This week’s seminar is called “The Business Case: What Angels Really Want” presented by Mike Volker, an entrepreneur, investor, and director of SFU’s Innovation Centre.
He opens up by discussing his own two venture funds, and how entrants in the NVBC competition have good chances of earning funding outside of the prize winnings. He then goes on to talk about his passion (tech startups), his experience (starting companies, raising capital, and investing capital into others), and his key observation over the past 30 years: that “good” companies will always get funded! (And that startups are getting better each year.)
At 6:10, Mike says that innovation is the number one key to growth. Entrepreneurs turn R&D and knowledge into a market with consumers, but there are obstacles, the biggest one being funding. But he believes that, nonetheless, it is a great time to start a company—a low prime rate and high GDP, as well as lower taxes and R&D costs, plus great infrastructure and special incentives.
What has changed in the startup landscape recently? Quite a few things, Mike notes. Lower valuations; more investors putting in smaller amounts of money; a greater emphasis on exits and the need for a “real plan”; increased toughness to tap non-accredited investors (they need one million dollars excluding real estate value, which is only two percent of Canada, and only a few of them are actually willing to invest in risky ventures); and increased toughness to use stock options for employees. He says that specific exit plans are now required—who will buy you, for how much, and why? What return can you offer your VC—5 times return in 5 years or 10 times return in 10 years? Note that these returns sound the same but they are not: 5X in 5 is a 38% return while 10X in 10 is only 26 percent (compounded annually).
6:30 rolls around and Mike asks the audience: is BCIC New Ventures a business plan competition or a business competition? The answer is both! Your business counts, but your business plan is the core foundation that explains its viability—”pick the idea most likely to be commercially viable with the greatest value.”
He then delves into an anecdote about his first business, involving oldschool computers. Three years into his business, back in the 1970s, he needed $50,000 to build computer units for a $100,000 order. So he went to his bank to ask for cash. The bank asked for a business plan—which his business didn’t have. It forced him to crunch real numbers and realize the importance of cash flow on a monthly, weekly, and even daily basis: how much money does your company need regularly? This matters. Slight differences in the timing of your operations can greatly affect your cash flow forecast. Getting credit is a good thing if you can earn the trust and execute the necessary diligence.
Cash flow is all about profit and loss (P&L), Mike explains at 6:50. What are you selling, who will buy it, how much will you make? But there is another P&L: Passion and Leadership. And sometimes this can trump profit and loss, but only in exceptional circumstances. It’s best to have both P&Ls in your favour.
Next, Mike goes on to discuss scale. Are you after the $100 million deal, or a “lifestyle business”? Do you shoot for the moon or a comfortable living? What is your vision for your company’s size? Once you decide this, sell your story… to the right audience!
He also advises entrepreneurs to have confidence. Mike talks about his history with RIM—founder and CEO Mike Laziridis contacted him for $30,000 in the 1980s because he knew Volker had just sold his business. Volker said he liked the confidence that Laziridis exuded, and that was a factor in his decision to make the investment. (He invested $30,000 for 15% of the company, which was worth $200,000 then and $75,000,000 now, but the deal lapsed.)
So what do angels want? They want fun. They want an interesting opportunity, a willing protege, and attractive return (10 to 100 times their initial return). Angels want the three I’s: Intensity, Integrity, and Immediacy. Do you have the necessary intensity, dedication and passion? Are you real, honest, and trustworthy? And are you ready to dig in and execute today?
At 7:00, Mike breaks down the investor pitch: “We the company need X number of dollars for Y project in return for Y percent of the company. Our plan is to be acquired by A in B years for C million dollars to give you an internal rate of return of D.”
7:05: Break time.
After break, Mike Volker shows a cap table, of which there is a detailed one online and should be one available as a slide online here soon. It covers each major step: from the ground up, to the angel round, to the VC round, to the exit, with the rising market cap in each stage and the subsequent gains for each person. If your angel invests $250k for 25% you now have a cap of $1 million and 75% ownership. Then the VC invests $3 million for 50%, bumping your value to $6 million but reducing your ownership to 37%. Finally you exit for $30 million: you net $11.25 million, the angel nets $3.75 million for a 15x return, and the VC nets $15 million for a 5x return.
Next, at 7:30, he explains the Shareholders’ Agreement, noting that it’s vital to “protect your baby.” You must cover such things as How to bring in new shareholders, how to buy and sell sells, etc. For your shareholders’ agreement, do not use a boilerplate or template document! You must custom-create your own specifically tailored to your company and your precise circumstances.
Your 5-page business case should consist of:
1. Product. What is it? How will it generate revenue?
2. Intellectual property. Is it patentable? Can you copyright it? A trade secret? Watch out: patents are hard to get and even harder to defend in legal battles!
3. Technology development. What stage of development are you in? Do you have just an idea? A prototype? A beta model? Is it already in production? No matter what, include time frames that are as specific as possible.
4. Business plan status. How much research has been done pertaining to your business viability? What is yet to be done? List your barriers and hurdles.
5. Market. This is the most important question to answer. Who will buy your product or service and why? What’s the potential to earn money, and how much money?
6. Distribution. What are your distribution channels and margins. Will you utilize strategic partners, OEMS, or chains?
7. Competition. There is no such thing as “no competition.” What is your uniqueness, your substitutes, your differentiators, your barriers?
8. Team. List the strengths, current and planned, of your participants, advisors, and board members. Emphasize these, but recognize your shortcomings too.
9. Financial basics. How much money do you need? How much have you raised? Have much have you spent? What are your 5-year projections? Be warned: only 0.5% of startups achieve $50 million in 6 years.
So why do deals get funded? Mike lists a host of reasons: because the people behind them are credible (domain and market knowledge), realistic (aware of how to achieve goals), aware of what they don’t know (utilize experts), not alone (utilizes a team), in control (leadership), and most of all… because they are liked! (consider it a courtship.)
At 8:10, Mike offers his final tips: Do not make the “only 1% of market” claim—it’s the kiss of death. Don’t compromise your business case by saying what you want investors to hear. Don’t give in to hyperbole and hype; instead leverage confident humility. Show leadership! And never procrastinate.
Mike ends the seminar by asking: “What’s the score of the Canucks game?”