As I outlined last week, trophy angel investors are always looking for trophy entrepreneurs. In many areas, not enough entrepreneurs meet the criteria, so it’s still a buyer’s market. The result is that the Main Street Venture Fund consistently has more money available than good opportunities for investment.
After considering about 200 investment opportunities over the past two years, we have established a decision making process to identify trophy entrepreneurs and startups. It consists of eight major criteria, which we call the “Eight P’s for Successful Funding”.
Proposition. A poorly understood value proposition causes false starts, lost time, costly mid course corrections and general frustration for all stakeholders involved. The value proposition is a short statement that clearly communicates the target customer, the customer’s problem and the pain that it causes, the unique solution that addresses this problem, and the net benefit of this solution (value derived versus relative cost) from the customer’s perspective. Creating a strong value proposition requires substantial customer insight, thorough study, an understanding of the real value of intellectual property, thoughtfulness, and several iterations.
Potential. Once we understand the target customer and value proposition, we need to know how many of these customers exist and how often they will buy the company’s products or services. While most entrepreneurs want to prove an enormous market size potential, rarely does the entrepreneur know how many real customers exist and how many products they could potentially buy over a period of time.
People. There is no product idea good enough to overcome bad partners. We look for many attributes amongst the team, including communication, leadership and management skills, subject matter knowledge, business expertise, relevant experience, openness to influence, team cohesion, motivation, integrity and credibility.
Plan. Unfortunately, we read far more poorly written business plans at Main Street than good ones. Entrepreneurs tend to write business plans that are difficult to read, heavy on technology, and give little thought to the business model and commercialization strategy. A good business plan should be no more than 20-25 pages long and tell a compelling, cohesive and complete story about the proposed business. Repetition will kill an otherwise acceptable business plan. Supporting detail should be included in an appendix, where the reviewer may read it if desired.
Profit. The financial plan should include a profit and loss statement, balance sheet, and cash flow statement that ties together and is consistent with the business plan narrative. This area can be especially challenging, as the skills required to complete a competent financial plan often exceed the entrepreneur’s ability. Particularly important is the capital structure plan that the business intends to follow as it moves toward commercialization.
Price. We see many entrepreneurs who grossly over value their company when attempting to obtain outside investment. The trophy investor wants to know how much money is needed, where the money will be spent, how long it will take to spend it, the long term strategy for future spending and funding, and how the valuation will grow over time. Planning for valuation growth and investor exit should begin prior to the investment.
Participation. Main Street members consider our involvement in our portfolio companies as important as our investment. A Main Street member typically joins the board of directors and actively participates in corporate governance and as an advisor to management. If needed, we will also take a more active role in the company in the area of business planning and execution monitoring.
Partnership. Main Street has a desired investment term of three to five years. While our members invest individually, their interests are represented collectively through our board of director seat. Our board member monitors the company’s progress monthly and reports back to the members. We have learned that even with successful relationships, the time, attention and support required to create a great company is inevitably greater than we had estimated.
So, if you want to attract a trophy investor, first do your homework and hone your skills on these eight P’s. Then you too can be a trophy entrepreneur, with dollars raining down on you.