“Attracting Investors to Your Start-up – Building the Great Company”
President, VenCap Advisory Group, Inc.
and General Partner, VenCap Opportunities Fund, L.P
Dennis Gerschick, a venture capital investor, attorney, CPA and Chartered Financial Analyst, speaks frequently throughout the world regarding a variety of business, investment, legal, and tax topics. He has chaired seminars for the Georgia Bar including annual seminars “Venture Capital Transactions,” “Alliances, Joint Ventures, and Partnerships” and many others.
In this eight-session briefing “Attracting Investors to Your Start-up – Building the Great Company” he speaks to both entrepreneurs and first-time investors on the fundamentals of building a great company.
Session 1-Business Ideas is a lively discussion that helps simplify one of the most challenging aspects of starting a new business. Mr. Gerschick cuts through the chatter and explains clearly why some business ideas are better than others in attracting an investor's interest and money in a company.
Session One - Business Ideas is complimentary and is available as online on-demand audio, MP3 download or transcription. All eight sessions are complimentary to Sponsors and are also available for purchase via MP3 download or on CD.
Session 1 - Business Ideas
Great ideas are a dime a dozen. The challenging part -- the part that differentiates entrepreneurs -- is to take an idea and translate it into something tangible, to actually convert an idea into a product or service. That’s why it may be 1% inspiration and 99% perspiration. Translating an idea to a tangible product or service is difficult and takes a lot of work -- tedious things, time-consuming things, things that are not sexy or glamorous or fun. But it just needs to be done. Lots of people have big ideas and big dreams, but they don’t ever do anything. I’ve been watching Larry the Cable Guy, and his famous line is, “Get ‘er done. Get ‘er done.” That should be the slogan for entrepreneurs. Get ‘er done, and just bang away day after day and take some action.
Ideas don’t sell themselves. You need to have a product or service you can actually take to somebody and say, “Here it is, will you buy this?” And getting to that point is difficult. So you have a product or service. But does it relieve a pain or meet a specific need in the marketplace, or is it just what I refer to as a “nice-to-have” product? The demand may not be great or the need may not be urgent, and this will impact the pricing that you set. Let’s take it to its literal sense: When somebody is in physical pain, what will they pay to eliminate their pain? They’re saying, “Hey doc, do whatever it takes, fix me, I don’t care what it costs, just eliminate my pain.” That’s one thing on a physical level. For business people, if you can eliminate their pain, you can charge significantly more than you can for a “nice-to-have” product.
Software that takes care of tax filing eliminates pain. A lot of people hate doing things with taxes, yet it’s required by law. And if you fail to file tax returns and start engaging in tax fraud, responsible persons can be criminally liable and locked up. That’s pretty painful. You need a product or service that eliminates unpleasant tasks for people. For example, I’ve invested in a company that simplifies online procurement. It streamlines the process; instead of having multiple fixed product catalogues lying around your office, you can have that all online. The software allows you to keep track of your inventory levels, and you can build in automatic reorder points so you don’t even have to think about it. With it you can place your procurement system on automatic pilot.
Trying to get a handle on the market for a new product involves a lot of guesswork. You try to analogize it by asking, “What product would this replace, and what’s the size of that market?” You like growing markets, because that gives you an upside and an idea: “If we capture X percentage of a market, what could our revenue be?” The larger growing market is just the size of the upside, and companies going public are looking for that. Take a look at the automobile industry. Its upside makes it an unattractive place to invest now. Why? Cars have been around a long time, so that’s not a fast-growing market. But it’s going to grow to some extent because the population is growing. Now look at Microsoft. When Microsoft went public, what was so attractive about that? Its fast rate of growth and the potential marketplace allowed its revenue to grow significantly.
So the stock market will pay higher multiples for companies growing at faster rates than for companies growing at lower rates. Venture capitalists certainly will take on great risks, but with great risks they’ve got to see at least the potential for great rewards. If a market is not growing, people yawn and move on to the next thing.
You’ve got to do things differently, so differentiate yourself. Give consumers a reason to do business with you. And it’s got to be substantial and meaningful, and it’s got to be something that consumers want. In every business, you can’t just pick the leader and say you’re going to be like the leader, or the best. You can’t be a “me too”. If you’re Burger King, what do you do? You can’t say, “We’ve got a better Big Mac.” You’ve got to come up with something different. And what did Burger King do? “We’re flame-broiled.” Burger King made an impact and had some success. Wendy’s comes along. So what do you do if you’re Wendy’s? “We’re different. We have square patties, we’re not round burgers, and it’s fresh, the freshest ingredients.”
