Think of your “deal” in this way:

1. Incubator – ‘correct’ you are chatting ideas and concepts, and a long ways from “start up”. You are funding it. If you are lucky, someone may pay you while you are conducting research to form and prove a working model.
2. Pre Seed – This is where the working model is taking shape. You may be angel money at this stage. Otherwise, count on yourself, friends, and relatives.
3. Seed Stage - The Working Model is sound, and now can be prepared to be validated. Raise money. $300-500k. (Maybe less/more – there is no set amount). You get what you can and show what you need to build and validate. You have to have test customers who like your product and will pay for it, or you never leave this stage.

• Many Entrepreneurs think great engineering is what is needed. Yes and No - 99% of Venture Capitalists will not fund engineering alone, some do. They will fund with the expectations that superior product edge and engineering must be there and is obvious or translates into Value proposition that can be sold. Companies fail here all the time, because engineers mistakenly believe marketing/sales are an ‘easy part”. HUGE ERROR.
• Marketing Strategy takes shape here at the Seed Stage. Without Revenues, you have nothing. Lots of skilled thinking required here. This is where bookwork and educational credential ends for some, and real experience is key to success. Talking about what is needed is not doing what is needed. Execution takes talent and Execution is never easy. Think about this. Moreover, never forget it.
• Oops, maybe you do have good engineering and IP, but you do not have a company, so you will never be an “Early stage” company. So go no further and stop here until you shape a company.

4. Early Stage Start up - Many entrepreneurs characterize themselves as “early stage” when they are actually “seed stage or earlier”. At Early Stage, you have validated your service, products, have a working model, and you have referable paying customers. Management Team is in place or at minimum, identified, or committed and will be on board fulltime with funding.
5. Start up Funding – This stage is fun, and where value is marked up as proof of concept is unequivocal. Validation is widespread. Now, the company raises a bigger round to move the company forward into profitability.
6. Late Stage – More of Stage 5
7. Exit Stage - Merge or Acquisition, Business Combination, Possible IPO, possible the company decides to self-fund, or alternative finance and continue as private. The Board decides what is right.
BTW the moment you take outside money, decisions are now for shareholders, not just you. All shareholders deserve updates. As CEO or founder, et al you enjoy being in the ‘bully seat’ which has pluses and minuses but never forget your investors as they aid your bills.

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Principles of “How do we get funded?”

Ten Things That Can Make or Break a Deal

An entrepreneur's guide to pitching early-stage venture-capital firms. Why do only a small fraction of the business plans that are sent to venture capitalists get funded? Most would simply answer that there are too many deals chasing too few investment dollars. Venture capitalists will tell you that the real reason is that there are not enough "quality" deals.

The entrepreneur and venture capitalist often view the "quality" of a deal very differently. The inexperienced entrepreneur often makes the mistake of not realizing that the venture capitalist will judge the "quality" of his or her deal relative to other deals that the venture firm is considering. Therefore, the entrepreneur must be cognizant of the fact that raising money is not simply an exercise in selling yourself and your deal to win a scarce amount of venture capital. Rather, it is truly a competition against other startups to win the most "mind-share" of the venture capital investor. Entrepreneurs who are the most successful at raising venture capital financing understand this fundamental point and strategically market their deals based on this knowledge.
Taking a large and growing market opportunity as a given, this guide describes some of the other factors that an entrepreneur should consider when pitching an idea or early-stage company to a venture capital firm - the “ten things that can make or break a deal.”

1. Referrals - will you be on top of the pile or the bottom?
In any given year, a venture capitalist receives as many as 500 business plans - that is equivalent of 42 plans per month or 10 plans per week. (and the volume can twice or half as much one week to the next).In addition to working on due diligence for new deals, the venture investor is often actively participating in the firm's existing portfolio companies - attending board meetings, recruiting and working with management. Given these other obligations, the venture investor is left with little time to thoroughly review business plans for new deals. However, a new deal that is accompanied by a referral from someone who has a relationship with the venture investor, such as a CEO or senior executive of an existing portfolio company, an attorney or even another venture capitalist, will get attention and will rise to the top.

2. Management, Management, Management - do you have the athletes?
“Location” is to real estate, as “management” is to start-ups. If you do not have or cannot attract the right management team, you will never maximize the opportunity. Venture capitalists want to make sure that the team has the relevant experience and innate ability to execute on the plan and "turn-on-a-dime" if necessary to make changes or hard decisions in order to get the business on course. The start-up must have, or be able to recruit, the skill-sets necessary to achieve the milestones needed to justify a step-up in valuation at the next round of financing.

