well. 

Happy hunting and don’t forget to establish your CREDIBILITY before you start talking to investors. 

Have you DOWNLOADED your FREE REPORT yet? “6 Capital Raising Myths Exposed”. CLICK HERE to fix that.

Well the time has come.

The amount of verbiage that gets bandied around in the media and even well-meaning friends and family (we forgive them) about how to raise capital for your startup, or business, is beyond reproach (slight exaggeration but not far from reality).

We thought it is about time that a few truths were told regarding the capital raising process.

Entrepreneurs are continually mislead about the true essence of the capital raising process and what it takes to capture the attention of private investors.

We've produced a report called "6 Capital Raising Myths Exposed" to try and combat this problem.

Here's a sneak peak of the full report:

Myth #1
"Numbers alone are enough to attract investors."

Entrepreneurs have somehow been led to believe that investing and investment decisions are all a matter of arithmetic. Facts, numbers alone, do not persuade. In order to persuade an investor, entrepreneurs have to be able to tell their stories...

Myth #2
"Investors will read your business plan."

Hundreds of would-be entrepreneurs have been taught that writing a long and polished business plan is necessary to raise investment capital. This is absolutely wrong. Find out exactly why this is the case...

Myth #3
"I don't know any angel investors"

If you live in Siberia then this may be the case, but otherwise, this is simply not true. Of course, you cannot open a phone book and look under angel investors. This type of investor is not recognised by most lawmakers and they tend to keep a low profile. Find out exactly where to find them...

Myth #4
"No means no more talking."

When an investor gives you a resounding "NO" after you have pitched them for investment, your natural response as an entrepreneur is to move on, with the view that they offer no additional value to your business building. This is probably the biggest mistake you can make when trying to raise startup funds. Find out why...

Myth #5
"Valuation doesn't matter."

There is a common misconception that your initial valuation doesn't matter because you'll make up ground as the business grows and receive higher valuations in the future. If only that was the case...

Myth #6
"The deal is done when an investor says yes"

It is natural to assume that, once everything is completely agreed and only signature signing and paper shuffling remain, your capital raising will close of its own volition. Nothing could be further from the truth...

That's just a small taste of the six most common capital raising myths. CLICK HERE to download the full report for FREE.

The full report goes into much more detail and explains the rationale behind each myth based on significant experience working in private capital markets.

We hope you find it useful and I'm keen to hear some comments and feedback from entrepreneurs or investors in the midst of raising capital, or who've been there, done that, in the past.

My contact details are on the final page of the report so feel free to give me a call or send me an email to discuss further, or comment in the field below.

And that DOWNLOAD link again.

If you’re looking to raise money for your startup then no doubt you have given thought to securing investment from a venture capital (VC) fund. But what are VC funds actually look for? 

Consider the following items to see if your business might be a good fit for VC investment:

1. You can demonstrate strong proof-of-concept

If you are raising money so you can quit your job, pay the bills and put food on the table then you are off to a bad start. You are deluding yourself into thinking you’ll raise money in this situation. Why? 

Professional investors aren’t interested in having a punt. They are interested in adding rocket fuel to a rocket that has already taken off. They don’t want to help you launch your rocket. That’s your job. 

2. You have a publicly listed competitor 

Are there listed companies doing roughly what you do? If so, you are a good chance of raising venture capital. Very few companies create a new kind of business. Most startups disrupt an existing business. 

Think realestate.com.au and the disruption to classified advertising for real estate. Carsales.com.au is another good example in a different vertical. 

A VC’s job is to invest in companies that can return a significant multiple on their initial investment. Very few startups achieve this outcome but it needs to be a possibility, and that means you need to be disrupting a pretty big market in the first place. 

3. You’re not building a feature of another product 

Many startups think if they create one great feature for a big product, then naturally they would be a good acquisition target for a bigger fish. In reality, a big company will just build that feature themselves with no outside help. 

Relying on acquisition as your only exit strategy is fraught with danger and kind of like high-stakes gambling. 

4. Your traction is fast and rapid 

VCs have to justify their appetite for high-risk, early-stage ventures. And to do that they need to invest in startups experiencing exponential growth, not steady-as-she goes linear growth. 

Steady linear growth is a noble way to build a bootstrapped business, especially if you are doing it on the side. But if you want to get funding for your company, you need explosive growth. 

Many startups think they need funding to get exponential growth. This is a myth. Funding almost never changes the growth trajectory of a company from linear to exponential. If you’re not experiencing exponential growth, your startup is probably not solving a problem that really needs to be solved. 

5. You have a team of co-founders 

Although many funded startups have one founder, the great majority have two or three. Why is it important to investors? For many reasons: What if you get hit by a bus? The investor wants to mitigate his or her risk.

Also, do other people believe in you? Having co-founders serves as a strong form of social proof. Nobody can do everything on their own and brilliant developers are usually terrible at sales. 

6. You’re generating cash 

There is a misconception among tech startups that if you are making too much money then you will get valued in terms of an earnings multiple. In some rare cases, this is true. Twitter and Facebook are two very rare exceptions. 

