John B. D. Colley - The Six Minute Strategist
Its The Strategy...For Business Sake!
Are you raising Venture Capital?
If you are you might like to meet up with me and spend a couple of hours asking me lots of questions about the process and what you should do?
Yes, I know time is precious.
What if you could ask all those questions and not have to spend half a day coming up to London to meet with me?
Here is a brief introductory video…
If you are following a lean start up philosophy, the cost of a full time CFO may seem like a luxury.
After all your focus should be to create a minimal viable product and get it out to prospective customers.
If you don’t have any revenues why would you want a CFO?
While there is no cut and dried answer to this question, here are six factors to consider when evaluating whether to hire a full time CFO.
Are you sleeping at night?
If you are a CEO and you do not have a firm (and detailed) grasp of your company’s financial position, you may wake up in the middle of the night worrying about it. Remember many young businesses fail because they run out of cash when they are growing too fast – over trading. If you are in this position, it may be time to make that CFO hire you have been putting off.
Decision making
If you do not have a detailed grasp of your financial position of the company it is very difficult to make objective and informed business decisions. Should you invest, divest, expand or contract? What is your profit margin? How do your fixed and variable costs break down? Can you financially evaluate two possible options? Making bad business decisions can cost you far more than the cost of a CFO.
Complexity
Complexity can be measured in a number of ways but none of them have anything to do with absolute levels of revenue.
These are just six examples. As your business becomes more complex, the need for a CFO grows with the added complexity as your finance function will need proper leadership and control. A good check is to see how long it takes for invoices to go out or how quickly the monthly finance report is produced each month.
Size
Size of course plays a role in this discussion. As businesses grow in size they need more structure and systems and this required functional experts within key roles, including finance. The complexities of the accounting and tax systems alone mean that such matters cannot be left to novices. Even if you can rely on your accountants to do much of this work, there comes a time when outsourcing the problem is not the answer.
Growth
Steady state businesses have a predictability of sorts which means that you may not need a CFO. If your business is growing quickly (or equally if you are contracting), managing the considerable day to day challenges requires an expert in control of finance. If there is any doubt in your mind about your cash position and your future cash flow forecast either way, call for the recruitment consultant and get hiring.
External investors
One of the key success factors in attracting external investment is being able to present a comprehensive and financially coherent business plan. The preparation of a financial model is only the start and investors expect regular, monthly reports on the performance of the business and how well you are keeping to plan.
This work is best achieved by a finance director who will create confidence in the financial competence of the management team as a whole. Just as importantly, if this work has to be done by the CEO, he (and I mean you) will not have as much time to carry out his main function of running and growing the business, particularly in client facing activities.
So, it’s down to you then. This is a key decision for you to make for your business and it deserves careful evaluation. Hopefully, this will help you to address the issue objectively.
Are you struggling to get your Start-Up Started?
Do you need to learn more about Business and Financial Plans
Do you need to learn how to pitch to investors?
Thank you, as ever, for joining the Conversation!
I am very grateful to Jonathan Moules, the Enterprise Correspondent of the Financial Times, for asking me to contribute to the Entrepreneurship Section in the Money Supplement of the Saturday Edition of the paper.
Jonathan has written a piece on MixPixie – an online service which enables you to customise a CD which they then produce and send to the recipient of your choice. Jonathan explains how the business was set up by Buffie du Pon, Adam Goodyer and James Perkins as a result of a misdirected valentines present – a CD which was posted through Buffie’s letter box by mistake. You can find MixPixie’s site here.
The company’s challenge is how to scale its business in a market where sales of CDs are declining and today’s conventional wisdom is that music delivery is only competitive online. In my view one of the USPs of this is the Social aspect of the business – the concept that you choose some tracks and design a bespoke CD cover for someone important to you and share that music with MixPixie’s product.
I felt that MixPixie really needs to reinforce this aspect of their business as well as working hard to find scalable opportunities. Using my Six Minute Strategist Methodology, I have set out Six Suggestions which MixPixie might consider to help Scale their business, five of which made it into the Financial Times article.
A Free Smart Phone App– customers can log in, mix and order their CDs from their Smart Phone or Tablet. In order to make their product easier to access, MixPixie needs to have a “mobile” solution – an App optimised for both smart phone and tablet which would enable their customers to access their site and create a CD without having to go back to their desktop or laptop computer. This needs to be on all the main platforms: Apple’s iOS, Google’s Android and Microsoft. The App itself should be simple to use but should also incorporate some of the Social Media integration discussed below.