3. Sustainable Competitive Advantage - what about the 800-pound gorilla?
Surprisingly too many entrepreneurs direct their competitive focus solely at new entrants and not enough on the "old-economy" behemoths. But these companies usually have the cash, patent portfolios, research programs, distribution networks and relationships that can easily kill off any entrepreneurial dream. The days of "first-mover" as the sole competitive advantage are over - entrepreneurs need to build defensible and sustainable competitive barriers into their business strategy.

4. Business Model – if you do not have “paying” customers, you do not have a business!
So, you have a great idea and a big market opportunity. Now the question is “how do you make money?” In order to make your financial plan - “believable”, in the eyes of a venture investor, ‘get your sales hat on’. Compare your financials to that of a comparable public company in its early years (information that is usually readily available from SEC filings), and prove your pricing structure by demonstrating what end-users will pay and what distributors will charge by thoroughly understanding the value-chain and doing your research by talking with customers.

5. Momentum - are you giving them more reasons to say "yes"?
Do not stop executing while you are raising money. New customers/sales, partnership deals, reports by analysts on the company, etc. help validate the opportunity and build confidence in the management team. If you can make progress and good things happen during the fundraising process, you will have a higher probability of closing a deal and closing it faster.

6. Recruiting - a measure of quality!
If good people commit to joining a startup once it is funded, that is a good sign. If solid experienced people join a startup before it is funded, that is a great sign. Anything short of that and the investor will have doubts about the quality of the deal and will be less inclined to invest. It is the entrepreneur's responsibility to build the team. Alternatively, convince the venture investor that he or she can build a team that can execute on the plan, and perhaps needs their help in doing so. Many Venture Capitalists are superb with this critical aspect.

7. Executive Summary - your first and often only impression!
Of the partners making a decision on your deal, only one, your sponsor, usually reads the entire business plan. However, all of them will typically read the executive summary. The executive summary should be the entrepreneur's main sales document, while the rest of the business plan should only serve to support the material in the executive summary. A voluminous business plan is a sign to a venture investor that the entrepreneur is spending far too much time analyzing and not enough time executing.

8. Portfolio Fit - Babe Ruth, Ted Williams or both? Are you merely better than before doing unthinkable things? On the other hand, are you so good that paradigm shifts are possible? Transistors sat idle for a few years in the 50s. The “mouse’ was around in 1975 – it took a GUI interface to make use of it 10 years later! (New paradigms).
Some venture firms, like Babe Ruth, only want to hit home runs - create billion dollar companies - and will accept a lot of big strike-outs - high risk - in achieving a higher “slugging” percentage. Others, like Ted Williams, do not mind hitting lots of doubles and triples - creating many solid $100+ million companies - achieving a higher batting average and on-base percentage. An entrepreneur has to figure out the partners' philosophy in this regard and determine if the deal is the right fit for the firm.
The same analysis should apply to the type of deals a firm does. For example, do not send a biotech deal to a firm that only does information technology investments. Some firms do not do early stage – or earlier - period.

9. Partner Politics - are you dealing with a democracy or dictatorship?
Getting approval from one partner may or may not make the deal happen. Most venture firms have a prescribed formula for how deals are approved by the partnership. Some require unanimous consent by all partners, while others only require majority consent. On occasion, a partner may have funds available to invest under his or her sole discretion. Whatever the case, an entrepreneur should understand how an investment decision is made and play the politics accordingly.

10. Location - if it takes too long to get there, I am not interested!
One well-known venture capitalist actually has this down to 30 minutes. In either case, there is good reason for this. In early-stage companies, where there is a lot of "company building" to be done, the venture investor is actively working with the management team and does not want to spend valuable time commuting. So, if you are an early-stage high-tech entrepreneur, heed the words of Willy Sutton and start your company in the SF Bay Area, Boston, Seattle/Tacoma, or Austin, TX- because "that's where the money is."
Other places of prime interest are Chicago area, NY area, with many sources of capital, and Minneapolis, Atlanta, Dallas, Denver area.

11. Investment Candidates - You can start anywhere, but many investors will not invest outside certain geographic areas by their funds stipulated formation or charter. Others have agreement with their funds Limited partners.

12. Don’t drink your own Kool Aid – Be realistic. Understand where you are in the cycle of development. A “start-up’ stage is bandied about with a wide meaning. We find a certain way to characterize your company. This is the most common error in entrepreneurial ranks.

~ Tom --- Let’s talk if we can be of service.

LinkedIn: Tom Cannon
Skype tcannon5556

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