Revenue and cash flow are the lifeblood of a company though. You can raise money without it, but typically it is a major factor in determining whether you will secure investment. Your ability to generate revenue demonstrates that you have some commercial acumen, not just an idea. 

7. You’re solving a problem that people know they have 

The most important part of understanding your customers is understanding their hopes, fears and desires. Often, a founder thinks their idea is the “bee’s knees” without any further evaluation. 

If your startup idea doesn’t solve a real problem though, no matter how clever it is, it will almost surely fade into the abyss. Facebook solved the problem of knowing what your friends are up to. The more primal the need you are solving, the more investable your startup. 

So will you get the attention of a VC fund? 

Just because you want, or think you need, investment from a VC fund doesn’t mean you will get it. Not every company is investable and if you are unable to articulate your story and substantiate your story with solid metrics then you may find it difficult to secure investment from a venture capital fund.

Those not familiar with the definition of a sophisticated investor may think of such people as those with a superior intellect to the masses. Or maybe as that guy you see reading the Financial Review at breakfast on a Saturday morning.

A quick check on some local stock forums indicates more confusion. One member defines a sophisticated investor as adviser speak for “I cant be bothered explaining the concept to you, if you dont understand the investment then this isnt for you” or “I dont know how it works so rather than embarrass myself I’ll have you believe this isn’t for you”. Another made comment that it “Can also mean HIGH RISK–best avoided” and “To become involved in Sophisticated Investments may I suggest wearing your best attire. I noticed a mass of sophisticated investors at the Melbourne Cup!”.

One forum participant “got serious” and stated that sophisticated investors are “Investment savvy” and “generally have a sound knowledge of the investments they are involved in. I guess to become one of these people you would gain as much knowledge and then a track record in an investment field or fields”.

I can tell you now that the correct definition of a sophisticated investor is “none of the above”. The bloke reading the Fin Review may well be a sophisticated investor but it’s not because he reads the Fin. ‘Sophisticated Investor’ actually has a statutory definition under Chapter 6D of the Corporations Act. A sophisticated investor is defined where:

• the minimum amount payable for securities is at least $500,000; or
  
• a qualified accountant certifies the total net assets of an individual as more than $2.5 million or whose gross income for each of the last two financial years is at least $250,000 per annum.
  
  

Section 708(8) lists a sophisticated investor as being exempt from the requirement to be issued a disclosure document. This, combined with the conditions above, implies that certain individuals are able to protect their own investment interests without regulatory protection based on a measure of net worth or how much they earn.

At the same time, you can also see that a sophisticated investor is not exactly an investor who is sophisticated. I’ve known some pretty whacky marketing and business development execs earning a lot more than $250k per anumm. These people I would never give a single dollar of my savings to manage though. Certain AFL footballers also come to mind.

If a full disclosure document was required for every offering of equity/debt funding in private and listed companies then our biggest companies would be law firms, not banks. In fact, some in this category actively discourage regulation and consider any legislative disclosure to be an unwanted cost and a pain in the proverbial all together.

There are a lot of savvy individual investors who actively participate in capital raising’s for private companies without protection from the Corporations Act. This works in your favour as an entrepreneur or SME business owner that is trying to raise capital. That’s not to say it makes in any easier. It just means that you might not have to put together a lengthy and detailed disclosure document and it may be the case that you find investment via a series of private discussions. It can also mean you are getting more than a cheque – think knowledge, industry contacts, partnerships, etc.

To say that finding these people is ‘never easy’ would be an understatement. If you have a viable product or service though then it becomes much easier. In fact a sophisticated investor will probably find you first. If you are a Pty Ltd company trying to raise capital for your business then your only option is to comply with the 20/12 rule or to raise capital from sophisticated investors. So it is imperative that you take note of this group of investors as they might be the difference between global or local, exceptional or mediocre, new or old. Happy networking.

An angel, when used with reference to funding a new business, is actually an individual investor that typically invests at the very early, pre-revenue stage of a business. Like any investor, they want to see a return on their investment but they’re also motivated by a desire to see new and innovative businesses succeed – sometimes for the sake of innovation itself.

A typical angel investor will invest in a business that’s part of an industry that they understand intimately and are probably still involved in day-to-day. They will more than likely want to offer advice and support to the business they have invested in so it’s not just about the money. If you’re seeking money from an angel investor then it is perfectly normal to allow them some type of influence regarding strategy and direction.

The amount of money you might expect from an angel investor is in the range of $10,000 – $100,000.  This could be even more if they are from an organised group of angels like the Australian Association of Angel Investors (AAAI). AAAI has sub groups in just about every major city in Australia.

In summary, an angel investor is:

• An individual investor
  
• Someone willing to invest in early-stage or start-up businesses
  
• Investment amounts: $10k – $100k, sometimes a bit more, groups could go up to $1m
  
• Have experience and contacts to contribute
  
• May be willing to be “hands-off” or “hands-on” adding important skills.
  
  

So now your business is up and firing and you’ve built a solid platform that’s generating cash. You might now be in a position to seek funding from a venture capital fund. A venture capital fund is money that is managed on behalf of others – typically large institutions. Some venture capitalists like to invest in a business immediately after a business has moved beyond the initial angel investor stage. Others prefer to wait a bit longer before they invest and will only be interested after a business has received a first, or even second round of venture capital investment.