Everybody’s familiar with Volkswagen Beetle from the mid-sixties. That was a phenomenally successful car and they did very well. But in the mid-70’s and 80’s Volkswagen took a dive, people didn’t want the Beetle anymore -- it kind of fell out of favor. Volkswagen came back and redesigned the Beetle and improved the quality of the car, and the Beetle came back in a second wave of success. Then Volkswagen said they wanted to attack a different market niche and came out with another model that they were trying to sell for $100,000. I didn’t think it was going to succeed, and I’m not aware of any great success that it had. Toyota did things differently with the Lexus. Lexus is a great car but they don’t use the Toyota name. They use Lexus as the brand name to differentiate it and attack a different niche.
I am not impressed with a strong patent portfolio. Most entrepreneurs and most lawyers simply are not qualified to determine whether they have a strong patent or a weak patent. What we’re looking for is some competitive advantage, something that will give us a lead over competition. Patents do not guarantee success. You can have the greatest patents in the world but that does not mean you are going to make money. And sometimes great business ideas are not patented at all. The secret formula for Coca-Cola was not patented. The legend is that they thought about it, but they saw patent expiration as a disadvantage -- under U. S. law patents expire in 20 years. As for McDonald’s -- I’d be hard pressed to find any patents for McDonald’s because they’re competing under trademarks. Trademarks can be very valuable assets: your trade name, your logo or even the colors that you use in your advertising. A lot more thought should go into trademarks than patents, in many cases.
So what do investors in early stage companies buy into? You have to ask yourself why people would put money into an early stage company. For a lot of these companies, there’s very little track record to evaluate, and nobody can say with certainty how things will develop. Then the question is, what can be successful? Hope is the key word - hope and optimism. You are really selling hope to the investor: “The future is going to be bright, and here are some facts or evidence that support that belief. Look at our growing revenue.” Just to show growing revenue indicates that there’s some market acceptance out there. If more and more people are buying your product or service, it gives investors hope.
I tell people there are so many lessons to learn from Microsoft. Microsoft is a great example because it’s a well-documented public company and many books have been written about it. Most people, in the software industry and throughout the country, will acknowledge that Microsoft does not produce the best software in the world. But they have a phenomenal marketing machine. The software is good enough, it can’t be crap or junk -- I’m not suggesting that -- but good enough so that people will use it. And then marketing and positioning is what Microsoft did so phenomenally well. The $64,000 marketing question is, “Would you pay X dollars for this new widget?” And that’s a whole different question than, “Do you like it, do you think it’s cool, would you use it?” A lot of people would say, “Yes, yes, sure I’d like to use it . . . Oh, you want me to write a check for this? Well, I guess I don’t need it that badly.” Writing a check really separates things out. It just says how badly people want it.
Who exactly is your customer? Identify each and all of them. You might think it’s obvious, but I will tell you right now it is not obvious, and many entrepreneurs have no clue who their customer is. That’s key. How well do you know your customer? How do you go about contacting your customer? For example, I mentioned that I had invested in a company that does online procurement. The procurement is for hospitals. Question: Who within the hospital makes the decision whether they’re going to buy our software? It varies by hospital. We need the materiel management director (that’s the guy that orders all the stuff and maintains inventory levels). We may also need the chief information officer, who is responsible for the hospital computer systems. This is a big-ticket item, so we need budget authority from the CFO, and because it’s significant change for the hospital we may need the CEO.
Sometimes people get too far ahead of the marketplace. That is, they have a great idea, but the market isn’t yet ready to accept it for another 10 or 15 years. There’s been a lot of examples of that, such as the guy who comes along and says, “I’ve studied cars and I understand our dependence on foreign oil, so I’ve come up with a new engine that runs on tap water. You can get your garden hose out and fill up your tank and the car will run.” Or the guy who says, “I’ve just created the flying car, just like George Jetson from the cartoon. It folds up into a suitcase, and this is really really cool.” Which company would you invest in? Most savvy investors would put their money on the water engine, because it’s a significant step forward but it’s not too far ahead. The flying car is cool, no question about it, but it’s going to be years and years before that’s a viable, revenue-producing product. Because there’s too much regulation, just trying to deal with that would take too long to resolve.
A crucial decision for investors is, do you bet on the horse or the jockey? Do you bet on the management team or is it the business model, the idea itself? The longer I’ve been involved, the more value and emphasis I place on people. I want people who are smart, energetic and confident but not cocky, people who are flexible and react to things and don’t think they have all the answers. Persistence wins out.
Be confident that you have a winning business idea. Demonstrate that you know the marketplace, that this is a step forward in the marketplace, that you’re making things better and that your product is better than what’s already out there. Show you’ve thought it through, that you understand what people will pay for your product or service, and that there are good margins involved so it’s going to allow you to generate significant cash flow or profit. Finally, make the best case possible that you have some competitive advantage that’s going to allow you to get established for some period of time to get a head start over the competition.
E-Strategies also includes these additional briefings by Dennis Gerschick:
Session 2: Legal structures
Session 3: Management
Session 4: Products and Services
Session 5: Barriers to Entry
Session 6: Exit Strategies
Session 7: Return on Investment
Session 8: Networks
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“Attracting Investors to
Your Start-up – Building the Great Company”