Work Directly with Musicians and Bands – a Service to promote back catalogues or “Special Mixes” for Festivals; the Bands own the rights already. While Bands are always promoting their latest recordings, MixPixie would enable Bands to produce limited edition releases of their back catalogue which could be sold at special events, such as Gigs or Festivals. If the Bands produced these in limited numbers and signed some of them, they would make great collectibles for their fans and offer MixPixie an entry to a new market. As the Bands already own the rights to the tracks, the project could be cost effective for both sides.
Corporate Customers – Companies are always looking for original ways to promote themselves to their clients and, in my view, a carefully selected mix of tracks at specific events could provide a very unique and appreciated gift. This could be volume business for MixPixie and once the relationship was initiated, the CD could either be remixed for each event or the order simply repeated.
Digital Download Bonus – While I appreciate the USP of MixPixie is the CD, the real value in my view is the personalisation of the gift. For a small additional fee, the customer could enable a digital download so that he/she could get a copy of the tracks. It may be that this counts as two licences and may therefore only be available to the person to whom the CD is being sent.
Social Sharing on MixPixie – Social Media was made for this. Music and Sharing. I would suggest that MixPixie have a one click enabling button so that you can share your music selection and occasion category on their site. When new customers come seeking music for their gift occasion, they will be able to see what other people have chosen in the past. This could be sortable by artist, songs and most popular selections to make it more useful. This should encourage other to use the service.
Pinterest – This new and highly visual network would be the perfect place to encourage customers to post their CD designs on Occasion based Boards on Pinterest.com. This does not necessarily need to include the personal messages but would encourage sharing and give customers ideas for gifts and designs. Pinterest is a highly viral site and this would also increase awareness of the service as each cover pinned can be linked back to MixPixie and encourage new customers to come over and find the site.
At present there is also a great SEO advantage to Pinterest. If you put a link in the description this gets full Google Juice back link benefit for the site. Pinterest is currently Page Rank 6. This is entirely white hat and as Pinterest becomes an increasingly important site in Google’s eyes, this benefit will only improve over time.
They have first mover advantage and need to capitalise on it.
Vinyl next please, Miss Pixie?
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Thank you for joining the Conversation!
In the first two parts of this series, I have discussed how to tell the different types of Venture Capital and Private Equity firms apart.
In this, Part 3, I will discuss how to approach VCs, what they are looking for in an investment and Six reasons why Business Plans are rejected.
Approaching Investors
Assuming you have now identified your short list of investors from the hundreds out there, here are some key questions to ask yourself.
What are Investors looking for?
Management Teams
Investors invest in strong and credible management teams backed by a strong business plan (focused on a strong business proposition). Remember that if Investors see 500 to 1000 plans a year (and they do) but they only do 5 to 10 deals a year, your odds are no better than 100-1 against.
A Clear Business Plan
The management team need to put together a strong, well laid out and comprehensive business plan which will be easy to read, clear, concise and compelling. The whole management team must be involved in the preparation of the plan and know it backwards. This ownership is key to being able to communicate the plan to investors with credibility.
Realistic and Honest
The plan should be realistic not optimistic. At the same time don’t do yourself down too much and expect the investors to run downside scenarios against you. Understand your market and its size, be realistic about the strengths and risks posed by your competitors. Be honest and straightforward, don’t leave skeletons in the cupboard. If due diligence subsequently reveals unexpected information, your potential investor will walk away.
A Compelling Business Case
Your plan should put forward a compelling business case for investment in your business. You are competing with other potential deals here and your case must convince the investors that yours is the deal they want to do.
Three to Five Years
The Business plan should scope the current business but prepare a financial plan going out at least three and preferably five years. I always recommend that you prepare a financial model on a 5 year monthly basis. It is easier to summarise this into annual periods than to try to reverse engineer an annual plan into 12 monthly segments.
In operational terms you should be detailed about your plans for the first 24 months. Don’t forget you are explaining where you are now, where you want to get to and the route from here to there.
50 Page Document
I will provide check list outlining the detailed structure of the financial plan in the Six Minute Strategist PRO when it launches but in essence you should be aiming to produce a word document of up to 50 pages. The financial model can be bound separately, if you print it out. Any bulky data sets should also be confined to the back of the document in apendicies.