Venture capital firms will be focused heavily on financial returns and businesses that offer a lot less risk than early stage start-ups. While angel investors limit their investments to relatively small amounts, venture capitalists tend to think of a starting point for funding to be around $1 million.

You will find that a venture capital fund expects to exercise more direct control over your business. They will do this by setting achievable milestones for your business and by having at least one seat on your board.

In summary, a venture capital firm is:

• A company or business rather than an individual
• Seldom interested in early-stage start-ups, unless compelling reason (eg. high tech with already successful founders)
• Investment amounts: +$1M up to $10m
• Have deep industry contacts
• Require seat on board
• Operate as a general partnership (GP) with limited partners (LPs) as investors
  
  

Understanding the difference between an angel investor and a venture capital firm is pretty straight forward. You probably already have an idea of the one which is right for your business. Finding them and getting them to invest in your business is the difficult part. Those seeking Angel investment in Australia can get started with websites like:

• the Australian Association of Angel Investors; or
• the Entrepreneur Investor Network; or
• Find Angel Investors; or
• the Australian Investment Network.
  
  

Venture capital firms will be more difficult to contact. They receive hundreds of applications from companies across many different sectors. The prominent firms include:

• GBS Ventures
• Starfish Ventures
• One Ventures
• Square Peg Capital
• Yuuwa Capital
  
  

There are many more and the focus tends to be on IT, Biotech or Cleantech companies. There are funds that invest in more traditional sectors like manufacturing or consumer goods. These include CHAMP Ventures or CVC Ventures among others.

In addition, there are service providers that offer introductions to both Angels and venture capital firms like Wholesale Investor – where I currently work. Wholesale Investor has a subscriber base of over 8,600 High Net Worths including retired CEOs, C-Suite Execs, Family Office trusts, Entrepreneurs, and others.

Guide for business owner:

• Can you show proof of concept for your product or service and is it sustainable?
• What experience do you have within your chosen sector or more broadly as an entrepreneur?
• Who are your key backers, or advisory board members?

Guide for business owner:

• Do you have an exit strategy for investors (IPO, trade sale, share buy-back, etc)?
• What is your commitment to this exit strategy?
• What might interrupt the path to achieving some type of exit (risks)?

Guide for business owner:

• Is your business moving up the growth curve or burning cash?
• How are you going to maximise the strategic value of your business? (NOTE: strategic value is not a multiple of profits)
• Can you name four companies that might buy your business one day?

Assuming you have a unique product or service that has a market, an investor will basically want to see that you have everything at stake. The founding father of venture capital in Australia, Bill Ferris, who now runs CHAMP Private Equity went as far as asking, “Do the owners of this business have their life on the line for this?”. He used this as part of his checklist when assessing potential investment in private companies so it is no exaggeration.

If you can answer the questions above with objective facts then you will be in a much better position to raise capital from Angel Investors, Venture Capital funds, High Net Worth individuals, Family Office trusts, or any other form of surplus capital.

I came across an article recently on Forbes.com written by Alison Johnston. Alison is the CEO and co-founder of InstaEDU, an online education business that helps students get high-quality, one-on-one academic support, on-call. Alison talked about 5 tricks for finding investors for a startup. The article was written based on her personal experience raising capital for InstaEDU. I thought it would be useful to adapt the article for Australian start-ups.

Alison made a good point early on that even when you’re ready to start talking to investors, one of the most challenging parts can be just that: actually talking to investors. Most venture capitalists and angel investors see dozens of pitches every month and simply don’t have time to meet with everyone. To make it more difficult, it’s not uncommon for first-time entrepreneurs to need to speak with 50+ investors before closing a round of funding. The good news is that there are now more resources than ever to help you source investors. Here are five tricks that Alison used to get meetings with the right investors for InstaEDU.

Services like the Australian Investment Network cater for entrepreneurs looking for startup funding in their business. A site like this is a good way to both learn about investors and for them to learn about you. Creating a profile—including specific info about your company, product, and team members—makes it easy for people who are interested in your space to find you.

Another good site is Angel List. There a number of Aussie startups on this site. Once you’ve completed your listing on Angel List, share your profile with your friends and professional acquaintances and request references. Send a personal note to your followers to try and start a dialogue with them.

If you are fortunate enough to get some followers for your business via a lisiting or other method then you want to focus on those investors who are going to be a good fit for your business. The chances of raising equity funding via a single meeting are pretty slim so being to restrictive on those that you meet with is not recommended. Cast the net wide.

On sites like AngelList you can make a list of people who have invested in the sector which you operate. You can take this to list other entrepreneurs and ask for their thoughts on who you should add or remove from the list, based on their experiences. Entrepreneurs who’ve been there/done that are an invaluable resource for helping you identify potential investors. They can also flag  investors known for being difficult to work with or who aren’t actively investing.   Put a list of people into a spreadsheet and include their sector of expertise (when applicable), mutual connections, relevant investments, location, and any other notes (e.g. has a wife and 3 kids).