Executive Summary
The front of the document should contain an executive summary which I always recommend you write once you have written the main plan. I have never understood how someone expects to summarise a document that has not yet been written. This part of the document must sell the deal as it is likely that this is the only part most of your audience will read initially when trying to select which deals to look at more closely.
Understand your Audience
Try to understand your audience. Investors want to make a good return on their investment and minimise their risk of not getting their money back. It can help to talk to management teams from their portfolio companies if you can reach out to them to better understand the style and approach of a particular house.
Six Reasons Business Plans are Rejected
In the final Part of this series, I will discuss the characteristics of a good financial plan and Six ways investors make money out of deals.
In the first Part of this series I examined the different types of Venture Capital and Private Equity firms.
In Part 2 I am going to discuss the factors which make up their investment criteria.
So, having worked out the type and stage of deal you want to organise, what else do you have to think about?
Size of Funds
It is important to find out the size of the current fund that the investor firm is currently working with. This dictates the next two factors. As a rule of thumb, take the fund size and divide by 20. This will give you an idea of the ideal size of “equity check” that the fund would like to be investing. I say “Equity Check” because the investment can be increased by syndication with other investors, mezzanine and debt finance.
Minimum Investment
This is the minimum equity check. If your deal is small than this, you are talking to the wrong investor.
Maximum Investment
There will be a limit to how much an investor will want to commit to a single deal. Again as a rule of thumb, divide the fund size by 10 as most funds will have a formal limit preventing them from investing more than 10% of the fund in a single company.
Fund Life Cycle
This is important. Funds typically have a 10 year life span. In the first four years the investors work hard to invest the fund. In years 5-7 they will co-invest but probably not invest in new deals. The final three years are years of harvest, selling the companies they have invested in and returning money to their investors. You can see from this why these investors aim to invest in a company for three to five years.
Sectors
This of course is critical. A Cleantech fund is not going to invest in a manufacturing business. Find out what the investors sector preferences are.
Geographies
Funds nearly always specify which countries they set out to invest in. This may sometimes be couched in vague language, asking for “operations in the UK”. Often UK funds specify that the company must be headquartered and incorporated in the UK.
Office Locations
On the face of it this is not a major issue but investors do not like to invest in companies where the operations are a long way away. Again as a rule of thumb, the smaller the company and the earlier the stage, proximity is a distinct advantage. For a major Leveraged Buyout, distance is less of an issue.
Contacts
Finally, you might have lined everything up but now you need to approach the investor. It is a distinct advantage to either know someone or to get a warm introduction to the firm. I have spent many years cultivating contacts in VC and PE firms for this reason. That having been said, if you have a great track record and a brilliant business opportunity, they are not going to turn you away.
In the next part of this four part series, I will discuss the approach to investors, what they are looking for and 6 reasons why Business Plans are rejected.
Can you tell the difference between a Private Equity firm and a Venture Capital firm?
Before you start to think about trying to raise finance from Private Equity or Venture Capital providers you need to make sure that you are approaching the right type of investor.
Finding the right investor can be like looking for a needle in a haystack. The British Venture Capital Association has over 200 investor member companies. If you add non-members to this, which will include US and European investors there are over 1,000 investors (my database for the UK is currently at 1,093 possible sources of finance) who you have to screen in order to arrive at a short list of firms to approach.
So, how can you tell the difference between Private Equity and Venture Capital and then understand the different types of companies in each category?
Lets start by differentiating between Venture Capital and Private Equity.
Venture Capital
In theory, Venture Capital funds invest in companies at an earlier stage and with greater risk. As a result they are seeking higher returns (as some of the companies WILL fail.) The earliest stage they may come in is in a Seed Round, typically investing in the hundreds of thousands (pounds or dollars).
The next institutional investment rounds are lettered sequentially, Series A, Series B, Series C etc. These rounds tend to increase in size and are normally done at increasing valuations (up rounds). As the investee company matures, it may need some additional finance ahead of an IPO, a pre-IPO funding round would then follow.
Private Equity
Private Equity Funds also have their market segments and specialisations. My database of PE funds recognises the following categories.
Don’t forget just identifying the investor is just the start of the process, now you have to get their attention. To do this you need to understand their investment criteria in depth and that is the subject of the next post in this series.
In the next few days, I am publishing a four part blog series on Private Equity and Venture Capital and this post is by way of a brief trailer for that series.
Recent conversations with Entrepreneurs have highlighted to me that the arcane world of Private Equity and Venture Capital is not well understood.
There is consequently a steep learning curve for those seeking investment which can put them at a material disadvantage. These posts will of course not level the playing field but hopefully will go some way to opening up an understanding of the topic.
I have made a short video to introduce the posts.
As can be seen from the Magic Hexagon above , I am covering six main topics in the four posts.
Monday 20th February 2012.
Part 1 covers the different Types of Venture Capital and Private Equity Firms. The criteria here are not mutually exclusive. I concentrate on the stage of development for VCs and the types of transaction for Private Equity.
Thursday 23rd February 2012
Part 2 of the series looks at the Key Investment Criteria that an entrepreneur will need to meet to be considered even in the intial stages by an investment firm
Monday 27th February 2012
In Part 3 I look at How to Approach an Investment Firm, discuss in more detail what they are looking for and suggest 6 Reasons Why Business Plans are Rejected.
Thursday 1st March 2012
In the final installment, Part 4, I discuss some of the Main Characteristics of the Financial Plan that will have to be prepared and conclude by trying to explain the main Six ways that the VCs and PEs make Money through their investments.
The blog posts are scheduled to be released at Noon UK Time.
I would be very interested to know what further questions and clarifications you would like me to address on this topic. Please email them to me at jbdcolley[at]aol.com or comment below.
I hope you enjoy the series as much as I enjoyed writing it for you!
Are you a UK StartUp or Early Stage Company seeking Capital?
I know how difficult and expensive it can be when you are starting up a business and have very limited resources.
This is how I want to try to help you.
For a limited time only, I want to extend a special deal for UK based early stage businesses. I want to offer you very low cost, low risk access to my personal UK Venture Capital and Private Equity Investor Database containing nearly 1100 firms to help you identify some suitable investors.
Here is my Offer how it works.
You email me at jbdcolley[at]aol.com and send me a brief profile of your business. Include with this the names of the VC firms you have already approached or already know. This will form a “Red List” of firms that I will not feed back to you.
I have a database of over 15,000 investors globally which I have built over the last 10 years so I probably know these investors already.
If I think your business is fundable, I will send you a brief 10 minute questionaire of key criteria for you to fill out. This requires simple very brief answers.
I will then screen your criteria against my database of investors to produce a short list. I will then tell you how many names I have found and these are available to you at £10 a name.
I will provide you with the name of the firm, its address, telephone number, website and the names of its executives. If I have a personal contact there, I will also tell you that to help you with your approach.
If I do not think your business is fundable, I will email back with some brief but direct reasons why not.
You tell me how many names you want to purchase, there is no minimum and you can come back to me three times to purchase names (this is only to minimise drip feeding one name at a time).
I will also require you to sign a contract that you will pay us 1% in cash of any funds raised from these investors as any time in the next two years.
The normal cost of fund raising is 5%-10% of funds raised so I believe that is represents very low risk and exceptional value.
The period is 24 months because investments will take time to arrange and can often be staged against milestones.
Would you like more information about raising Venture Capital or Private Equity?
I am publishing a series explaining on Venture Capital and Private Equity which will cover:
When these posts come out I will link to them here. The first of these will be published on Monday 20th February 2012.
Six Minute Strategist PRO
I will be making more detailed information on how to raise capital for StartUp companies through the Six Minute Strategist PRO – my membership section of my site which will provide entrepreneurs will detailed checklists and guides to help and this will be available in the near future for a low monthly fee.
Need some Consultancy Advice?
However, if you want some consultancy advice from me, I am prepared to offer a limited number of one hour sessions at £97 per hour to help you get started in your funding process. These consulting sessions will be conducted over Skype so there is no travelling involved.
You apply for a slot, we agree an agenda and a time. You transfer the fee to my PayPal Account (details of which I will provide to you) in advance and then we do the call.
Thats is – simple, direct and fair.
If you are a StartUp, particularly a Technology StartUp get in touch with me now. jbdcolley[at]aol.com or check out my contact details on the site.
May 2012: This offer is now closed. Thank you to all who participated.
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